Chapter 5 of 15
What is SIP and How Does it Work?
Rupee cost averaging, compounding, step-up SIP, and common mistakes.
Arjun, a 26-year-old marketing professional from Bengaluru, started his investment journey with a simple SIP of ₹5,000 per month in a Flexi Cap fund. Three months in, the market fell sharply. His colleagues panicked and stopped their SIPs. Arjun, who understood how SIPs work, kept investing — and bought significantly more units at the lower prices. By the time the market recovered, Arjun's average cost was much lower than those who had paused. This chapter explains exactly why SIP is one of the most powerful financial tools available to Indian investors.
What Is a SIP?
Think of SIP like buying vegetables at the local market every week. When vegetables are expensive, you buy less; when they're cheap, you buy more. Over time, your average cost ends up lower than if you tried to time your purchases. SIPs work exactly the same way with mutual fund units.
Rupee Cost Averaging: The Heart of SIP
Rupee cost averaging is what makes SIPing through market ups and downs so powerful. When markets fall and NAV drops, your fixed SIP amount buys more units. When markets rise and NAV is high, you buy fewer units. The result: your average cost per unit is lower than the average NAV over the period.
| Month | NAV (₹) | Amount Invested | Units Purchased |
|---|---|---|---|
| Month 1 | 100.00 | ₹10,000 | 100.00 |
| Month 2 | 80.00 | ₹10,000 | 125.00 |
| Month 3 | 70.00 | ₹10,000 | 142.86 |
| Month 4 | 90.00 | ₹10,000 | 111.11 |
| Month 5 | 110.00 | ₹10,000 | 90.91 |
| Month 6 | 120.00 | ₹10,000 | 83.33 |
| Total | Avg: ₹95.00 | ₹60,000 | 653.21 units |
Average cost per unit = ₹60,000 ÷ 653.21 = ₹91.86 (much lower than the average NAV of ₹95) At Month 6 NAV of ₹120, portfolio value = 653.21 × ₹120 = ₹78,385 on an investment of ₹60,000 — a return of 30.6% even though the NAV started at ₹100 and is only at ₹120 (20% up from start).
The extra return came entirely from rupee cost averaging — buying more units when the market fell in months 2 and 3.
SIP vs Lumpsum: Which Is Better?
| Scenario | SIP | Lumpsum | Winner |
|---|---|---|---|
| Falling Market (invest, market drops then recovers) | Buys more units at lower prices — excellent returns | Immediate loss, slower recovery | SIP wins |
| Rising Market (invest at start of sustained rally) | Buys fewer units as NAV rises throughout | All units bought at low NAV — maximum gains | Lumpsum wins |
| Volatile/Sideways Market (up-down-up pattern) | Rupee averaging works perfectly — lower average cost | Returns depend entirely on entry/exit timing | SIP wins |
| Investor Psychology | Removes timing anxiety, builds discipline | Requires courage and market knowledge to deploy | SIP wins |
| For Regular Income (salary earners) | Natural fit — invest as salary arrives | Requires large idle capital upfront | SIP wins |
For lumpsum investments, using a STP (Systematic Transfer Plan) from a liquid fund to equity over 6–12 months captures much of SIP's benefit. More on STP in the Advanced Strategies chapter.
Step-Up SIP: The Wealth Accelerator
A Step-Up SIP (also called a SIP Top-Up) automatically increases your monthly SIP amount by a fixed percentage every year, matching your income growth. This is one of the most underused but powerful features of SIP investing.
Most Indians get a 10–15% salary increment annually. Instead of letting lifestyle inflation absorb all of your raise, increase your SIP by 10% each year. This seemingly small habit makes an extraordinary difference over time. All major platforms — Groww, Zerodha, CAMS — allow you to set up a step-up SIP with annual increments.
- Total invested over 20 years: ₹24 lakh
- Corpus at 12% CAGR: approximately ₹98 lakh
- Year 1: ₹10,000/month, Year 2: ₹11,000/month, Year 3: ₹12,100/month... Year 20: ₹61,159/month
- Total invested over 20 years: approximately ₹68.7 lakh
- Corpus at 12% CAGR: approximately ₹1.27 crore
The step-up SIP generates ₹29 lakh more wealth. While you did invest more total (₹68.7 lakh vs ₹24 lakh), the proportional wealth creation is far superior because you invested more in the later, higher-compounding years.
Other SIP Variants to Know
Flexi-SIP: Instead of a fixed amount, you set a range (e.g., minimum ₹2,000, maximum ₹10,000). The SIP amount varies based on market conditions or your instructions.
Trigger SIP: Starts automatically when a specific trigger is met — like Nifty falling 5% or a specific NAV level. Useful for disciplined buying on dips.
Perpetual SIP: No end date — continues until you manually stop it. Ideal for long-term goals like retirement.
Pausing and Stopping SIPs
Life happens — job loss, medical emergency, home loan EMI spike. Most AMCs allow you to pause a SIP for 1–3 months without cancelling it entirely. This is far better than stopping the SIP and losing the mandate, which means setting everything up again.
To pause a SIP: Log into your Groww/Zerodha account → My SIPs → Select the SIP → "Pause SIP" → Select months to pause. The SIP automatically resumes after the pause period.
Important: Never stop a SIP because the market is falling. Market falls are precisely when SIP works hardest for you, buying more units at lower prices.
Ready to see your SIP projections? Try the SIP Calculator
with step-up feature to see your potential corpus.
Arjun invests ₹5,000/month via SIP. In Month 2, the NAV falls from ₹100 to ₹80. What happens to his investment due to rupee cost averaging?
Key Takeaways
- SIP invests a fixed amount monthly, automatically — it eliminates the need to time the market and removes emotional decision-making from investing.
- Rupee cost averaging means SIPs buy more units when markets fall and fewer when markets rise, resulting in a lower average cost per unit over time.
- A Step-Up SIP that increases your monthly investment by 10% annually can generate significantly more wealth — over 20 years, the difference can be ₹30+ lakh on a ₹10,000 starting SIP.
- Never stop a SIP because the market is falling — that is exactly when SIP is most beneficial, accumulating cheap units that will grow when markets recover.