What is a SIP and How Does It Actually Work? A No-Jargon Guide
A Systematic Investment Plan (SIP) is not a product. It is a method — an automated instruction to buy units of a mutual fund on a fixed date every month. Think of it as a recurring deposit, except the money buys fund units instead of earning a fixed rate.
What literally happens
1. You pick a mutual fund (say, Parag Parikh Flexi Cap) 2. You set up an SIP: ₹5,000 on the 5th of every month 3. On the 5th, ₹5,000 auto-debits from your bank 4. That ₹5,000 buys you units of the fund at that day's NAV 5. If NAV is ₹100, you get 50 units. If NAV is ₹50 (market fell), you get 100 units. 6. Repeat forever. Sell units anytime; profit/loss = (selling NAV − average buying NAV) × units.
Why SIP works better than lump-sum for most people
Rupee cost averaging. Because you buy more units when the market is low and fewer when it is high, your average cost ends up lower than the average NAV over the period. You benefit from volatility instead of fearing it.
Forced discipline. Nobody has the stomach to invest ₹60,000 on the day the market crashes 10%. An SIP does it for you automatically.
Psychology. ₹5,000/month feels smaller than ₹60,000/year, even though they are identical.
The compounding number that matters
₹5,000/month for 20 years at 12% CAGR becomes ₹50 lakh. Your contribution: ₹12 lakh. Gains: ₹38 lakh. ₹5,000/month for 30 years at 12% becomes ₹1.76 crore. Contribution: ₹18 lakh. Gains: ₹1.58 crore.
That extra 10 years turns ₹38 lakh of gains into ₹1.58 crore. This is compounding. It is the entire reason to start early.
Mistakes new SIP investors make
1. Stopping during a market crash. That's exactly when SIPs buy the most units. Never stop. 2. Switching funds every year chasing last year's winner. Stick for 5+ years. 3. Too many funds. 2-3 diversified equity funds is enough. Seven isn't "more diversified" — it's just a mess. 4. Not increasing the SIP amount as salary grows. A step-up SIP (10% increase every year) roughly doubles the final corpus.
Taxation
Equity SIP units held > 12 months: LTCG at 12.5% on gains above ₹1.25 lakh/year. Units held < 12 months: STCG at 20%.
Start with our SIP Calculator and Step-up SIP Calculator — plug in your salary and target corpus, see what monthly amount gets you there.
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