What is SIP? Meaning, how it works and an example
SIP (Systematic Investment Plan) is a way to invest a fixed amount in a mutual fund scheme at regular intervals, usually every month. It is a method of investing, not a separate product, and it does not guarantee any return.
Updated: · For education only. Not investment advice.
How a SIP works
You choose a scheme, an amount and a date. On that date every month the amount is debited from your bank account and used to buy units of the scheme at that day NAV. When the NAV is low you get more units, and when it is high you get fewer. Over time this averages your purchase cost, but it does not remove market risk.
A simple example (hypothetical numbers)
Suppose you invest ₹5,000 every month. In month 1 the NAV is ₹50, so you get 100 units. In month 2 the NAV falls to ₹40, so you get 125 units. In month 3 the NAV is ₹50 again, so you get 100 units. You have invested ₹15,000 and own 325 units, an average cost of about ₹46.15 per unit. These numbers are only for explanation.
SIP and lump sum
In a lump sum you invest the whole amount at once. In a SIP you invest in parts over time. A SIP suits people who invest from monthly income, while a lump sum depends on a single entry point. Neither is guaranteed to perform better.
Common misunderstandings
- SIP guarantees returns. It does not. The value of your units depends on the market.
- A SIP is a type of fund. It is only a way of investing in a fund.
- Past returns decide everything. Past performance does not guarantee future results, so also look at risk, costs such as the expense ratio, and the scheme documents.
Try it yourself
Frequently asked questions
Can I stop a SIP anytime?
In most open-ended schemes you can pause or stop a SIP, but some schemes, such as ELSS, have a lock-in period of three years for each instalment. Check the scheme documents.
What is the minimum SIP amount?
It depends on the scheme. Many schemes allow SIPs from a few hundred rupees a month, and some from ₹100. Check the scheme details.
What happens if I miss a SIP instalment?
The instalment is usually not processed if your bank account lacks funds, and your bank or the fund house may charge a fee. Repeated failures can lead to the SIP being stopped. Terms vary, so check with the fund house.
Sources and further reading
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.