Understanding SIP: The Basics
A Systematic Investment Plan (SIP) is a method of investing a fixed amount at regular intervals (typically monthly) into a mutual fund scheme. Instead of investing a large lump sum, SIP spreads your investment over time, making it affordable and disciplined. Each month, the fund house debits a fixed amount from your bank account and allocates units at the current NAV. This guide explains how SIP works, how returns are calculated (including XIRR and CAGR), the formula behind it, and practical examples.
Key Takeaways
- SIP = fixed amount at regular intervals: Usually monthly. Units bought at prevailing NAV
- Rupee-cost averaging: More units when market low, fewer when high. Smooths volatility
- Returns expressed as XIRR: Because cash flows are irregular (monthly). CAGR for lump sum
- Formula: Maturity = P × [((1+r)^n − 1)/r] × (1+r). P=monthly amount, r=monthly return, n=months
- Compounding works over time: ₹5K/month for 10 yrs @ 12% ≈ ₹11.5L. For 20 yrs ≈ ₹50L
How SIP Works: Step by Step
- Choose fund and amount: Select a mutual fund (equity, debt, or hybrid) and fix monthly SIP amount. Minimum often ₹100–500.
- Set date: Pick a date (e.g. 1st or 5th) for auto-debit. Same date each month.
- Auto-debit: Fund house debits your bank account. You receive units at that day's NAV.
- Units accumulate: Each month adds more units. Total units × current NAV = portfolio value.
- Pause or stop: Most funds allow pause (1–3 months) or stop. No penalty for stopping.
Rupee-Cost Averaging
With SIP, you invest the same amount every month. When the market falls, you buy more units; when it rises, you buy fewer. Over time, your average cost per unit can be lower than the average market price—this is rupee-cost averaging. It does not guarantee profits but reduces the impact of buying at a single high point. It also enforces discipline: you invest regardless of market levels.
SIP Return Formula
XIRR vs CAGR
- CAGR (Compound Annual Growth Rate): Used for lump-sum investments. Single initial outflow, single final value.
- XIRR (Extended Internal Rate of Return): Used for SIP and other irregular cash flows. Handles multiple investments at different dates. Mutual fund statements and SIP calculators use XIRR to show your actual return.
- Why XIRR for SIP: You invest every month. Each installment has a different holding period. XIRR accounts for the timing of each cash flow and gives one annualised return figure.
Worked Example: ₹10,000 Monthly SIP
📊 10 years, 12% expected return
Factors Affecting SIP Returns
- Amount: Higher SIP = larger corpus. Double the SIP = roughly double the maturity.
- Tenure: Longer = more compounding. 20 years >> 10 years for same monthly amount.
- Return rate: Equity funds historically 10–14% over long periods. Debt 6–8%. Use realistic assumptions.
- Fund performance: Past returns don't guarantee future. Choose funds with consistent strategy and reasonable track record.
- Timing of start: Starting in a high market vs low market affects early returns, but over 10+ years the impact often evens out due to rupee-cost averaging.
Tax on SIP Returns
- Equity funds: LTCG (holding >1 year) tax-free up to ₹1L/year, 10% above. STCG ( holding <1 year) 15%.
- Debt funds: LTCG (holding >3 years) 20% with indexation. STCG added to income, taxed at slab.
- ELSS: 3-year lock-in, 80C benefit. LTCG same as equity.
- Factor tax when redeeming. SIP in equity for 10+ years usually qualifies for LTCG.
Common SIP Misconceptions
- SIP guarantees returns: No. Returns depend on fund and market. SIP only ensures discipline and averaging.
- SIP is only for equity: No. Debt and hybrid funds also offer SIP.
- Need to time SIP start: Starting anytime is fine. Long tenure matters more than start date.
- SIP = no risk: Equity SIP has market risk. Value can fall. Stay invested for long term.
Use Our SIP Calculator
Enter monthly amount, expected return, and tenure. Get maturity value and year-wise projection. Use for goal planning (retirement, education, etc.).
Disclaimer
Past performance does not guarantee future returns. Mutual fund investments are subject to market risk. Read offer document before investing.