Systematic Investment Plan
Also written SIP · Systematic Investment Plan (SIP) · Rupee cost averaging
A facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
In plain language
An SIP fixes the rupees, not the units. Rs 10,000 a month buys whatever that money buys on the date it is invested — a lot of units when the market is down, fewer when it is up.
That asymmetry is the entire mechanism, and it works in the investor's favour automatically. The cheap months buy more units than the expensive ones, so the average cost of acquisition ends up below the simple average of the NAVs on the transaction dates. This is rupee cost averaging, and it requires no forecast of any kind.
The second benefit is behavioural and probably larger. Investing Rs 10,000 every month is a decision made once. Investing Rs 1,20,000 in one go is a decision an investor postpones when markets are falling, which is precisely when they should not.
How it works
An SIP can open a fresh folio or add to an existing one, and the minimum to start one is typically lower than for a lump-sum purchase. It can even be started during a New Fund Offer. Instalments are collected through NACH, standing instructions or post-dated cheques, so the transaction executes without the investor having to act each month — which the workbook describes as protecting the portfolio from investor inertia.
Stamp duty applies to every instalment. Since 1 July 2020, units issued against any purchase — lump sum, SIP, STP, switch-in or IDCW reinvestment — attract stamp duty at 0.005% of the amount invested, and units are allotted only on the amount left after it. On a Rs 10,000 instalment that is 50 paise.
A distributor bringing in an eligible new investor through SIP earns additional commission of 1% of the total investment made during the first year, capped at Rs 2,000, under SEBI's framework for new individual investors from B-30 cities and new women investors.
The formula
Units allotted in a month = Instalment ÷ NAV on the transaction date
Average cost per unit = Total amount invested ÷ Total units accumulated
Rupee cost averaging is the observation that:
Average cost per unit < Simple average of the NAVs
whenever the NAV varies at all.
A worked example
An investor runs Rs 10,000 a month into an equity scheme for six months through a market dip.
| Month | NAV (Rs) | Units allotted |
|---|---|---|
| 1 | 42.00 | 238.095 |
| 2 | 38.50 | 259.740 |
| 3 | 35.00 | 285.714 |
| 4 | 39.20 | 255.102 |
| 5 | 44.00 | 227.273 |
| 6 | 46.50 | 215.054 |
| Total | 1,480.978 |
Total invested = Rs 60,000
Average cost per unit = 60,000 ÷ 1,480.978 = Rs 40.51
Simple average of NAVs = 245.20 ÷ 6 = Rs 40.87
The units were acquired 36 paise below the average NAV, without a single judgement about the market. Month 3 is where it happened: the cheapest NAV bought the most units.
Value the holding at month 6, when the NAV is Rs 46.50:
| Units | Value at Rs 46.50 | |
|---|---|---|
| SIP of Rs 10,000 × 6 | 1,480.978 | Rs 68,865 |
| Lump sum of Rs 60,000 at month 1 (NAV 42.00) | 1,428.571 | Rs 66,429 |
The SIP is Rs 2,436 ahead — because the market fell before it rose. Reverse the path and put the same six NAVs in ascending order, and the lump sum wins. Rupee cost averaging lowers the average cost; it does not promise to beat a lump sum.
(Each Rs 10,000 instalment actually buys units worth Rs 9,999.50 after stamp duty of 0.005%; the table ignores that rounding.)
Why NISM asks about it
Chapter 9 (Investor Services), section 9.11.1, introduces the SIP and works the rupee-cost-averaging arithmetic; Chapter 8 adds the stamp duty, and Chapter 6 the distributor commission. Expect a computation asking for units allotted at given NAVs or for the average cost, plus recall questions on which transactions attract stamp duty and how the ELSS lock-in works on a SIP.
Common exam traps
- SIP is a facility, not a product. It is a way of investing into a scheme, not a scheme, an asset class or a separate category of fund.
- Rupee cost averaging lowers the average cost below the average NAV — that is all it guarantees. It does not guarantee a profit and does not always beat a lump sum; in a market that only rises, the lump sum wins.
- Every instalment attracts stamp duty at 0.005%, and so do STP instalments, switch-ins and IDCW reinvestments. Units are allotted net of it.
- In an ELSS, each instalment is locked in for three years from its own date. The whole SIP does not unlock three years after the first instalment.
- Each instalment is a separate purchase with its own date, which is what drives both that lock-in and the holding-period test for capital gains.
- A SIP can be started in an NFO — a point the workbook makes explicitly and questions like to test.
Where this is taught
- Series V-A · Chapter 9: Investor Servicesintroduced here
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series II-B · Chapter 14: Financial Transactionsintroduced here
- Series V-D · Chapter 9: Investor Servicesintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series XXI-A · Chapter 6: Collective Investment Vehiclesintroduced here
Related terms
- New Fund OfferThe period in which a mutual fund scheme's units are offered to the public for the first time, at a fixed NFO price rather than at NAV, and during which the registrar builds the scheme's first register of investors.
- Stamp dutyA levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Systematic Withdrawal PlanA standing instruction to redeem a set amount — or only the appreciation — from a mutual fund scheme at a chosen frequency, used to manufacture a regular income in retirement.
- Equity Linked Saving SchemeAn equity mutual fund category that carries a section 80C deduction of up to Rs 1.5 lakh with a compulsory three-year lock-in — the shortest lock-in of any tax-saving instrument.
- One-Time MandateA folio-level authorisation letting a specified mutual fund debit a specified bank account through NACH for purchases, up to a set limit, so the investor need not initiate payment each time.
- RebalancingRestoring a portfolio to its target asset allocation after markets have pushed it away — which mechanically sells what has risen and buys what has fallen, with no view on market direction.
- Loss aversionThe behavioural tendency to prefer avoiding a loss over acquiring an equal gain — it is better not to lose Rs 5,000 than to gain Rs 5,000 — which keeps investors out of sound opportunities.
- SIP Top-upA SIP facility that raises the instalment at chosen intervals by a fixed amount or a percentage, until a cap or end date is reached, after which the instalment stays constant.
- Direct and regular plansThe two routes into the same mutual fund scheme: a direct plan with no distributor and a lower expense ratio, and a regular plan that pays distributor commission — same portfolio, separate NAVs.
- Statement of AccountsThe registrar's proof of investment for a mutual fund folio, showing amount, price and units for each transaction and, from the second one, the balance units and their current value.
- PAN exemptionThe relaxation that lets small mutual fund investors invest without a PAN — up to a composite Rs 50,000 a year in micro-SIPs and lump sums — by quoting a PAN Exempt KYC Reference Number from a KRA.
- Two-factor authenticationThe requirement that online mutual fund subscriptions and redemptions be authenticated by two factors, one of them an OTP sent to the email or phone registered with the AMC — signature does the job offline.
- NPCIThe National Payments Corporation of India — the umbrella body for retail payments and settlement, set up with RBI and IBA support, which runs NACH and the account validation used to verify investors' bank accounts.
- MICR codeThe 9-digit Magnetic Ink Character Recognition code printed on the MICR band of a cheque, identifying the bank branch: 3 digits for the city, 3 for the bank and 3 for the branch.
- Micro investmentMutual fund investments up to Rs 50,000 in aggregate under all schemes of a fund house, which an individual investor may make without a PAN — but never without KYC.
- Financial planningThe process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
- Capital appreciationThe gain made when the market value of an investment rises above what you paid for it — as distinct from income, which is the interest or dividend the investment pays you along the way.
- Recurring DepositA bank deposit where you put in a fixed amount every month for a set term. It earns more than a savings account, and TDS applies beyond a stipulated amount of interest.
- Compound interestInterest earned on the original amount and also on the interest already earned. Rs 1,000 at 9% grows to Rs 31,409 in 40 years compounded, against Rs 4,600 with simple interest.
- PMT functionThe spreadsheet function that converts a target corpus into the fixed periodic saving needed to reach it — the arithmetic behind every "how much should I invest a month" answer.
- Volatility riskThe risk that a company's share price swings up and down over time, even when the company itself is not in danger of failing. One of the seven risks in the booklet.
- Market timingTrying to pick the exact best moment to buy or sell. The booklet calls it a "complex or even impossible duty" and offers regular investing (SIP, rupee cost averaging) instead.
- Solution oriented schemesOne of the five broad categories of mutual fund schemes: schemes that invest according to a personal goal such as retirement or a child's education.
- Risk managementThe general practice of protecting yourself financially against loss — insurance is one tool for it, and spreading your investments is another.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Consolidated Account StatementA single statement showing an investor's transactions and holdings across every scheme of every mutual fund in India, linked by PAN and issued monthly where there has been a transaction.
- Trail commissionThe commission an AMC pays a mutual fund distributor as a percentage of the current value of the investments they brought in, calculated daily and paid for as long as the investor stays invested.
- Ticket sizeThe minimum amount an investment requires — from as little as Rs 50 or Rs 100 in some avenues to more than Rs 1 lakh or even Rs 1 crore in others.
- NACHNational Automated Clearing House — NPCI's centralised electronic clearing system for repetitive payments, which replaced ECS and now carries SIP debits and dividend and redemption credits.
- Full trail modelSEBI's rule that AMCs pay distributors only trail commission in all schemes — no upfront commission and no upfronting of trail, in cash or kind, through sponsorships or any other route.
- Equity mutual fundA mutual fund that invests in shares to pursue growth, professionally managed and diversified across large, mid or small caps, sectors and investment styles.
- Periodic investingBuilding a holding in a volatile asset through small regular instalments rather than one lump sum, so more units are bought when prices are low and the average cost falls.
- Diversified equity fundAn equity scheme that invests across a wide spectrum of companies drawn from several industries, so that no single company and no single industry can sink the portfolio.
- Value averagingA systematic investing method that sets a target growth path for the investment's value and invests more when the value falls short of it and less when it runs ahead.
- Focussed fundAn equity mutual fund scheme that holds a concentrated portfolio of at most 30 stocks, as capped by SEBI, trading broader diversification for higher conviction in fewer names.
- Implementation servicesThe execution of an Investment Adviser's recommendations in the securities market, which the adviser may offer to a client but only through direct schemes and without charging any fee or commission for it.
- SwitchA single mutual fund transaction that redeems units from one scheme (or option) and invests the proceeds in another on the same date — a redemption and a purchase rolled into one.