How a SIP works: compounding, time and rupee-cost averaging

In September 2026, Indians put a record ₹32,490 crore into mutual funds through SIPs, up from ₹32,297 crore in August and ₹29,361 crore a year earlier, according to AMFI data. They did it in a month when the industry's total assets fell 5.1%.

So what is a SIP, and why do so many people keep paying into one when markets are falling?

A SIP is a habit, not a product

A systematic investment plan, or SIP, is simply a standing instruction: take a fixed amount from my bank account on a fixed date every month and buy units of a mutual fund. You can run a SIP in an equity fund, a debt fund or an index fund. The SIP itself earns nothing. What you earn depends entirely on the fund it buys.

The idea has caught on in a big way. About 63 lakh new SIPs were registered in September alone, and money invested through SIPs was worth ₹17.86 lakh crore at the end of the month.

Not all of it stays. SEBI data reported in September showed investors also pulled about ₹1.5 lakh crore out of SIP investments in FY26, leaving net SIP inflows of about ₹2 lakh crore.

Idea 1: compounding

Compounding means your returns start earning returns of their own. In the early years, it barely shows. Later, it does most of the work.

In this example, after 10 years you have put in ₹12 lakh and it is worth about ₹23 lakh. After 25 years you have put in ₹30 lakh, and it is worth about ₹1.9 crore. More than 80% of the final amount is growth, and most of that growth arrives in the last 10 years.

The flip side: the assumed return matters enormously. The same ₹10,000 a month for 25 years would grow to about ₹70 lakh at 6%, ₹96 lakh at 8% and ₹1.34 crore at 10% (FIN2DAY calculation). Nobody can promise 12%.

Idea 2: time beats amount

Because compounding is back-loaded, starting early matters more than almost anything else.

Starting at 25 instead of 35 means putting in ₹12 lakh more over the years, but ending with roughly ₹2.5 crore more. Each five-year delay cuts the final amount by roughly 40% in this example.

Idea 3: rupee-cost averaging

A fixed monthly amount buys more units when prices are low and fewer when they are high. This is called rupee-cost averaging.

Here, ₹60,000 buys 700 units, so the average cost is about ₹85.71 a unit, below the ₹90 average price over the six months. When the price reaches ₹120, the holding is worth ₹84,000. The falls were what made that possible, which is one reason SIP investors are told not to stop when markets drop.

It is not magic. If prices only rise, a lump sum invested at the start would usually do better. Averaging reduces the risk of investing everything at a bad moment; it does not guarantee a profit.

What a SIP can't do

• Remove market riskAn equity SIP can show a loss for months or years. The examples above assume a steady return that real markets never deliver.
• Beat inflation automaticallyA fixed SIP amount buys less each year as prices rise. Some investors raise it every year with a "step-up" SIP.
• Fix a bad fund choiceCosts matter. A fund's expense ratio is charged every year and compounds against you, just as returns compound for you.

Educational content only, not investment advice. Mutual fund investments are subject to market risks.