Common Misunderstandings About SIPs
Several common beliefs about SIPs do not match how they work. This lesson takes them one at a time: assured returns, market risk, stopping a SIP, starting early, past performance and minimum amounts.
What a SIP is, and what it is not
The first misunderstanding is that a SIP is a kind of scheme with a return of its own. A SIP is a way of buying units: a fixed amount invested at fixed intervals in a scheme that offers the facility. The result comes from that scheme's NAV, which can fall as well as rise.
It follows that a SIP carries no assured return. It does not assure a profit or protect against loss in a falling market, however long it runs. Nor does one minimum apply everywhere: the minimum amount and number of instalments are set by each scheme.
Risk is in the scheme, not in the way of buying
A second belief is that a SIP removes market risk. Spreading purchases over many dates changes the average cost of the units. It does not change the scheme's portfolio, so the units move with the NAV exactly as units bought in one purchase do.
A holding built through a SIP shows a gain only when the NAV is above its average cost. Below that, it shows a loss.
Stopping a SIP
Many people believe that stopping a SIP books a loss. Stopping only ends further purchases. The units already bought remain in the folio and continue to move with the NAV, up or down.
A loss is realised only when units are redeemed for less than they cost. The reverse also holds: stopping does not undo a fall in value, and a later recovery is not assured.
Early starts and past winners
Starting earlier gives each instalment more time. The amount invested matters as well, so a small SIP started early does not automatically end ahead of a larger one started later. The worked example shows the comparison going each way on the same assumed rate.
Another belief is that last year's top performer stays on top. Past performance may or may not be sustained in future and is not a guarantee. Mutual fund advertisements may not use rankings or offer an indicative return, and AMFI's code of conduct bars a distributor from promising or indicating returns.
Rules at a glance
Stopping is not selling (illustrative)
Imran holds 1,000 units bought through a SIP for ₹27,000 in all, an average cost of ₹27 a unit. The NAV is now ₹24, so the holding is worth ₹24,000. He stops the SIP and redeems nothing, so he still holds 1,000 units: worth ₹30,000 if the NAV later stands at ₹30, or ₹20,000 if it stands at ₹20. A loss of ₹3,000 would be realised only if he redeemed all the units at ₹24.
Early and small against later and larger (illustrative)
- Assumptions, for arithmetic only: growth of 1% a month, with instalments at the start of each month. On these assumptions ₹1 a month grows to ₹3,529.91 over 360 months, ₹999.15 over 240 months and ₹504.58 over 180 months.
- First pair. ₹500 a month for 30 years: 500 × 3,529.91 = ₹17,64,955, on 500 × 360 = ₹1,80,000 invested.
- ₹5,000 a month for 15 years: 5,000 × 504.58 = ₹25,22,900, on 5,000 × 180 = ₹9,00,000 invested. The later, larger SIP ends higher.
- Second pair. ₹2,000 a month for 30 years: 2,000 × 3,529.91 = ₹70,59,820, on 2,000 × 360 = ₹7,20,000 invested.
- ₹5,000 a month for 20 years: 5,000 × 999.15 = ₹49,95,750, on 5,000 × 240 = ₹12,00,000 invested. Here the earlier, smaller SIP ends higher.
Result. Neither an early start nor a larger instalment decides the outcome alone; both the amount and the time matter. All four figures rest on an assumed constant rate, which no scheme has, so they are arithmetic and not forecasts.
Key points
- A SIP is a way of investing regularly, not a product; no return is assured.
- Spreading purchases changes the average cost, not the risk of the scheme; the units move with the NAV.
- Stopping a SIP only ends further purchases; a loss is realised only when units are redeemed below cost.
- Both the amount and the time matter: an early small SIP does not automatically end ahead of a later, larger one.
- Past performance may or may not be sustained and is not a guarantee.
Common misunderstandings
- A SIP does not guarantee returns: it is a method of investing, and the result depends on the NAV of the scheme.
- Stopping a SIP does not book a loss: a loss is realised only when units are redeemed below their cost.
- A small SIP started early is not certain to end ahead of a larger one started later: the amount invested matters as well as the time.
Questions people ask
Is there such a thing as a SIP rate of return?
No. A SIP has no rate of its own. The return is whatever the scheme's NAV delivers on each instalment, and it can be negative.
If a SIP runs long enough, is a profit assured?
No. A SIP does not assure a profit or protect against loss, however long it runs.
What happens to the units when a SIP is stopped?
Nothing. They remain in the folio and go on moving with the NAV until the investor redeems them.
What this lesson relies on
- SEBI Master Circular for Mutual Funds, 20 March 2026 (advertisement code and performance disclosure)
- AMFI code of conduct for mutual fund distributors
- Scheme Information Document of the scheme concerned (minimum amount and number of instalments)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.