What is a SIP? A simple guide, with an example

A SIP (systematic investment plan) invests a fixed amount in a mutual fund on the same date every month, straight from your bank account. It works like a recurring deposit, except the money goes into a mutual fund instead of a bank deposit.

How does a SIP work?

You choose a fund, a monthly amount and a date. Each month that amount buys units of the fund. The price of one unit is called the NAV.

• When the NAV is low, the same amount buys more units.
• When the NAV is high, it buys fewer.
• Over time this evens out the average price you pay per unit. This is called rupee-cost averaging.

So you don't need to guess when markets will rise or fall.

An example

A SIP of ₹5,000 a month, assuming 12% a year (an assumption, not a promise):

From 10 to 20 years, what you put in doubles, but the value grows almost four times. Earning returns on earlier returns is called compounding, which is why starting early matters.

At 10% a year instead of 12%, the value after 15 years would be about ₹20.1 lakh; at 7%, about ₹15.6 lakh. Mutual fund returns vary, and some years can be negative.

How much do you need to start?

Most funds allow a SIP from ₹100 to ₹500 a month (it varies by fund). You can start small and raise it as your income grows. A SIP that rises by a set percentage every year is called a step-up SIP.

Who is a SIP for?

• People with a monthly salary or income
• Goals more than 5 years away: children's education, marriage, a home, retirement
• Anyone who wants to invest steadily without watching the market every day

Common questions

Can I stop or change a SIP?

Yes. You can usually stop, change the amount or pause a SIP without any penalty. What you have already invested stays in the fund. When you take money out, some funds charge an exit load if you sell within a set period.

Is a SIP safe?

A SIP is only a way of investing, not a product. The risk depends on the fund you choose: equity funds go up and down more, debt funds less. What matters is choosing a fund that fits your goal, time frame and how much risk you can take.

Is a SIP taxed?

Each monthly SIP instalment counts as a separate investment. When you sell, the tax on the gain depends on the type of fund and how long you held it. See the tax guide for details.

See what your SIP could become

Try the SIP calculator with your own amount and time frame. If you have a goal in mind, the Goal Planner shows the monthly SIP it needs. For investing all at once instead, read SIP or lumpsum.