Ravi earns ₹45,000 a month and can spare ₹5,000 after rent and bills. He does not have ₹2 lakh lying around to invest in one go, and he does not want to time the market. A SIP, or systematic investment plan, was built for exactly this: a fixed amount goes from his bank account into a mutual fund scheme on a set date every month, and he gets units at whatever price applies that day.
Before starting a SIP, though, it helps to understand what you are buying into. This guide covers what a mutual fund is, how SEBI groups schemes, what NAV and expense ratio mean, direct and regular plans, exit loads, KYC and how to check any scheme yourself on the AMFI and SEBI websites. It does not recommend any fund.
What a mutual fund is, in plain terms
A mutual fund is a common pool of money collected from many investors and invested according to a stated objective, such as buying shares of large companies or lending to the government through bonds. The investments are held in a trust, and the investors are its joint beneficial owners. Trustees oversee the fund, and an asset management company (AMC), appointed by the trustees with SEBI approval, does the actual investing.
When you put in money, you get units. If the investments rise in value, each unit is worth more; if they fall, each unit is worth less. There is no fixed return and no guarantee, which is the key difference from a fixed deposit. In exchange, you get a professionally managed, diversified portfolio for amounts as small as a monthly SIP.
How a SIP works
A SIP is not a product in itself. It is a way of investing in a mutual fund scheme: a fixed sum goes in at regular intervals instead of all at once. SEBI’s investor education material describes SIPs as staggered investments made monthly, quarterly or half-yearly, on dates you choose (for example the 1st, 5th, 10th or 15th of the month), with commitment periods such as six months or one, three or five years.
Each SIP instalment buys units at that day’s price. When prices are low, your fixed amount buys more units; when prices are high, it buys fewer. Over time this evens out your average cost, which is why people call it rupee cost averaging.
As an illustration, say you invest ₹5,000 a month for three months. The unit price is ₹50 in month one, ₹40 in month two and ₹62.50 in month three. You get 100, 125 and 80 units, a total of 305 units for ₹15,000. Your average cost is about ₹49.18 per unit, lower than the simple average of the three prices (about ₹50.83). This does not guarantee a profit. It simply means you are not betting everything on one day’s price.
You can run your own numbers in the SIP calculator, using an assumed return such as 10% a year for illustration, never as a promise.
SIP vs lump sum: which suits you
A lump sum puts a large amount in at once, so the whole amount faces the market’s ups and downs from day one. A SIP spreads the entry over months or years. Neither is always better. The table sets out the trade-offs.
| Point | SIP | Lump sum |
|---|---|---|
| How money goes in | Fixed amount at regular intervals | Large amount in one go |
| Timing risk | Spread across many dates | All on one date |
| Suits | Monthly earners building wealth from salary | Someone with a bonus, maturity amount or sale proceeds |
| Discipline | Automatic, through a bank mandate | Depends on you deciding to invest |
| If markets rise steadily after you invest | Later instalments buy at higher prices | Whole amount gains from the start |
Many families combine the two: a SIP from monthly income, plus lump sums when a bonus or maturity amount arrives. The lumpsum calculator shows how a one-time amount might grow at an assumed rate.
NAV: the price of a unit
Net asset value, or NAV, is the value of one unit of a scheme, based on the value of everything the scheme holds. Open-ended schemes, which accept purchases and redemptions continuously, transact at NAV, so your SIP instalment buys units at the NAV that applies to that day.
A common mistake is to think a fund with a NAV of ₹15 is “cheaper” than one with a NAV of ₹150. It is not. A lower NAV just means you get more units for the same money; what matters is how much the underlying portfolio grows. A fund’s NAV also already reflects its costs, which is why the direct plan of a scheme usually shows a higher NAV than its regular plan.
You can look up the latest NAV and NAV history of any scheme on the AMFI website by choosing the fund house and scheme.
How SEBI groups mutual fund schemes
So that a “large cap fund” means the same thing at every fund house, SEBI sets uniform categories. Its circular of 26 February 2026 revised the framework. Schemes are now grouped as equity, debt, hybrid, life cycle funds and other schemes (fund of funds and passive schemes such as index funds and ETFs). The older solution-oriented category, used for retirement and children’s funds, has been discontinued.
Equity categories
Some key equity categories and the minimum share of assets each must hold:
- Large cap fund: at least 80% in large cap companies.
- Mid cap fund: at least 65% in mid cap companies.
- Small cap fund: at least 65% in small cap companies.
- Multi cap fund: at least 75% in equity, with a minimum of 25% each in large, mid and small caps.
- Flexi cap fund: at least 65% in equity, free to move across company sizes.
- ELSS (tax saver) fund: at least 80% in equity.
- Focused fund: at most 30 stocks.
SEBI defines large caps as the 1st to 100th companies by full market capitalisation, mid caps as the 101st to 250th, and small caps as the 251st onwards. AMFI publishes the list of stocks in each group, updated every six months.
Debt, hybrid and passive schemes
Debt categories are defined mostly by how long their holdings run. An overnight fund invests in securities maturing in one day; a liquid fund holds debt and money market securities maturing within 91 days; others are defined by the duration of the portfolio, such as ultra short term funds with a Macaulay duration of three to six months. Hybrid funds mix asset classes: a conservative hybrid fund keeps 10% to 25% in equity, a balanced hybrid fund 40% to 60%, and an aggressive hybrid fund 65% to 80%. Index funds and ETFs must hold at least 95% in the securities of the index they track.
Expense ratio and direct vs regular plans
Every scheme charges an annual fee to run the fund, called the expense ratio. It comes out of the scheme’s assets, so you never see a bill; it simply reduces your return.
Each scheme comes in two plans with the same portfolio. A regular plan is bought through a distributor, broker or agent, and its expense ratio includes the commission paid to that intermediary. A direct plan is bought straight from the fund house with no intermediary, so its expense ratio is lower. SEBI’s own investor website gives this illustration: on a 10% gross return, a regular plan with a 1.5% expense ratio leaves you 8.5%, while a direct plan with a 0.5% ratio leaves 9.5%.
Taking that same illustration, ₹1 lakh growing at 8.5% a year becomes about ₹2.26 lakh in ten years, while at 9.5% it becomes about ₹2.48 lakh. The gap of roughly ₹22,000 comes purely from cost. A regular plan can still be the right choice if you value a distributor’s help and paperwork support; just know what you are paying for it.
Exit loads and other charges to check
An exit load is a fee some schemes charge if you redeem units before a set period, expressed as a percentage of the redemption value. It exists to discourage short-term trading. SEBI’s investor site notes that equity funds may have an exit load for redemptions within one year, some funds step the load down over time, and liquid funds charge little or nothing.
Using SEBI’s example, if a scheme has a 1% exit load within a year and you redeem ₹1,05,000 after six months, ₹1,050 is deducted and you receive ₹1,03,950. Redeem after a year and the full amount is paid. With a SIP, remember that each instalment has its own purchase date, so the exit load period runs separately for each one.
Tax is the other cost on redemption. Gains on equity-oriented schemes are taxed at 20% if held for 12 months or less, and at 12.5% on long-term gains above ₹1.25 lakh a year, for tax year 2026-27. Debt-heavy schemes are taxed at your slab rate.
KYC and starting your first SIP
Before you invest, you must complete KYC (know your customer). In the securities market, KYC is centralised through KYC Registration Agencies (KRAs) registered with SEBI. You do it once, and the KRA shares your details with other intermediaries, so you do not repeat it for every fund house. You can check your KYC status on a KRA’s website.
You can then invest through a physical application form, the fund house’s website or app, or an AMFI-registered distributor. Typical steps for a SIP:
- Complete or confirm your KYC.
- Choose a scheme and decide between its direct and regular plan, and between growth and income options.
- Pick the SIP amount, date and frequency.
- Set up a bank mandate so instalments are debited automatically.
- Add nominees; you can name up to three people with percentage shares, or formally opt out.
How to check a fund on AMFI and SEBI before you invest
You do not need a paid service to do basic homework. Use these free official resources:
- Scheme information document (SID): sets out the scheme’s objective, asset allocation, strategy, fees and expenses, and terms for redemption. Read the asset allocation table and the exit load section at the very least.
- Risk-o-meter: every scheme carries one of six risk levels, from low to very high. It is reviewed monthly, and fund houses must disclose it with their portfolio on their own websites and on the AMFI website within 10 days of each month’s end.
- AMFI website: shows the latest NAV and NAV history for every scheme, the risk parameter disclosures, and a tool to locate and verify a mutual fund distributor.
- SEBI SCORES: if a complaint to the fund house is not resolved, you can escalate it on SEBI’s online grievance system at scores.gov.in.
Compare a scheme only with others in the same SEBI category; a small cap fund and a liquid fund do different jobs.
Key takeaways before you start a SIP
- A SIP is a method of investing a fixed sum regularly; the scheme you choose decides the risk.
- Check the SEBI category and the risk-o-meter, and match them to how long you can stay invested.
- Compare expense ratios; a direct plan costs less, a regular plan pays for a distributor’s service.
- Read the exit load terms in the SID, and remember each SIP instalment has its own clock.
- Complete KYC once through a KRA, add nominees, and verify any distributor on the AMFI website.
- Use NAV only as a unit price, not as a sign that a fund is cheap or expensive.
A SIP works best when it runs for years, through good markets and bad, so pick an amount you can keep paying without strain. This guide is general information, not investment advice, and it does not recommend any scheme.
