8.10What is SIP?
1What is it?
A SIP (Systematic Investment Plan) invests a fixed amount automatically every month (or week) into a fund.
2Why does it exist?
It builds discipline, removes the need to time the market, and gives rupee cost averaging: you buy more units when prices are low and fewer when high.
3Diagram
Month 1 (NAV ₹10)
100 units
Month 2 (NAV ₹8)
125 units
Month 3 (NAV ₹12.5)
80 units
4Calculation
Average cost = Total invested ÷ Total units
- Month 1: ₹1,000 at NAV ₹10 → 100 units.
- Month 2: ₹1,000 at NAV ₹8 → 125 units.
- Month 3: ₹1,000 at NAV ₹12.5 → 80 units.
- Total ₹3,000 for 305 units → average ≈ ₹9.84.
Average cost ₹9.84 is below the simple average NAV of ₹10.17.
5Risks
- SIPs don’t prevent losses in a falling market.
- Stopping SIPs during falls defeats the purpose.
6Quick revision
- Fixed amount, regular intervals.
- Rupee cost averaging.
- Discipline beats timing.
7Knowledge check
Q1. ₹2,000 at NAV ₹20 buys how many units?Show answer
100.
Q2. What is rupee cost averaging?Show answer
Buying more units when prices are low and fewer when high with a fixed amount.
Q3. Should you stop your SIP when markets fall?Show answer
Usually not; that is when you buy more units cheaply.
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