What is SIP Investment & How SIP Works?

1 April, 2025

Synopsis 

• The full form of SIP is Systematic Investment Plan. 

• It is a Mutual Fund investment method where you can invest fixed amounts at regular intervals. 

• You can start SIP investments with amounts as low as ₹500. 

Systematic Investment Plans, or SIPs, are one of the most popular ways of investing in Mutual Funds. SIPs help inculcate financial discipline and build wealth for the future. With SIPs, you can start small and gradually build a corpus in a systematic and planned manner. Keep reading on to learn more about SIP investments and how they work. 

What is an SIP? 

An SIP is a systematic approach to investing in Mutual Funds. Similar to a Recurring Deposit, SIP investment involves allocating a pre-determined amount of money for investment in the market at regular intervals (usually every month). You can start an SIP with amounts as low as ₹500.  

You can consider the SIP route to invest in stocks and Mutual Funds because it allows you to participate in the stock market while managing risk better. 

Fundamentals of SIP 

SIPs work on the following two principles: 

• Rupee Cost Averaging  

SIPs can help you minimise market volatility by eliminating the guessing game of market performance. Regular investing ensures that the average purchase cost is evened out in the long run. 
 
When the markets rise, you get fewer units, and when the markets fall, you receive more units. This may minimise your risk and ensure you acquire investments at a lower average cost per unit. 

• Compounding  

Saving a small sum of money regularly for long periods of time can have an impact on your investment because of the effect of compounding. The following examples illustrate that: 
 
‘A’ starts investing for his 60th birthday at the age of 40. 

 
 Assuming returns of 12% and a monthly investment of ₹1,000, his total corpus at the end of 20 years will be ₹9,99,000. 
 
‘B’ starts investing for his 60th birthday at the age of 20. 
Assuming returns of 12% and an investment of ₹1,000 per month, his total corpus at the end of 40 years will be a staggering ₹1.19 crore -- almost 10 times the corpus accumulated by A.  
 
Regular investments spread over longer durations yield greater returns and profits. 

How Does SIP Work? 
Here’s a step-by-step breakdown of how you can invest in SIPs: 

1. Select a Mutual Fund based on your goals and risk appetite. 

2. Set a fixed amount to invest regularly and choose a preferred frequency. 

3. On the auto-debit date, the SIP amount will be automatically deducted from the linked bank account. 

4. Fund units are bought at the prevalent Net Asset Value (NAV). 

5. More units are bought when prices are low and fewer when high. This is also known as Rupee Cost Averaging. 

6. Returns are reinvested, accelerating wealth creation over time 
   
   

Advantages of Investing in SIP 

• Financial Discipline: The regularity of SIPs breeds financial discipline. It encourages forced savings and helps you build a corpus without cramping your lifestyle. 
  
  

• Flexibility: SIPs provide greater flexibility in investing. You can increase or decrease the amount of investment at any time. 
  
  

• Convenience: SIPs are a hassle-free mode of investing. You can easily do it online with a one-time set of instructions.  
  
  

• Potential for Reduced Risk: Lump sum investments may expose you to greater capital risk. A SIP spreads your investment over time and may reduce the risk to capital and help you navigate volatility better. 
  
  

Read more about Equity Linked Savings Schemes (ELSS) here. 

Looking to apply for a Mutual Fund Investment? Click here to get started now! 

*Disclaimer: Mutual Funds are subjected to market risks. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.