Systematic Investment Plan (SIP)

With a SIP, an investor sets up an automatic instruction for a fixed sum to be invested in a chosen mutual fund on a set date each month. The money buys fund units at that day’s price.

Because the amount is fixed, more units are bought when prices are low and fewer when prices are high. This is the same principle as dollar-cost averaging, often called rupee-cost averaging in India. For example, an investor putting 5,000 a month into an equity fund buys 100 units when the price is 50 and about 83 units when the price is 60.

SIPs make investing accessible, since they can start with small amounts, and they build a disciplined habit of regular saving. They also remove the temptation to time the market. Many investors increase their SIP amount each year as their income grows, an approach called a step-up SIP.

SIPs do not guarantee profits or protect against losses in falling markets. Returns depend on the performance of the chosen fund. They can usually be paused, changed or stopped, although some tax-saving funds have lock-in periods. SIPs have grown rapidly in India and are a major source of inflows into its mutual fund industry.