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What is SIP?

Definition

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

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.

Real-Life Scenario

Priya, a 28-year-old software engineer in Bangalore, earns ₹80,000/month. She starts a SIP of ₹10,000/month in an equity mutual fund. On the 5th of every month, ₹10,000 is auto-debited from her bank account. In month 1, when the NAV is ₹50, she gets 200 units. In month 2, the market drops and NAV falls to ₹40 — she gets 250 units. In month 3, NAV rises to ₹60 — she gets 166.67 units. After 3 months, she has invested ₹30,000 and holds 616.67 units at an average cost of ₹48.65 per unit — lower than both the starting and ending NAV.

Key Points to Remember

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

It automates the investment process through bank auto-debit

You can start with as little as ₹500 per month

SIP works on the principle of Rupee Cost Averaging

It removes the need to time the market

SIP instills financial discipline and regular saving habit

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

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

Formula

FV = P × [(1+r)^n - 1] / r × (1+r)
Where:
FV = Future Value
P = Monthly SIP amount
r = Monthly rate of return (annual return / 12)
n = Total number of months

Numerical Example

Monthly SIP: ₹10,000 | Expected Return: 12% p.a. | Duration: 20 years

Monthly rate (r) = 12% / 12 = 1% = 0.01
Total months (n) = 20 × 12 = 240

FV = 10,000 × [(1.01)^240 - 1] / 0.01 × (1.01)
FV = 10,000 × [10.8926 - 1] / 0.01 × 1.01
FV = 10,000 × 989.26 × 1.01
FV = ₹99,91,479 ≈ ₹1 Crore

Total Invested: ₹24,00,000 (₹24 Lakhs)
Wealth Gained: ₹75,91,479 (₹75.9 Lakhs)
Total Value: ₹99,91,479 (≈ ₹1 Crore)

Frequently Asked Questions

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What does SIP stand for?

Summary Notes

SIP is a method, not a product — it is the disciplined way of investing in mutual funds

Start early, invest regularly, stay invested for the long term

SIP removes emotional decision-making from investing

The power of SIP compounds over time — even small amounts grow significantly

Choose your SIP amount based on your income, goals, and risk appetite