How SIP Works: A Deep Dive into NAV & Allotment
To make the most of your investments, it is helpful to look under the hood and understand exactly how your monthly installment is converted into wealth over time.
The Monthly Cycle: Step-by-Step
- Automated Bank Debit: On your scheduled date, your bank transfers your SIP installment (e.g., ₹5,000) to the mutual fund asset management company (AMC).
- NAV Calculation: At the close of market hours (3:30 PM IST), the AMC calculates the scheme's Net Asset Value (NAV) based on the closing stock prices.
- Unit Allotment: The AMC divides your investment amount by that day's NAV to calculate your unit allotment. (Formula:
Units Allotted = Investment Amount / Closing NAV). - Consolidation: Newly allotted units are added to your existing mutual fund folio, compounding alongside all previously accumulated units.
A Worked Example of Rupee Cost Averaging
| Month | Investment | NAV Price | Units Allotted |
|---|---|---|---|
| Month 1 (Market Normal) | ₹5,000 | ₹50 | 100.00 Units |
| Month 2 (Market Crash -20%) | ₹5,000 | ₹40 | 125.00 Units (+25% more units!) |
| Month 3 (Market Rally +50%) | ₹5,000 | ₹60 | 83.33 Units |
Notice that in Month 2 when the market crashed, your ₹5,000 acquired 125 units instead of 100! When the market recovered in Month 3, those 125 units surged in value. This is how market volatility works to your advantage in a SIP.
Frequently Asked Questions
Net Asset Value (NAV) is the per-unit market price of a mutual fund scheme. It is calculated at the end of every trading day by dividing the scheme’s total net asset valuation by the total outstanding units.