Mutual Funds and the SIP Habit
How ₹500 a month can own a slice of fifty companies, why fees matter more than they look, and why boring wins.
Close to ₹30,000 crore a month, ₹500 at a time
In March 2021, Indians invested about ₹9,200 crore a month into mutual funds through systematic investment plans. By March 2025 it was about ₹26,000 crore, and through 2026 it ran close to ₹30,000 crore a month. Most of that money arrives in small amounts, ₹500, ₹1,000, ₹5,000, debited automatically on a fixed date from crores of bank accounts across the country.
In 2026, that steady stream became one of the most important forces in the Indian market. When foreign investors sold heavily during the Gulf war, SIP money kept buying, month after month, and the market fell far less than it would have a decade earlier. None of these savers were trying to time the market. Most were simply following a plan they had set up and then left alone. This unit explains what they were buying, what it costs, and why such an unexciting habit works so well.
Rupee cost averaging, month by month
| Month | NAV | Units for ₹1,000 |
|---|---|---|
| 1 | ₹100 | 10.00 |
| 2 | ₹80 | 12.50 |
| 3 | ₹60 | 16.67 |
| 4 | ₹80 | 12.50 |
| 5 | ₹100 | 10.00 |
| 6 | ₹110 | 9.09 |
A fixed ₹1,000 buys more units when the price falls. Change the price path to see how the average cost moves.
Pooling Money: How a Mutual Fund Works
A mutual fund collects money from many investors and invests it together in shares, bonds or both, according to a stated objective. Each investor receives units. The value of one unit, the net asset value or NAV, is calculated every business day by dividing the value of everything the fund owns by the number of units. If the fund’s holdings rise 1% in a day, the NAV rises about 1%.
Pooling solves two problems for small savers. First, diversification: ₹500 cannot buy one share each of fifty companies, but a fund can, so your ₹500 owns a slice of all fifty. Second, management: a professional team, regulated by SEBI, handles the buying, selling, record-keeping and paperwork. In return, the fund charges a yearly fee.
Equity funds invest mainly in shares. Higher potential returns, bigger swings, best for goals seven or more years away.
Debt funds invest in bonds and deposits. Lower, steadier returns, suited to goals one to three years away.
Hybrid funds mix the two in a set proportion.
Index funds and ETFs simply copy an index such as the Nifty 50, at very low cost.
The Cost You Do Not See: Expense Ratio
Every fund charges an expense ratio, a yearly fee taken as a percentage of your money. You never receive a bill. It is deducted from the fund’s value every day, so the NAV you see is already after costs. Actively managed equity funds charge around 0.5% to 2% a year; index funds can charge 0.1% to 0.3%. Every fund also has a “direct” plan, bought straight from the fund house, and a “regular” plan, sold through a distributor, which costs more because it includes commission.
A difference of 1.3 percentage points a year sounds trivial. Over 25 years it is worth more than ₹37 lakh, more than the entire amount invested. Fees compound against you exactly the way returns compound for you. This is one of the few things in investing that you can control completely, and it is why low-cost index funds are often recommended for beginners.
The SIP and Rupee Cost Averaging
A systematic investment plan invests a fixed amount in a fund on a fixed date every month, automatically. Because the amount is fixed, it buys more units when the NAV is low and fewer when it is high. This is called rupee cost averaging, and it means that over time your average cost per unit tends to be lower than the average price.
In that example, the NAV ends exactly where it started, at ₹100. Someone who invested ₹5,000 on day one would have no gain at all. The SIP investor, who kept buying through the dip, owns 61.67 units worth ₹6,167, a gain of about 23%. The fall was not a disaster for the SIP investor; it was a sale. This only works if the SIP keeps running through the fall, which is exactly when people are most tempted to stop.
Diversification and Asset Allocation
Diversification means not depending on any single company, sector or asset. If you own one share and that company fails, you lose everything. If you own a fund holding fifty large companies, one failure barely shows. Diversification cannot remove the risk of the whole market falling, but it removes the risk of one bad bet ruining you.
Asset allocation is the bigger decision: how much of your savings goes into equity, debt, gold and cash. Research on investment portfolios consistently finds that this mix explains far more of an investor’s long-term results than which particular fund they picked. A simple approach for a young saver is mostly equity for long goals, debt for goals within three years, a small slice of gold, and an emergency fund in cash. As goals get closer, money gradually moves from equity to debt.
Deep Dive: Why the Index Usually Wins
Active fund managers try to beat the market by choosing better shares. Some do, for a while. But S&P’s SPIVA scorecards for India have repeatedly found that most actively managed large-cap funds trail their benchmark index over long periods, once fees are counted. The reason is arithmetic. All investors together own the market. Before costs, the average active rupee earns the market return. After costs, it must earn less. Low-cost index funds simply take the market return and keep the fee small.
That does not mean active funds are useless, or that index funds cannot fall. An index fund tracking the Nifty fell with it in 2026. What it means is that for a beginner who does not want to spend hours choosing managers, a Nifty 50 or broad-market index fund, bought through a direct plan with a low expense ratio, is a sensible default.
Case Study: The SIP That Did Not Stop
Between January and October 2026, the Nifty fell about 16% from its record. Many new investors, who had started SIPs after 2020 and had never seen a long fall, watched their portfolios turn red for the first time. Some stopped their SIPs. Others, often older investors who had lived through 2008 and 2020, increased them.
History favours the second group. Investors who kept SIPs running through 2008 and 2020 bought the most units at the lowest prices, and those units drove most of their later gains. Stopping a SIP in a fall turns a temporary paper loss into a permanent missed opportunity. The most useful thing to decide before investing is not which fund to buy, but what you will do when it falls 20%. If the honest answer is “panic,” the plan should hold less equity.
Check yourself
0/12 answered1. What does a mutual fund do?
2. NAV stands for, and means:
3. For a goal two years away, which fund type usually fits best?
4. The expense ratio is:
5. In Fig 8.1, how much more does the low-fee fund end with?
6. Why does a regular plan cost more than a direct plan of the same fund?
7. In a falling market, a ₹2,000 monthly SIP:
8. In Fig 8.2, the NAV ends where it started, yet the SIP investor gains about 23%. Why?
9. Diversification protects you mainly against:
10. Research finds that long-term results depend most on:
11. Why do most active funds trail their index over long periods?
12. What is the most useful thing to decide before starting an equity SIP?
Find two funds that track the Nifty 50, one index fund and one ETF, plus one actively managed large-cap fund. Note each one’s expense ratio (direct plan) and five-year return. In 150 to 200 words, explain which you would choose for a ₹1,000 monthly SIP for a goal ten years away, and why, using expense ratio, diversification and what you would do in a 20% fall.