Short answer: A SIP, or systematic investment plan, is a way to put a fixed sum into mutual funds at regular intervals, most often monthly. You set the amount and the date once, usually through an automated bank debit, and each instalment buys units of a mutual fund scheme at that day’s NAV.
Last reviewed: 7 November 2026
At a glance
| Term | What it means | How it fits into a SIP |
|---|---|---|
| SIP | A fixed sum invested at regular, pre-decided intervals, most often monthly | An investment mode for buying mutual fund schemes, not a product of its own |
| NAV (net asset value) | The price of one unit of a mutual fund scheme on a given day | Changes with the scheme’s prices, so each instalment buys a different number of units |
| Units | Shares of the scheme that you hold after each instalment | The number bought depends on the NAV at the time |
| e-NACH / e-mandate | A standing permission that lets your bank debit a fixed amount on a chosen date | Usually automates each monthly payment |
| Rupee cost averaging | The tendency of the average purchase cost per unit to smooth out over time | Results from buying a fixed amount at changing prices |
| Compounding | Returns that are reinvested so that gains earn further gains | Drives long-term wealth building |
What is a SIP, and what is it not?
A SIP is a method of investing, not a separate financial product. The money goes into mutual fund schemes, which are pooled investments run by fund houses, and the SIP only sets the schedule and size of your purchases. The same scheme can usually be bought as a lump sum or through a SIP, so the choice is about how the money is invested over time.
How does each instalment turn into units?
Each instalment is converted into units at the scheme’s prevailing NAV. Because the fixed amount is constant, the number of units you receive changes with the price.
Here is a hypothetical example with invented figures, for illustration only. Suppose you invest Rs 2,000 each month for three months:
- Month 1: NAV Rs 100, so Rs 2,000 buys 20 units.
- Month 2: NAV Rs 80, so Rs 2,000 buys 25 units.
- Month 3: NAV Rs 125, so Rs 2,000 buys 16 units.
You invest Rs 6,000 in total and hold 61 units. Your average cost per unit is Rs 6,000 divided by 61, which is about Rs 98.36.
What is rupee cost averaging, and what does it not do?
Rupee cost averaging is the effect seen in the example above. A fixed amount buys more units when prices are low and fewer when prices are high, so the average purchase cost per unit tends to smooth out over time.
The catch is that averaging only changes your cost per unit. It does not guarantee a gain. In the example, the simple average of the three NAVs is about Rs 101.67, while your average cost is about Rs 98.36, but the value of your 61 units still depends on the NAV on the day you check it. If prices fall and stay low, the smoothed cost does not protect the value of what you hold.
How does compounding fit into a SIP?
Compounding happens when returns are reinvested, so that gains earn further gains. In a SIP, the returns on your units can be reinvested rather than withdrawn, so the base on which future gains are earned keeps growing.
This is the effect that drives long-term wealth building. It works in both directions, though: if the scheme’s value falls, reinvestment also compounds the losses on the smaller base. The effect is slow and depends entirely on how the scheme performs.
How do you set up a SIP?
Setting up a SIP involves a few steps:
- 1. Choose the mutual fund scheme you want to invest in.
- 2. Choose the fixed amount for each instalment and the date each month.
- 3. Authorise an e-NACH or e-mandate so your bank can debit that amount on the chosen date each month.
Once these are in place, the instalments run automatically. Check the details of the scheme itself before starting, since the SIP only controls how you buy it, not what the scheme holds.
Can you change or stop a SIP?
SIPs are flexible. You can usually increase or decrease an instalment, pause it or stop it without penalty. This flexibility is useful, but it also means that a SIP can be stopped at a point when prices are low, which locks in the lower value of the units you hold at that time.
What are the risks and catches?
SIP returns are market-linked and not guaranteed. The value of your units can rise or fall with the market, and at some points you may hold units worth less than you have paid in. A SIP is not a fixed deposit, and it does not promise a particular return.
Regular debits also reduce the cash you have available each month. If the amount is set higher than you can comfortably spare, a SIP can become a source of strain rather than savings, so the amount and date should match your own circumstances. Averaging and compounding describe how the arithmetic works, not what will happen to your money.
Frequently asked questions
Is a SIP a separate investment product?
No. A SIP is an investment mode for buying mutual fund schemes rather than a separate financial product in its own right. It sets how and when you buy units of a scheme.
Does a SIP guarantee returns?
No. SIP returns are market-linked and not guaranteed, so they can rise or fall with market performance.
Can I stop a SIP whenever I want?
SIPs are flexible, so you can usually stop, pause, increase or decrease instalments without penalty. Check the terms of your scheme and bank before making changes.
Sources and last check
Facts in this article were checked against the sources below on 7 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- upstox.com (broker education)
- icicidirect.com (broker education)
- dhan.co (broker education)
- kotakneo.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.