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Strategic Financial Management · Mutual Funds

SIP, Systematic Plans and Investor Options in Mutual Funds

Updated 11 October 2026 · Fact-checked

A SIP invests a fixed rupee amount at regular intervals, so you buy more units when NAV is low and fewer when it is high. Average cost per unit = total amount invested ÷ total units bought. This is lower than the simple average of NAVs when NAV varies. SWP and STP move money out of a scheme in a planned way.

Understand SIP, Systematic Plans and Investor Options

A Systematic Investment Plan (SIP) lets you invest a fixed amount in a mutual fund scheme at fixed intervals, usually monthly. You do not try to time the market. The fund allots units at the NAV (plus any load) prevailing on each investment date.

The key idea is rupee cost averaging. Your rupee amount is fixed, but the units you get change with NAV. When NAV falls, the same amount buys more units. When NAV rises, it buys fewer. Over time your average cost per unit is the harmonic mean of the NAVs, which is never higher than the simple (arithmetic) average of those NAVs. It is equal only when all NAVs are the same. Note that this lowers your average cost, but it does not guarantee a profit or protect you from loss if the market keeps falling.

Two companion plans work in the opposite direction. A Systematic Withdrawal Plan (SWP) lets you redeem a fixed amount (or fixed number of units) at regular intervals from your holding, which gives you a regular cash flow. A Systematic Transfer Plan (STP) moves a fixed amount at regular intervals from one scheme to another of the same fund house, for example from a liquid or debt scheme to an equity scheme. Both involve redemption from the source scheme, so load and tax effects can arise.

SIP versus lump sum: a lump sum invests everything on one date, so your return depends on that entry NAV. It tends to do better if the market rises steadily after you invest. A SIP spreads entry points, so it reduces the risk of a bad entry and suits regular income earners. Neither is always better.

Investor options within a scheme are mainly growth and dividend (now called IDCW, income distribution cum capital withdrawal). In growth, no payout is made and returns show up as a higher NAV. In the dividend option, the fund may distribute part of the surplus, and the NAV falls by the amount paid out (ex-dividend NAV). Reinvestment of the payout buys new units at the ex-dividend NAV. Payout is not guaranteed.

Key rules to remember

Units allotted per instalment
Units = Amount invested ÷ NAV (or purchase price) on that date
If an entry load applies, divide by the purchase price (NAV + load), not NAV. Use the number of decimals given in the question.
Average cost per unit
Average cost per unit = Total amount invested ÷ Total units acquired
This is the harmonic mean of NAVs when equal amounts are invested each time.
Simple average NAV
Simple average NAV = Σ NAV ÷ n
Use only for comparison. It is not your cost. The average cost is lower unless all NAVs are equal.
Value of holding
Value = Total units × Current NAV
Use the NAV on the valuation date. Use redemption price if exit load applies.
Return on SIP (absolute)
Absolute return = (Value of holding − Total invested) ÷ Total invested × 100
This is not annualised. Because instalments are invested for different periods, do not treat it as an annual rate.
Ex-dividend NAV
NAV after payout = NAV before payout − Dividend per unit
Needed for the dividend option and reinvestment problems.
Units remaining after SWP
Units left = Units held − Σ (Amount withdrawn ÷ NAV on withdrawal date)
Each withdrawal redeems units at that day's NAV (less exit load, if any).

How to solve SIP, Systematic Plans and Investor Options questions

Use one table for every SIP, SWP or STP question. It keeps the working clear and earns method marks even if you slip on arithmetic.

  1. 1Read the question and note the plan type (SIP, SWP or STP), the amount, the dates, the NAVs and any load or dividend.
  2. 2Draw a table with columns: date, NAV (or price after load), amount, units.
  3. 3Compute units for each date as amount ÷ NAV. For SWP, units redeemed are amount ÷ NAV and are subtracted.
  4. 4Total the amount invested and the total units. Keep decimals consistent with the question.
  5. 5Find average cost per unit = total amount ÷ total units. If asked, also compute the simple average NAV for comparison.
  6. 6Find the closing value = units × closing NAV, then the gain or return if required.
  7. 7Handle dividends and loads separately: reduce NAV by the payout for ex-dividend NAV, and reinvest at the ex-dividend NAV.
  8. 8State a short conclusion, for example that the average cost is below the average NAV because more units were bought at low NAVs.

Quickest way: Table-and-totals shortcut

When to use it: Use in SIP problems with 3-6 instalments and fixed amounts, where you need average cost and closing value.

  1. Write NAVs in a row and compute units for each instalment right away.
  2. Add units once. Total invested is just amount × number of instalments.
  3. Divide total invested by total units for average cost.
  4. Multiply total units by the closing NAV and subtract total invested for the gain.
  5. Sense check: average cost must be below the simple average NAV (if the NAVs differ) and above the lowest NAV.

Common mistakes in SIP, Systematic Plans and Investor Options

  • Using the simple average of NAVs as the average cost per unit.

    It looks natural to average the prices paid, but the units bought at each price differ.

    Fix: Always divide total rupees invested by total units. The simple average is only a comparison figure.

  • Assuming rupee cost averaging guarantees profit.

    Students remember that it lowers average cost and overstate the benefit.

    Fix: Say it lowers average cost relative to the average NAV, but returns depend on the NAV at redemption. If NAV ends below your average cost, there is a loss.

  • Ignoring entry load while computing units.

    Students divide by NAV even when the question gives a load.

    Fix: Check for a load. Units = amount ÷ purchase price, where purchase price = NAV + load. Note that SEBI has abolished entry load on mutual fund schemes, so apply it only when the question states it.

  • Confusing SWP with STP.

    Both involve regular redemptions from a scheme.

    Fix: SWP sends cash to the investor. STP moves money from one scheme to another, so the investor stays invested.

  • Not reducing NAV after a dividend payout.

    Students forget that the payout comes out of the scheme's assets.

    Fix: Use ex-dividend NAV = NAV − dividend per unit, and reinvest at that NAV.

  • Treating the absolute SIP gain as an annual return.

    The gain percentage looks like a rate of return.

    Fix: Label it as absolute return over the period. An annualised figure needs an IRR-type calculation, which is done only when the question asks for it.

Worked examples

Example 1

Meera invests ₹10,000 at the start of each month for four months in a mutual fund scheme. The NAVs on the four dates are ₹20, ₹25, ₹40 and ₹50. There is no load. (a) Find the total units acquired and the average cost per unit. (b) Compare it with the simple average NAV. (c) Find the value of her holding and gain if the NAV at the end of month 4 is ₹45.

Show the solution
  1. Units: 10,000 ÷ 20 = 500; 10,000 ÷ 25 = 400; 10,000 ÷ 40 = 250; 10,000 ÷ 50 = 200.
  2. Total units = 500 + 400 + 250 + 200 = 1,350.
  3. Total invested = 4 × ₹10,000 = ₹40,000.
  4. Average cost per unit = 40,000 ÷ 1,350 = ₹29.63 (approx.).
  5. Simple average NAV = (20 + 25 + 40 + 50) ÷ 4 = 135 ÷ 4 = ₹33.75.
  6. Average cost (₹29.63) is lower than the simple average NAV (₹33.75) because more units were bought when NAV was low.
  7. Value of holding = 1,350 × 45 = ₹60,750.
  8. Gain = 60,750 − 40,000 = ₹20,750. Absolute return = 20,750 ÷ 40,000 × 100 = 51.88%.

Answer: Total units = 1,350; average cost per unit ≈ ₹29.63 against a simple average NAV of ₹33.75; value = ₹60,750; gain = ₹20,750 (51.88% absolute).

Example 2

Arjun holds 5,000 units of a scheme and starts a Systematic Withdrawal Plan of ₹20,000 per month for three months. There is no exit load. The NAVs on the withdrawal dates are ₹40, ₹50 and ₹25. (a) How many units are redeemed and how many remain? (b) What is the value of the remaining units at a NAV of ₹32?

Show the solution
  1. Units redeemed month 1 = 20,000 ÷ 40 = 500.
  2. Units redeemed month 2 = 20,000 ÷ 50 = 400.
  3. Units redeemed month 3 = 20,000 ÷ 25 = 800.
  4. Total units redeemed = 500 + 400 + 800 = 1,700.
  5. Units remaining = 5,000 − 1,700 = 3,300.
  6. Value of remaining units = 3,300 × 32 = ₹1,05,600.
  7. Observation: the same ₹20,000 needed fewer units when NAV was high and more when NAV was low, so withdrawing in a falling market uses up units faster.

Answer: Units redeemed = 1,700; units remaining = 3,300; value of remaining units = ₹1,05,600.

Exam tips

  • Show the table. Examiners award marks for units per instalment, totals and the average cost formula.
  • In MCQs, expect a quick calculation of average cost per unit or units left after an SWP. Do the totals first, then divide.
  • Read for load, dividend payouts and reinvestment. These small details change the NAV you must use.
  • Write one line of interpretation, for example why average cost is below average NAV. It is often asked in the descriptive part.
  • For differences between SWP and STP, or growth and dividend options, answer in short contrasting points.

Practice questions from Mutual Funds

SIP, Systematic Plans and Investor Options: frequently asked questions

What is rupee cost averaging in a SIP?

It means investing a fixed amount at regular intervals, so you buy more units when NAV is low and fewer when it is high. This brings your average cost per unit below the simple average of the NAVs when NAVs vary. It does not guarantee a profit.

How do I calculate average cost per unit in a SIP problem?

Add up all the rupees invested and divide by the total units acquired. Compute units for each instalment as amount ÷ NAV. Do not average the NAVs directly.

What is the difference between SWP and STP?

In a Systematic Withdrawal Plan, a fixed amount is redeemed at intervals and paid to you as cash. In a Systematic Transfer Plan, a fixed amount is moved from one scheme to another scheme of the same fund house, so your money stays invested.

Is SIP better than a lump sum investment?

Neither is always better. A lump sum can do better if markets rise steadily after you invest, while a SIP reduces the risk of a poor single entry point and suits regular savers.