A SIP, or systematic investment plan, invests a fixed amount in a mutual fund at regular intervals, usually monthly. Each instalment buys units at that day’s net asset value (NAV), so you buy more units when prices are low and fewer when they are high. Over time your wealth grows through compounding. At an assumed 12% annual return, ₹5,000 a month for 10 years, invested at the start of each month, grows to about ₹11.62 lakh on ₹6 lakh invested.
Returns are never guaranteed. Here is how the maths works and what to watch.
How is the future value calculated?
Calculators, including the one SEBI provides on its investor website, use the future value of a series of payments:
- FV = P × [((1 + r)^n − 1) ÷ r] × (1 + r)
P is the monthly amount, r is the annual return divided by 12, and n is the number of months. The final (1 + r) assumes each payment is made at the start of the month.
Worked example:
- P = ₹5,000
- r = 0.12 ÷ 12 = 0.01
- n = 120
- (1.01)^120 = 3.3004
- FV = 5,000 × (2.3004 ÷ 0.01) × 1.01 ≈ ₹11,61,695
If each payment is made at the end of the month, the result is about ₹11,50,193. Check your own figures with the SIP calculator.
How much difference does time make?
Time matters more than almost anything else. Keeping ₹5,000 a month at an assumed 12%:
- 10 years: about ₹11.62 lakh on ₹6 lakh invested
- 15 years: about ₹25.23 lakh on ₹9 lakh invested
- 20 years: about ₹49.96 lakh on ₹12 lakh invested
Doubling the period from 10 to 20 years doubles what you put in but more than quadruples the result. The return assumption matters too: at 10% the 10-year figure is about ₹10.33 lakh rather than ₹11.62 lakh. See the general principle with the compound interest calculator.
What is rupee cost averaging?
Because the amount is fixed, the number of units varies with the NAV. Example with ₹2,000 a month:
- Month 1, NAV ₹40: 50 units
- Month 2, NAV ₹50: 40 units
- Month 3, NAV ₹25: 80 units
You invest ₹6,000 and get 170 units, an average cost of ₹35.29 per unit. The simple average of the three NAVs is ₹38.33. Buying more units when prices dip lowers your average cost. It does not prevent losses if the market falls and stays down, but it removes the need to time your entry.
Are SIP returns guaranteed?
No. Mutual fund investments are subject to market risks, and the 12% figure above is an assumption, not a promise. Equity funds can fall sharply in a given year. A SIP reduces timing risk but not market risk. Debt funds are less volatile but also carry interest rate and credit risk. Match the fund to your goal and time horizon, and read the scheme documents before investing.
How does a SIP compare with a fixed deposit?
A fixed deposit gives a known return and, at banks, deposit insurance up to ₹5 lakh per depositor per bank. A mutual fund offers potentially higher long-term returns with no guarantee. Many people use both: deposits for an emergency fund and near-term goals, and an equity fund plan for goals more than five years away. Compare the certain option with the FD calculator.
How do I measure returns?
For regular investments, the right measure is XIRR, which accounts for the timing of each instalment. Comparing the final value with total invested gives an absolute return, which ignores time. Fund factsheets also show point-to-point returns for lump sums, which are not the same as your actual result. Use the ROI calculator for a simple before-and-after comparison, but rely on XIRR in your account statement for the real annualised figure.
Can I pause, stop or change a SIP?
Yes. Most funds let you pause, stop or change the amount without a penalty from the fund house, though exit loads may apply if you redeem units within a set period. Stopping instalments does not sell your existing units; they stay invested. Many investors raise the monthly amount each year as income grows, a step-up approach that can significantly lift the final corpus.
What costs reduce SIP returns?
Every mutual fund charges an annual expense ratio, which is deducted from the fund’s assets before the NAV is published. Direct plans, bought without a distributor, usually have lower expense ratios than regular plans of the same scheme. A difference that looks small each year compounds over a long SIP. Exit loads can apply if you redeem early, and capital gains tax may be due when you sell units. Check the scheme information document for current charges, and compare plans before you register a SIP rather than after.
How do I start?
- Complete KYC with a registered intermediary or the fund house
- Choose a fund that matches your goal and risk tolerance
- Pick an amount and date that suit your salary cycle
- Set up a mandate for auto-debit from your bank
- Review the plan once a year, not every day, and rebalance if your goal changes
Check that the fund is offered by a SEBI-registered mutual fund. Consistency is what makes a SIP work: the investor who keeps going through bad markets usually ends up ahead of the one who stops.
Sources
FAQ
What does “How Does a SIP Investment Work?” explain?
A SIP, or systematic investment plan, invests a fixed amount in a mutual fund at regular intervals, usually monthly. Each instalment buys units at that day’s net asset value (NAV), so you buy more units when prices are…
How should I use this guide with a calculator?
Read the definitions and assumptions first, then open the linked calculator with the same inputs. Treat results as estimates, not professional advice.
Is this financial or medical advice?
No. Calcenzo content is educational. Confirm important decisions with a qualified professional and official sources for your situation.