Key Takeaways
- Every instalment buys units at the current Net Asset Value (NAV).
- Lower prices buy more units; higher prices buy fewer — this is rupee-cost averaging.
- Your corpus grows as units accumulate and their value changes.
- Longer horizons give compounding more time to work.
On this page
The mechanics, step by step
On your chosen date, the fixed SIP amount is debited and used to buy units of your mutual fund at that day's Net Asset Value (NAV). If the NAV is lower, the same money buys more units; if the NAV is higher, it buys fewer. Repeating this every period is what produces rupee-cost averaging.
How compounding fits in
As your units grow in value, that growth stays invested and can generate further growth. Small differences in return rate or time horizon can lead to large differences in the final corpus. You can see this yourself by changing the "years" input in the SIP calculator and watching the estimated gains change far more than proportionally.
Rupee-cost averaging, with numbers
Suppose you invest ₹10,000 on the same date for four months and the fund's NAV is ₹100, ₹80, ₹125 and ₹100.
| Month | NAV | Units bought |
|---|---|---|
| 1 | ₹100 | 100.00 |
| 2 | ₹80 | 125.00 |
| 3 | ₹125 | 80.00 |
| 4 | ₹100 | 100.00 |
You hold 405 units for ₹40,000 — an average cost of ₹98.77 per unit, below the simple average NAV of ₹101.25. Fixed-rupee investing automatically buys more units when prices are low and fewer when they are high. It does not guarantee a profit (a market that only falls still loses money), but it removes the need to time entries.
What happens behind the scenes
- You register a mandate (NACH/e-mandate) authorising the fund house to debit a fixed amount on a chosen date.
- On each date the amount is debited and units are allotted at that day's applicable NAV, subject to the fund's cut-off time.
- Units accumulate in your folio; you can pause, increase (a step-up SIP), stop or redeem at any time, subject to any exit load.
What a SIP is not
A SIP is a way of buying, not a product. The risk and return come entirely from the scheme you choose — an equity fund SIP is market-linked; a liquid-fund SIP is not. Minimum amounts, dates and mandate limits are set by each fund house; SEBI regulates the funds themselves. Project a plan with the SIP calculator, remembering that the rate you enter is an assumption.
The underlying formula
Calculators estimate the future value of a SIP using the future value of an annuity formula, assuming a constant periodic return. Real returns vary, so treat the output as an illustration of one assumption, not a forecast.
Sources
We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.
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How Compound Interest Works
Compound interest is interest earned on both your principal and previously earned interest. Over time, and with more frequent compounding, it grows money faster than simple interest.
investingHow to Calculate SIP Returns
SIP returns are estimated with the future value of an annuity formula. For real, uneven cash flows, XIRR gives the annualised return that accounts for the timing of each instalment.
investingWhat Is a Step-Up SIP?
A step-up SIP increases your monthly investment by a set percentage or amount each year, usually to match rising income, which can meaningfully grow the final corpus.
investingWhat Is a SIP (Systematic Investment Plan)?
A SIP, or Systematic Investment Plan, is a method of investing a fixed amount into a mutual fund at regular intervals — usually monthly — instead of investing a large sum at once.