How Does a SIP Work?

You set up a SIP of ₹5,000 a month. On the fixed date, ₹5,000 leaves your account.

What do you actually get in return?

Not a fixed number of shares or a guaranteed return. You get units of a mutual fund, and the number of units depends on the day’s price. Here is how that plays out over twelve months.

Three Terms You Need

• SIP (Systematic Investment Plan): A way of investing a fixed amount in a mutual fund at regular intervals, usually monthly. It is a method of investing, not a separate product.

• NAV (Net Asset Value): The price of one unit of the fund. It is the value of the fund’s holdings, minus its liabilities, divided by the number of units, and it is calculated every business day.

• Units: What you receive for your money. Units bought = amount invested ÷ NAV.

So at an NAV of ₹100, ₹5,000 buys 50 units. At ₹80, it buys 62.5 units.

A SIP Over 12 Months (Hypothetical)

Assume ₹5,000 a month in a fund whose NAV moves like this:

Here is what the table tells us:

• Invested: ₹60,000 (12 × ₹5,000).

• Units owned: 643.734.

• Your average cost per unit: ₹93.21 (₹60,000 ÷ 643.734).

• Simple average of the 12 NAVs: ₹94.42.

• Value at the month-12 NAV of ₹108: about ₹69,523, a gain of about ₹9,523, or 15.9%.

Notice the gap between ₹93.21 and ₹94.42. Your average cost sits below the average NAV because the same ₹5,000 bought more units when the NAV was low (62.5 units at ₹80) and fewer when it was high (45.455 at ₹110).

What Is Rupee-Cost Averaging?

That effect is called rupee-cost averaging. Because you invest a fixed amount, you automatically buy more units when prices fall and fewer when they rise. Over time, your average cost per unit tends to land below the average price.

The benefit is mostly practical. You do not have to guess the right month to invest, and one badly timed purchase cannot define your whole result.

Related Reading : Why your SIP may not be generating returns

What AMFI Cautions: It Does Not Assure a Profit

This is the part that gets forgotten. AMFI states that rupee-cost averaging does not assure a profit and does not protect against losses in declining markets. SIP investment news

Here is what that looks like. Suppose the NAV falls steadily from ₹100 to ₹62 over the same twelve months:

• Invested: ₹60,000.

• Units owned: 795.107, more than in our first example, because prices were lower.

• Average cost per unit: about ₹75.46, well below the starting NAV.

• Value at the final NAV of ₹62: about ₹49,297, a loss of about ₹10,703, or 17.8%.

Averaging did its job, since your average cost was lower than where you started. But the NAV ended below your average cost, so you still have a loss. A SIP lowers the risk of investing everything at a peak. It does not remove market risk.

What a SIP Does Well?

A SIP’s biggest strength is behavioural:

• It builds the habit. The money goes out on a fixed date, before you can spend it or second-guess it.

• It removes the timing decision. You are not waiting for a “good time.”

• It works with small amounts. SIP flows now run above ₹30,000 crore a month, according to AMFI-linked data, such as ₹30,954 crore in May 2026.

It also helps to know that each SIP instalment is treated as a separate investment, so exit loads and tax holding periods apply to every instalment on its own. How SIP works

One more thing: when markets fall, each instalment buys more units at lower prices, so stopping a SIP during a fall removes the very benefit that averaging offers. Whether to continue still depends on your goal, time horizon and risk capacity.How mutual fund works

How to Start a SIP

1. Complete your KYC. This is a one-time process.

2. Choose a fund that matches your goal and risk level. The riskometer and the fund’s time horizon matter more than last year’s returns.

3. Set the amount and the date. Start with a sum you can keep up through good and bad years, and increase it as your income grows.

Related Guide : Difference between stock SIP and mutual fund SIP

FAQs

How does a SIP work?

You invest a fixed amount in a mutual fund at regular intervals. Each time, your money buys units at that day’s NAV, so you get more units when the NAV is low and fewer when it is high.

What is NAV in a SIP?

NAV, or Net Asset Value, is the price of one fund unit, calculated every business day. Your units bought equal the amount invested divided by the NAV.

What is rupee-cost averaging?

It is the effect of investing a fixed amount regularly: you buy more units when prices fall and fewer when they rise, which tends to lower your average cost per unit.

Does a SIP guarantee returns?

No. AMFI says rupee-cost averaging does not assure a profit and does not protect against losses in declining markets.

Can a SIP go into loss?

Yes. If the NAV at the time you sell is below your average cost per unit, you will have a loss.

Disclaimer:
This article is for educational purposes only and does not constitute investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.