A SIP (systematic investment plan) invests a fixed amount in a mutual fund on a fixed date every month. Each instalment buys units at that day's NAV, the net asset value per unit of the fund.
Rupee-cost averaging in four months#
Suppose you invest ₹5,000 a month and the NAV moves as below. These NAVs are made up to show the effect.
| Month | NAV | Units bought |
|---|---|---|
| 1 | ₹50 | 100 |
| 2 | ₹40 | 125 |
| 3 | ₹25 | 200 |
| 4 | ₹50 | 100 |
You invested ₹20,000 and hold 525 units, so your average cost is about ₹38.10 a unit. The average of the four NAVs is ₹41.25. Because the same amount buys more units when the price is low, your average cost ends up below the average price.
What a SIP does not do#
- It does not guarantee a profit or protect against a fall that lasts for years.
- It does not make an unsuitable fund suitable. Fund choice still matters most.
- It works best over long periods, where many market ups and downs are averaged in.