How SIP Works

A SIP (systematic investment plan) invests a fixed amount in a mutual fund on a fixed date every month, deducted automatically from your bank account. Each instalment buys units at that day's NAV (net asset value): ₹5,000 at an NAV of ₹50 buys 100 units. Your investment is worth the number of units you hold multiplied by the current NAV.

Over time, compounding does the heavy lifting: the returns your money earns start earning returns themselves. See what your own SIP could grow to in the SIP Calculator.

Here is ₹5,000 a month in an equity fund at an assumed 12% a year:

Doubling the time from 10 to 20 years doubles what you put in but more than quadruples the value. Equity returns are not guaranteed: some years will be negative, and 12% is an assumption, not a promise.

The SIP compounding formula, for a fixed monthly instalment invested at the start of each month, is:

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

• FV = value at the end
• P = monthly SIP amount
• r = monthly return = annual return ÷ 12 ÷ 100
• n = number of months

For ₹5,000 at 12% for 10 years: r = 0.01, n = 120, so FV = 5,000 × [(1.01^120 − 1) ÷ 0.01] × 1.01 = ₹11,61,695. In Excel, =FV(12%/12, 120, -5000, 0, 1) gives the same result.

Compounding is slow at first and fast later. With ₹5,000 a month at 12%:

You put in the same ₹6 lakh in each decade. The difference is the growth on the growth, which is why starting early matters more than starting big.

To reach ₹1 crore at an assumed 12% a year, you need a monthly SIP of about:

With ₹5,000 a month at 12%, a SIP crosses ₹1 crore after about 25 years 6 months. Increasing the SIP every year, as below, gets there much sooner.

Rupee cost averaging means that by investing the same amount every month, you buy more units when prices are low and fewer when they are high, so your average cost per unit ends up below the average price.

Example: ₹6,000 a month for three months at NAVs of ₹100, ₹80 and ₹120 buys 60, 75 and 50 units, 185 in all. Your average cost is ₹18,000 ÷ 185 = ₹97.30, below the ₹100 average NAV. It does not prevent losses if prices keep falling, but it removes the need to time the market.

A step-up SIP increases your monthly instalment by a fixed percentage every year, usually in line with salary increases. It is one of the most effective ways to build wealth faster.

₹5,000 a month for 20 years at 12%:

Most fund houses and investment apps let you set an automatic yearly top-up when you start the SIP.

A lumpsum gives more if you already have the money and invest it at a good time, because all of it compounds from day one; a SIP is better when you invest from monthly income or want to avoid putting everything in at a market peak.

₹6 lakh invested at once at 12% grows to ₹18.64 lakh in 10 years, against ₹11.62 lakh from ₹5,000 a month over the same 10 years. But the SIP investor never needed ₹6 lakh up front, and a lumpsum invested just before a fall can take years to recover. Compare both in the Lumpsum Calculator.

If you stop a SIP, your existing units stay invested and keep growing or falling with the market; you lose nothing you have already invested. There is no penalty for stopping, and you can start a new SIP at any time.

If instalments fail because of low bank balance, your bank may charge a bounce fee, and after several missed instalments in a row the fund house may cancel the SIP. Units in an ELSS fund stay locked for 3 years from each instalment's date even after you stop.

To measure the real return on a SIP you have been running, use the XIRR Calculator, because each instalment was invested on a different date.