How Does a SIP Work? (Step-by-Step)

A Systematic Investment Plan (SIP) simplifies the complex world of stock market investing. It works on the principle of consistency. Here is the lifecycle of a SIP investment:

Step 1: Setup and Mandate

You select a mutual fund scheme and decide on a monthly amount (e.g., ₹2,000) and a date (e.g., 5th of every month). You sign a one-time bank mandate (NACH) authorizing the fund house to deduct this amount.

Step 2: Auto-Debit

On the 5th of every month, ₹2,000 is automatically debited from your bank account. This ensures you never miss an installment due to forgetfulness or spending habits.

Step 3: Allotment of Units (NAV)

The money transfers to the mutual fund. The fund manager allots you "Units" based on the current market price, known as Net Asset Value (NAV).

• Month 1: NAV is ₹20. You get 100 Units.
• Month 2: Market is UP, NAV is ₹25. You get 80 Units.
• Month 3: Market is DOWN, NAV is ₹16. You get 125 Units.

Notice how you bought MORE units when the price was low? This is the magic of SIP.

Step 4: Compounding

Over time, the returns earned on your units also start generating returns. This "interest on interest" effect grows your wealth exponentially over 10-15 years.

Step 5: Redemption

When you reach your financial goal, you can sell (redeem) your units at the NAV of that day. The total amount is credited to your bank account.