What is SIP?
financeDefinition
SIP (Systematic Investment Plan) is a method of investing a fixed amount in a mutual fund at regular intervals (usually monthly). SIP harnesses the power of compounding and rupee-cost averaging — you buy more units when prices are low and fewer when prices are high, reducing the average cost over time.
Detailed Explanation
A SIP allows you to invest as little as ₹500 per month into a mutual fund scheme of your choice. Unlike a lump-sum investment, a SIP spreads your investment over time, which protects you from investing all your money at a market peak.
Rupee-cost averaging is the key advantage: when the market falls, your fixed SIP amount buys more fund units at a cheaper price. When the market rises, the units you bought cheaply are now worth more. Over a long period (10–20 years), this averaging effect significantly improves returns compared to trying to 'time the market'.
SIP returns are calculated using the compound interest formula. A ₹5,000/month SIP at a 12% annual return over 10 years grows to approximately ₹11.6 lakhs — despite investing only ₹6 lakhs. The extra ₹5.6 lakhs is pure compounding return.
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