How does SIP works?

You can enroll for an SIP directly without having to make a one-time investment. Suppose you enroll for a SIP of RS per month for one year in January 2008. Your first investment will be for Rs500 and units will be allotted. As it takes time for an SIP document to be processed with banks, your SIP installments may start latest by March. A few fund house also allow SIPs in their new fund offer (NFO) period. This way, if you like a particular NFO, you do not have to wait for a-month-and-a-half to start an SIP.

You can use a SIP in two ways:
1: By issuing the required number of post-dated cheques, or

2: By authorizing your banker to debit your account on a specific date of a month for the SIP period chosen by you, also known as auto debit facility. This is a more convenient way to invest in a SIP.

Assume you invest Rs1000 every month and your SIP date is the first of every month. On this date, every month, the appropriate number of unit will be credited to your MF account. As your monthly contribution remain the same, if the market and, therefore, your fund’s net asset value NAV) goes up , you will get fewer units; if your fund’s drops you will get more units.

Computing your returns:Ultimately, you need to know the returns you have through your investments. Its easy to calculate returns if it’s a one-time investment because you simply calculate the percentage between the two values.(cost price and selling price) and then annualize it if the time period is more than a year. But how do you do it in a SIP, where there are multiple values, one for each month? Using the XIRR function in Microsoft Excel, You can calculate returns with irregular payments. The IRR’ of X1RR stands for internal rate of return and denotes the interest rate accrude on a investment where there is a series of payment.(SIP installment) and an income (redemption) at the end.