What is SIP and How is It Calculated? Formula and Example
Learn what a SIP is, how NAV and rupee cost averaging work, the six types of SIP, SIP vs lumpsum, and how to calculate SIP returns with the formula and an example.
You want to grow your savings, but you would like to start small. A Systematic Investment Plan (SIP) can prove helpful. It lets you invest a fixed, comfortable amount in mutual funds at regular intervals, so you can build wealth step by step instead of waiting for the right time or a large lump sum.
The next questions to follow through are, “How much should I invest?” and “How much could it grow into?”
You can find your answer through an SIP calculator, to estimate how much of your investments may grow over a specific period of time.
In this blog, we will explain what a SIP is, how it works, how the calculation is done, and how online calculators can make your planning easier.
What is SIP?
It is a method of investing in mutual funds where you invest a fixed amount, say ₹500, ₹2,000 or ₹5,000, at regular intervals, usually every month. The amount is automatically deducted from your account on a date you choose and invested in the mutual fund scheme of your choice.
Through a SIP, you invest in market-linked mutual funds, so the value of your investment moves with the market. It does not carry a fixed or guaranteed return.
How Does a SIP Work?
When you invest in a mutual fund, you are allotted units. The price of one unit is called the Net Asset Value (NAV). NAV is calculated at the end of every business day. The fund house takes the total value of all the investments the fund holds, subtracts its expenses and liabilities, and divides the result by the number of units issued. Because the market value of those investments changes, the NAV changes too. For example, if you invest ₹5,000 when the NAV is ₹50, you receive 100 units.
Here is how NAV works:
Each time your SIP installment is processed, the money buys a certain number of units of the mutual fund at that day’s NAV.
- When the market is down and the NAV is low, your fixed amount buys more units.
- When the market is up and the NAV is high, the same amount buys fewer units.
Over a long period, investing regularly at different NAVs can help average out the purchase cost of your units. This is known as rupee cost averaging. It reduces the need to time the market, but it cannot guarantee profits or protect you from losses when markets fall.
Here’s a simple example.
Suppose you invest ₹5,000 every month:
| Month | NAV (₹) | Units Bought |
|---|---|---|
| January | 50 | 100 |
| February | 40 | 125 |
| March | 25 | 200 |
| April | 40 | 125 |
| May | 50 | 100 |
| June | 62.50 | 80 |
Over six months, you invested ₹30,000 (₹5,000 × 6) and received 730 units in total. Dividing the amount invested by the units received gives your average cost per unit: ₹30,000 ÷ 730 = about ₹41.10.
Notice that the NAV moved between ₹25 and ₹62.50 during these months, yet you paid about ₹41.10 per unit on average. You did not have to pick the best month to invest. In the months when the NAV was low, your fixed amount simply bought more units.
Key Benefits of Investing Through a SIP
- Start small: Many mutual fund schemes allow SIPs from as little as ₹100 to ₹500 per month.
- Builds discipline: Investing happens automatically, so saving becomes a habit.
- No need to time the market: Regular investing spreads your purchases across market highs and lows.
- Potential for compounding: Returns earned on your investment may be reinvested and can start earning returns of their own over time. The longer you stay invested, the more this effect can add up, although it depends on market performance and is not guaranteed.
- Flexibility: You can usually increase, pause or stop your SIP as your needs change, depending on the fund house and platform.
Six Types of SIP
Not every SIP works the same way. Here are the main types you will come across:
- Regular SIP: You invest a fixed amount at a fixed interval, for example ₹5,000 on the 5th of every month.
- Step-up (top-up) SIP: You increase your SIP amount at set intervals, for example once a year, so your investment grows along with your income.
- Flexible SIP: You can change details such as the instalment amount, and sometimes the frequency, by informing the fund house in advance. This can help if your income varies.
- Perpetual SIP: No end date is fixed, so the SIP continues until you ask the fund house to stop it. It suits long-term goals where you are not tied to a specific tenure.
- Trigger SIP: Some platforms offer trigger-based investing, where an investment is made automatically once a condition you have set is met, such as the NAV reaching a particular level. The features and conditions differ from one provider to another, so check the details before you opt in.
- Multi-SIP: Some fund houses let you invest in more than one of their eligible schemes through a single SIP, so you do not have to set up a separate SIP for each scheme. The available options depend on the provider.
The features available depend on the fund house and the scheme, so check what is offered before you start.
SIP vs Lumpsum: What is the Difference?
They both are different ways of investing in mutual funds. The difference lies in how and when the money goes in.
| SIP | Lumpsum | |
|---|---|---|
| How you invest | A fixed amount at regular intervals | One large amount at one time |
| Who it suits | Regular earners who want to invest gradually | Those who have a large surplus amount available |
| Market timing | Purchases are spread across market highs and lows | Depends on the market level on the day you invest |
| Starting amount | As low as ₹100 to ₹500 per month in many schemes | Usually higher, varies by scheme |
| Effort | Automatic once set up | A one-time decision |
No option is better than the other. The right choice depends on your goal, your cash flow and how comfortable you are with market fluctuations.
How is SIP Calculated?
You can estimate the future value of a SIP with a simple formula. The formula depends on when each instalment is invested. For the calculation below, we assume that each monthly SIP instalment is invested at the beginning of the month.
FV = P × [ ((1 + i)ⁿ − 1) ÷ i ] × (1 + i)
Here,
- FV is the future value, or the maturity amount
- P is the amount you invest every month
- i is the monthly rate of return (annual rate ÷ 12 ÷ 100)
- n is the total number of monthly instalments
Example
Say you invest ₹5,000 per month for 10 years and assume an expected return of 12% per year.
- P = ₹5,000
- i = 12 ÷ 12 ÷ 100 = 0.01, or 1% per month
- n = 10 years × 12 = 120 months
Putting these values into the formula:
FV = 5,000 × [ ((1.01)¹²⁰ − 1) ÷ 0.01 ] × 1.01
FV ≈ ₹11.62 lakh (approximately)
In this case:
- Total amount invested: ₹6,00,000
- Estimated gains: about ₹5.62 lakh
- Estimated maturity value: about ₹11.62 lakh
This shows how compounding can add to your investment over time. Remember, 12% is only an assumption used to explain the calculation. Actual mutual fund returns vary with market conditions and are not guaranteed.
How Time Changes the Result
The same ₹5,000 monthly SIP, assuming a monthly return of 1% and investments made at the beginning of each month, could grow to different amounts depending on the investment period.
| Investment Period | Total Invested | Estimated Value (approx.) |
|---|---|---|
| 5 years | ₹3,00,000 | ₹4.12 lakh |
| 10 years | ₹6,00,000 | ₹11.62 lakh |
| 15 years | ₹9,00,000 | ₹25.23 lakh |
| 20 years | ₹12,00,000 | ₹49.96 lakh |
Note: These are illustrative estimates based on a 1% monthly return and beginning-of-month instalments. Actual mutual fund returns vary with market conditions and are not guaranteed.
Notice how the gap between what you invested and what it could become widens as the years pass. The longer you stay invested, the more time compounding has to work, which can add to the value of your SIP. The final outcome will still depend on how much you invest each month and on the returns the market actually delivers.
SIP Calculator
We saw how to calculate SIP through formulas. But this process can be very tedious, especially when you want to try different amounts and time periods. This is where the SIP calculator helps.
A SIP calculator is a free online tool that does the maths for you in seconds, you simply enter:
- Your monthly investment amount
- The expected annual rate of return
- The investment duration in years
The calculator then shows you the total amount invested, the estimated returns and the estimated maturity value.
How to Start a SIP
Starting a SIP is a simple process and it only takes a few minutes to be done with the online process:
Complete your KYC
Start by completing your KYC (Know Your Customer) verification using the prescribed identification and address details. You will also need to provide the bank details required to set up your investment.
Choose a platform
You can invest through a fund house’s website, or through a SEBI-registered distributor, broker or investment app.
Pick a fund
Choose a scheme that matches your goal, your time horizon and your comfort with risk. Read the scheme documents before you decide.
Set the amount and date
Decide how much to invest and on which date of the month.
Set up auto-debit
Link your bank account through an auto-debit mandate so each installment is deducted automatically.
Review regularly
Check your SIP at least once a year to see if it still fits your goals.
Conclusion
A SIP is a simple and disciplined way to invest in mutual funds, even if you are just starting out. By investing a fixed amount regularly, you can benefit from rupee cost averaging and compounding without worrying about market timing. Understanding how a SIP is calculated helps you set realistic expectations, and a SIP calculator makes it easy to plan your monthly investments around your goals.
Before investing, take some time to understand the scheme, its risks and your own financial goals.
Frequently Asked Questions (FAQs)
What is the minimum amount to start a SIP?
Many mutual fund schemes allow you to start a SIP with ₹100 to ₹500 per month. The exact minimum depends on the scheme.
Can I stop my SIP anytime?
Yes, you can usually cancel your SIP by following the process set by your fund house or investment platform. It is best to send the request well before your next instalment date, as processing times differ. Cancelling a SIP only stops future instalments. Your existing units stay invested until you choose to redeem them, and any exit load, taxes or lock-in conditions would apply at that point. In ELSS funds, each instalment has its own three-year lock-in period.
Is the SIP calculator result accurate?
It is an estimate based on the return rate you enter. Actual returns depend on market performance and may differ.
Is SIP better than lumpsum investing?
Neither is better for everyone. SIP suits regular earners who want to invest gradually, while lumpsum may suit those who have a large amount available and can handle market ups and downs. Your goal and risk comfort should decide.
Are SIP returns guaranteed?
No. SIPs are invested in market-linked mutual funds, so returns are not guaranteed.
Relevant Financial Calculators
Put these concepts into practice using our free, instant financial calculators: