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.
Why averaging matters
Because markets move up and down, no single entry price is "correct". By spreading purchases across many dates, a SIP gives you an average cost rather than a single lucky or unlucky price. This is especially useful for investors who cannot predict short-term market direction — which is almost everyone.
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.
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.