Topic 2 of 9~5 min read

How SIP Works

Definition

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.

In Simple Words

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.

Real-Life Scenario

Rajesh starts a ₹5,000/month SIP in a large-cap equity fund: Month 1: NAV ₹100 → 50 units Month 2: NAV ₹90 → 55.56 units (market dipped — got more units!) Month 3: NAV ₹85 → 58.82 units (more units at lower price) Month 4: NAV ₹95 → 52.63 units Month 5: NAV ₹110 → 45.45 units (market recovered) Month 6: NAV ₹120 → 41.67 units Total invested: ₹30,000 Total units: 304.13 Average cost per unit: ₹98.64 Current value (at ₹120 NAV): ₹36,496 Profit: ₹6,496 (21.7%) Notice: Even though the market fell initially, Rajesh's SIP bought more units at lower prices, and when the market recovered, he made excellent returns.

Key Points to Remember

SIP runs on auto-debit — completely automatic after setup

Units are allotted based on the NAV on the date of investment

Lower NAV = more units purchased (which is actually beneficial)

Higher NAV = fewer units but existing units have appreciated

The average cost of units tends to be lower than the average NAV

SIP mandate is given through OTM (One Time Mandate) or NACH

SIP date can be chosen (1st, 5th, 10th, 15th, 20th, 25th usually)

Units are allotted T+1 (next business day) for equity funds

Frequently Asked Questions

Test Your Knowledge

2 questions to check your understanding

Question 1 of 2Score: 0/0

When the market falls during a SIP, what happens to your units?

Summary Notes

SIP automates investing — set it up once and let it run

Units accumulate over time through regular purchases

Market dips during SIP are opportunities, not threats

The average purchase cost is usually lower than the average market price

Consistency is key — the longer you stay invested, the better the results