How a systematic investment plan works, step by step

What a SIP is

A systematic investment plan (SIP) is a way of investing a fixed amount in a mutual fund scheme at regular intervals, usually every month. The amount is debited from your bank account on a date you choose and invested in the scheme you have selected.

Each instalment buys units at the scheme’s applicable net asset value (NAV). Which day’s NAV applies depends on the scheme’s cut-off time and on when your money reaches the fund house, as set out in SEBI’s rules and the scheme documents.

Why the number of units changes

Because the NAV moves up and down, the same amount buys more units when prices are lower and fewer units when they are higher. Over time this averages out the price you pay per unit. This is often called rupee-cost averaging.

Averaging does not guarantee a profit, and it does not protect you from losses if markets fall and stay low for a long time.

What you decide

You choose the scheme, the amount, the date and how often you invest. Most SIPs can later be paused, stopped or changed, and some fund houses let you increase the amount each year. The scheme documents set out how much notice the fund house needs.

Costs, exit loads and tax

The scheme’s expense ratio is already reflected in its NAV, so you do not pay it separately. Some schemes charge an exit load if you redeem units within a set period after buying them.

Each instalment is treated as a separate purchase with its own date. When you redeem, units are generally treated as sold in the order they were bought (first in, first out), so recent instalments may still attract an exit load or count as short-term for tax even if your SIP started years ago. Check the scheme documents and current tax rules, or ask your tax adviser.

Before you start

Read the scheme information document and key information memorandum. Check the scheme’s riskometer, which SEBI requires every scheme to show on a six-level scale from Low to Very High, and make sure the scheme suits how long you can stay invested.