SIP Basics ~5 min read

What is SIP?

A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money at regular intervals (typically monthly) into a mutual fund scheme. It allow...

Definition

Systematic Investment Plan

A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money at regular intervals (typically monthly) into a mutual fund scheme. It allows investors to buy units of a mutual fund on a pre-determined date each month, enabling disciplined and regular investing regardless of market conditions.

In Simple Words

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Think of SIP like a recurring deposit, but instead of putting money in a bank, you invest it in mutual funds. Every month, a fixed amount is automatically deducted from your bank account and invested in your chosen mutual fund. When the market is low, your fixed amount buys more units. When the market is high, it buys fewer units. Over time, this averages out your purchase cost — a concept called Rupee Cost Averaging. SIP removes the need to time the market and builds a habit of disciplined investing.

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Recurring Deposit

Fixed amount → Bank. Safe but low returns (~6-7%)

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SIP in Mutual Fund

Fixed amount → Market. Higher potential (~10-15% p.a.)

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Investing ₹500/month

Start small, build a habit, watch it grow into lakhs

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Fully Automatic

Auto-debit on your chosen date. Set once, forget.

Real-Life Scenario

Priya's SIP Journey

Priya, a 28-year-old software engineer in Bangalore earning ₹80,000/month, starts a SIP of ₹10,000/month in an equity mutual fund. Here's what happens in her first 3 months:

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Priya Sharma

Software Engineer, Bengaluru · SIP: ₹10,000/month

Month	Market NAV	Amount Invested	Units Purchased	Market Mood
Month 1	₹50.00	₹10,000	200 units	😐 Neutral
Month 2	₹40.00	₹10,000	250 units	📉 Market Dip
Month 3	₹60.00	₹10,000	166.67 units	📈 Market Rally
✅ Result after 3 months		₹30,000	616.67 units	Avg Cost: ₹48.65

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Key insight: Priya's average cost per unit (₹48.65) is lower than both the starting NAV (₹50) and ending NAV (₹60). She benefited from the market dip by automatically buying more units — this is Rupee Cost Averaging in action.

Key Points to Remember

What Makes This Important

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SIP allows you to invest a fixed amount regularly in mutual funds

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It automates the investment process through bank auto-debit

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You can start with as little as ₹500 per month

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SIP works on the principle of Rupee Cost Averaging

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It removes the need to time the market

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SIP instills financial discipline and regular saving habit

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You can increase, decrease, pause, or stop SIP at any time

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No lock-in period for most SIP investments (except ELSS)

The Formula

SIP Future Value Formula

FV = P × [(1 + r)^n − 1] / r × (1 + r)

FV — Future Value of investment

P — Monthly SIP amount (₹)

r — Monthly rate of return (Annual % ÷ 12)

n — Total number of months invested

ℹ️

Why divide annual rate by 12? SIP contributions happen monthly, so we need the monthly equivalent of the annual return rate. For 12% p.a., the monthly rate is 12 ÷ 12 = 1% = 0.01.

Worked Example

₹10,000/month × 20 years

// step-by-step calculation

Monthly SIP

₹10,000

Expected Return

12% p.a.

Duration

20 years

1Monthly rate (r) = 12% ÷ 12 = 1% = 0.01

2Total months (n) = 20 × 12 = 240 months

3(1.01)^240 = 10.8926

4[(1.01)^240 − 1] ÷ 0.01 = 989.26

5FV = 10,000 × 989.26 × 1.01 = ₹99,91,479

Total Invested

₹24 L

₹10,000 × 240 months

Total Wealth Created

≈ ₹1 Cr

₹99,91,479 future value

Gains from Market

₹75.9 L

3.16× your investment!

FAQs

Frequently Asked Questions

Most mutual fund companies allow SIPs starting from ₹500 per month. Some AMCs even offer SIPs starting at ₹100. There is no maximum limit for SIP investments.