How it unfolds, step by step
The setup
Three instalments of ₹1,000 are allotted at NAVs of ₹20, ₹16 and ₹25. Units are the amount divided by the NAV. So those instalments buy 50, 62.5 and 40 units. That is 152.5 units for ₹3,000 in total. A real statement carries the actual scheme, plan, option, date, amount and units. It also carries the adjustments this example leaves out on purpose.
What happens next
Take the money paid in and divide it by the units held. That is ₹3,000 ÷ 152.5, or about ₹19.67 a unit. The simple average of ₹20, ₹16 and ₹25 is ₹20.33. The two differ because the cheapest instalment bought the most units. So it weighs more in the total than it does in the list of prices. That weighting is the whole of what rupee-cost averaging does.
What it means — and does not
It spreads purchases across whatever prices occur. It does not show that a falling NAV is cheap. Nor does it decide whether the scheme suits a reader's time horizon, need for cash or capacity for loss. A schedule cannot turn a risky exposure into a guarantee. Value the same 152.5 units later at ₹18 and they are worth ₹2,745, against ₹3,000 paid in. At ₹22 they are worth ₹3,355. Both endings follow from identical instalments. And three instalments are far too few to show anything general about averaging.
- NAV at allotment (₹)
- Average cost paid: ₹19.67 · 19.67
Three ₹1,000 instalments allotted at NAVs of ₹20, ₹16 and ₹25 buy 50, 62.5 and 40 units. That is 152.5 units for ₹3,000. The money-weighted average cost of ₹19.67 sits below ₹20.33, the simple average of the three NAVs. The reason is that the cheapest instalment bought the most units.
Show the underlying data
| Instalment | NAV at allotment (₹) |
|---|---|
| 1 | 20 |
| 2 | 16 |
| 3 | 25 |
What this does not establish
The reading stops holding as soon as the example's simplifications are dropped. Units here are amount ÷ NAV. A real allotment applies the scheme's own cut-off time and applicable date. So the units on a statement can differ from the units in this arithmetic. A bank debit date is not the allotment record. The reading also stops holding the moment one smooth annual rate is applied to a run of dated instalments. That describes a path markets do not follow. A dated cash-flow method such as answers the question a single growth rate cannot. One consequence is worth knowing before two tools are compared. The site's own /tools/sip-calculator converts an annual rate the way published calculators usually do. It divides the rate by twelve (r ÷ 1200) rather than compounding the twelfth root of (1 + r). It also assumes the instalment is debited at the start of the month, which earns that month's growth. A calculator that picks either convention differently will show a different figure from the same inputs. That is a difference of convention, not of correctness.
Things to check
5Does the record show scheme, plan, option, date, amount and units allotted? Or only a bank debit?
Is the average being quoted the money divided by the units, or the simple average of the prices?
Is the return read from one annual rate applied to the total? Or from the dated contributions themselves?
Does the other calculator divide the annual rate by twelve and debit at the start of the month? This site's does.
Remember: three instalments are an illustration. They are not evidence about how averaging behaves.
Common mistakes
4Reading the simple average of the NAVs, ₹20.33 here, as the average cost paid, which is ₹19.67. The units bought at each price are the weights.
Treating a schedule as protection. The same three instalments finish below or above the money paid in, depending only on the later NAV.
Calling a SIP a category of fund. It describes how money goes in. The scheme still decides what it is exposed to.
Reading a calculator's maturity figure as money that will arrive. It is only the arithmetic of an assumption the reader typed in.
Three instalments of ₹1,000 are allotted at NAVs of ₹20, ₹16 and ₹25. What is the average cost of one fund unit?
- ₹20.33 — the simple average of the three NAVs, since all three instalments were the same size
- It cannot be worked out until the value at the end of the period is known
- ₹19.67
Show the answer
C. ₹19.67
Equal amounts do not buy equal units. At ₹16 the ₹1,000 bought 62.5 units, and at ₹25 only 40. So 152.5 units cost ₹3,000, and the average is ₹19.67. The tempting answer is the first one, because the instalments really were identical. But the prices are averaged with the units as weights. The cheapest instalment carries the most of them.
Frequently asked
3Does a SIP guarantee a profit over time?
No. It is a way of contributing, and the scheme's own exposure decides the outcome. In the example above the same three instalments are worth ₹2,745 at a NAV of ₹18 and ₹3,355 at ₹22.
Is a SIP itself a kind of mutual fund?
No. It is a method of paying into a scheme. Two people running identical schedules into different schemes hold entirely different risks.
Does a lower NAV mean the fund is better value?
No. A lower NAV buys more units of that scheme. Nothing else follows from the number itself. The page /learn/mutual-fund-nav-and-expenses works through why the unit count changes nothing about the percentage return.