How SIP Works
SIP works through a systematic process: an investor selects a mutual fund, decides a fixed investment amount and date, provides a bank mandate for auto-debit, a...
The SIP Mechanism
SIP works through a systematic process: an investor selects a mutual fund, decides a fixed investment amount and date, provides a bank mandate for auto-debit, and the system automatically invests the amount each month by purchasing units at the prevailing NAV (Net Asset Value). The units accumulate over time, and the investment grows through both additional purchases and market appreciation.
When you set up a SIP, here is exactly what happens each month: (1) On your chosen date, the amount is auto-debited from your bank. (2) The mutual fund house receives the money and allots units based on that day's NAV. (3) If NAV is ₹100 and you invest ₹5,000, you get 50 units. (4) Next month, if NAV drops to ₹80, the same ₹5,000 buys you 62.5 units. (5) Your units keep accumulating in your folio. (6) When you decide to redeem, the total units × current NAV = your investment value. The beauty is that by investing regularly, you don't need to worry about whether the market is up or down — you benefit from both scenarios.
Like an EMI — fixed amount leaves your bank on a set date, every month
Each month you collect more pieces of the fund, building your portfolio
NAV is the price per unit. Lower NAV = more units for your money
All your units are stored in a folio — like a digital locker of wealth
Rajesh's 6-Month SIP
Rajesh starts a ₹5,000/month SIP in a large-cap equity fund. Watch how his units accumulate over 6 months, especially benefiting from the early market dip:
| Month | NAV (₹) | Amount Invested | Units Purchased | Market Mood |
|---|---|---|---|---|
| Month 1 | ₹100.00 | ₹5,000 | 50.00 units | 😐 Neutral |
| Month 2 | ₹90.00 | ₹5,000 | 55.56 units | 📉 Dip |
| Month 3 | ₹85.00 | ₹5,000 | 58.82 units | 📉 Further Dip |
| Month 4 | ₹95.00 | ₹5,000 | 52.63 units | 📊 Recovery |
| Month 5 | ₹110.00 | ₹5,000 | 45.45 units | 📈 Rally |
| Month 6 | ₹120.00 | ₹5,000 | 41.67 units | 📈 Bull Run |
| ✅ Total after 6 months | Avg: ₹98.64 | ₹30,000 | 304.13 units | Value: ₹36,496 |
What Makes This Important
Step-by-Step Calculation
Rajesh's 6-month SIP: ₹5,000/month in Large-Cap Fund Month 1: ₹5,000 ÷ ₹100 NAV = 50.00 units Month 2: ₹5,000 ÷ ₹90 NAV = 55.56 units Month 3: ₹5,000 ÷ ₹85 NAV = 58.82 units Month 4: ₹5,000 ÷ ₹95 NAV = 52.63 units Month 5: ₹5,000 ÷ ₹110 NAV = 45.45 units Month 6: ₹5,000 ÷ ₹120 NAV = 41.67 units Total units = 50.00 + 55.56 + 58.82 + 52.63 + 45.45 + 41.67 = 304.13 units Total invested = ₹5,000 × 6 = ₹30,000 Average cost per unit = ₹30,000 ÷ 304.13 = ₹98.64 Current value = 304.13 × ₹120 = ₹36,496 Profit = ₹36,496 − ₹30,000 = ₹6,496 (21.7% return in 6 months)
Frequently Asked Questions
NAV (Net Asset Value) is the price of one unit of a mutual fund. When you invest through SIP, the number of units you receive depends on the NAV on the day of investment. Lower NAV means more units, higher NAV means fewer units.
🧠 Quick Quiz
2 questions to check your understanding