What Is SIP? How Systematic Investment Plans Work
A Systematic Investment Plan (SIP) is a method of investing a predetermined, fixed sum of money into a chosen mutual fund scheme at regular intervals—most commonly monthly or weekly.
Rather than attempting to time equity market peaks and troughs with lump-sum capital, a SIP automates periodic asset accumulation.
Quick Answer
A SIP is an automated payment facility that invests a set amount into a mutual fund scheme on a specific calendar date each month. It leverages rupee cost averaging to buy more units when prices decline and fewer units when prices rise.
Key Takeaways
- Rupee Cost Averaging: Automated purchasing across varying NAV points eliminates the psychological hazard of market timing.
- Low Starting Threshold: In India, SIP contributions can start from as low as ₹250 to ₹500 per month.
- Power of Compounding: Reinvesting returns over 10, 15, or 20-year horizons allows compounding to drive corpus accumulation.
- Complete Liquidity: In open-ended schemes without lock-ins, investors may pause, modify, or stop a SIP at any time without financial penalties.
Rupee Cost Averaging Demonstrated
To understand how rupee cost averaging functions across market cycles, consider a ₹5,000 monthly SIP during six months of market fluctuation:
| Month | Monthly Allocation | Unit NAV (₹) | Units Purchased | Cumulative Units |
|---|---|---|---|---|
| Month 1 | ₹5,000 | ₹50.00 | 100.00 | 100.00 |
| Month 2 | ₹5,000 | ₹40.00 | 125.00 | 225.00 |
| Month 3 | ₹5,000 | ₹35.00 | 142.86 | 367.86 |
| Month 4 | ₹5,000 | ₹42.00 | 119.05 | 486.91 |
| Month 5 | ₹5,000 | ₹48.00 | 104.17 | 591.08 |
| Month 6 | ₹5,000 | ₹55.00 | 90.91 | 681.99 |
(Source: AMFI Investor Education Series on Systematic Investment Mechanics).
Mathematical Outcome:
- Total Capital Invested: ₹30,000
- Total Units Accumulated: 681.99 units
- Average Acquisition Cost Per Unit: ₹30,000 ÷ 681.99 = ₹43.99
- Current Valuation at Month 6 NAV (₹55): 681.99 × ₹55 = ₹37,509
Notice that the average purchase cost of ₹43.99 is significantly lower than the initial ₹50 NAV, because market drawdowns allowed the investor to accumulate more units at ₹40 and ₹35.
How to Calculate Your Projected SIP Corpus
You can model your potential SIP compounding and future corpus using our SIP Calculator or check the impact of annual salary hikes using our Step-Up SIP Calculator.