What is SIP? A Beginner’s Guide to Systematic Investment Plan

Investing in mutual funds often feels complicated - when to invest, how much to invest, and whether the market is “right.” A Systematic Investment Plan (SIP) simplifies all of this. It allows you to invest small amounts regularly in mutual funds, making investing more disciplined, affordable, and easier to manage for first-time as well as experienced investors.

In this guide, we have decoded what SIP is, how it works, key considerations, and more.

What is a SIP?

A Systematic Investment Plan (SIP) is a method of investing in mutual funds where you invest a fixed amount at regular intervals, usually monthly. Instead of investing a large sum at once, SIP spreads your investment over time.

You can start a SIP with:

• A small fixed amount
• A fixed date every month
• A chosen mutual fund scheme

How SIPs Work

A Systematic Investment Plan works on the principle of investing a fixed amount at regular intervals, regardless of market conditions. Once you register for a SIP, the chosen amount is automatically debited from your linked bank account on a predetermined date—usually monthly.

Each time the SIP amount is invested, you are allotted mutual fund units based on the Net Asset Value (NAV) applicable on that particular day. Since market prices fluctuate daily, every SIP instalment is invested at a different NAV. Over time, this results in rupee cost averaging, where you buy more units when prices are low and fewer units when prices are high.

Importantly, every SIP instalment is treated as a separate investment. This matters for taxation, lock-in periods (in ELSS funds), and redemption. SIPs do not protect you from market risk, but they help manage timing risk by spreading investments over a longer period.

What is NAV?

*NAV (Net Asset Value) is the price at which you buy or sell a mutual fund unit. It represents the per-unit value of a mutual fund scheme on a particular day.

In simple terms, NAV is calculated by taking the total value of all the investments held by the mutual fund, subtracting its expenses and liabilities, and dividing the result by the total number of units outstanding.

NAV changes daily based on the market value of the fund’s underlying investments. When you invest through a SIP, the number of units you receive depends on the NAV on the day your SIP amount is invested.

What is Rupee Cost Averaging?

Rupee Cost Averaging is a benefit of investing a fixed amount regularly, as done through a SIP. 

Since markets move up and down, each SIP instalment is invested at a different NAV. When the NAV is low, you buy more units, and when the NAV is high, you buy fewer units. Over time, this helps average out the cost at which units are purchased.

Rupee cost averaging does not guarantee profits or protect against losses, but it can help reduce the impact of short-term market volatility when investing over the long term.

Potential Benefits of Investing in SIP

1. Encourages Disciplined Investing

One of the biggest advantages of SIP is that it turns investing into a habit. Since investments are automated, SIPs remove the need for repeated decision-making and help investors stay consistent even during volatile markets.

2. May Reduce the Impact of Market Volatility

Markets move up and down in the short term. SIPs may help average out the purchase cost of mutual fund units over time, and may reduce the risk of investing a large amount at an unfavourable market level.

3. Makes Investing Affordable and Accessible

SIPs allow investors to start with relatively small amounts. This makes mutual fund investing accessible even to first-time investors or those with limited surplus income.

4. Investors May Potentially Benefit from Long-term Compounding

When SIP investments are continued over a long period, returns generated can potentially earn further returns. This compounding effect becomes more meaningful when investors remain invested for several years.

5. Flexible and Investor-friendly

Most SIPs offer flexibility—you can increase the SIP amount, pause it temporarily, or stop it altogether, subject to fund house terms. This makes SIPs adaptable to changing financial situations.

Can SIP Save Tax?

SIP by itself does not provide tax benefits. However, SIPs invested in Equity Linked Savings Schemes (ELSS) can help reduce taxable income.

ELSS is a category of equity mutual funds eligible for tax deduction under Section 80C of the Income Tax Act. Investments made in ELSS—whether as a lump sum or through SIP—qualify for a deduction of up to ₹1.5 lakh in a financial year. Please note that the tax benefit is available only if you have opted for the old tax regime.

Each SIP instalment in an ELSS fund has a mandatory lock-in period of three years from the date of investment. This means SIP instalments are locked in individually, not as a whole.

While ELSS funds invest primarily in equities and carry market risk, they combine tax savings with long-term wealth creation potential, making them a popular investment option.

Key Considerations Before Starting a SIP

1. Identify your Financial Goal

Before starting a SIP, it is important to clearly define what you are investing for—such as retirement, children’s education, buying a house, or wealth creation. Clear goals help in choosing the right fund and time horizon.

2. Decide your Investment Horizon

SIPs work best when aligned with long-term goals. Short investment horizons may not be suitable for volatile fund categories, especially equity-oriented funds.

3. Assess your Risk Appetite

Different mutual funds carry different levels of risk. Investors may choose funds that match their comfort with market fluctuations rather than chasing high past returns. You can consider consulting with a SEBI-registered investment adviser before putting your money in a fund.

4. Consider Costs and Fund Structure

Expense ratios, plan type (Direct or Regular), and fund strategy (active or passive/index) can significantly impact long-term returns. Reviewing scheme documents helps investors make informed choices.

How Are Mutual Funds Taxed via SIP Investments? (STCG & LTCG Rules Explained)

Taxation of SIP investments depends on the type of mutual fund and the holding period of each SIP instalment. Since every SIP instalment is considered a separate purchase, tax liability is calculated individually for each instalment at the time of redemption.

Taxation of Equity Mutual Fund SIPs

1. Short-Term Capital Gains (STCG)

If equity mutual fund units are redeemed within 12 months of investment, the gains are classified as short-term. As per rules applicable in 2025, STCG on equity mutual funds is taxed at 20%, plus applicable surcharge and cess.

2. Long-Term Capital Gains (LTCG)

If equity mutual fund units are held for more than 12 months, gains are treated as long-term. LTCG exceeding ₹1.25 lakh in a financial year is taxed at 12.5%, without the benefit of indexation*.

*Indexation benefit means adjusting your investment’s purchase price for inflation so you pay tax only on the real profit, not the amount that increased because of rising prices/inflation.

Taxation of Debt Mutual Fund SIPs

For debt mutual funds, capital gains taxation depends on the investor’s income tax slab. Investments made in debt mutual funds after 1 April 2023 are taxed as per slab rates, irrespective of the holding period. This rule applies to SIP instalments as well.

Taxation of ELSS SIPs

ELSS investments qualify for tax deduction under Section 80C, provided you have opted for the old tax regime. On redemption after the lock-in period, ELSS gains are taxed as equity LTCG, following the same ₹1.25 lakh exemption and 12.5% tax rate.

What Happens if I miss SIP Instalment?

If you miss a SIP instalment due to insufficient balance or a payment failure, there is no penalty. The instalment is simply skipped, and the SIP continues from the next scheduled date.

Missing one or two instalments does not cancel your SIP automatically. However, if multiple consecutive instalments are missed, the mutual fund house may discontinue the SIP, depending on its terms.