Choosing regular SIPs is a more practical approach than trying to time market downturns. Predicting whether the market will rise or fall accurately is extremely challenging, and while forecasts are feasible, certainty about future outcomes remains elusive.
Investing in the stock market offers various strategies, each with its unique set of challenges and potential rewards. In this article, we will explore two popular investment approaches: Regular Systematic Investment Plans (SIPs) and the strategy of buying the dip. We will compare which method might be better for different types of investors. Through this exploration, we aim to assess the challenges and benefits associated with SIPs and buying on the dip, providing insights into which strategy may align best with your financial goals and risk tolerance.
Join us as we delve into the nuances of these investment strategies to help you make informed decisions for your portfolio.
Regular SIPs vs Buying on Dips with Examples
You can invest in the stock market through various strategies. The two most popular strategies are regular SIPs (Systematic Investment Plan) and buying the dip. The former involves making regular and pre-determined investments regardless of market conditions, while the latter focuses on investing when market prices drop.
It is worth mentioning here that SIP is a disciplined approach. It averages out the cost of investments over time. Whereas, when you “buy on dips”, you capitalise on lower prices for higher returns. Eventually, both methods aim to build wealth but differ in their execution and underlying principles.
We will understand the concepts of SIP and DIP better through a hypothetical example of Mr. A, a 30-year-old software engineer who wants to do long-term financial planning by investing in mutual funds. He is looking to build a substantial corpus over the next 10 years. For this purpose, he considers different investment strategies and decides to test four different approaches.
Scenario 1: Buying only on dips
Mr. A decides to invest Rs. 5,000 every time the market drops by 2%. Over 10 years, he ended up investing Rs. 6,05,000. Despite the market's ups and downs, his strategy pays off in the following way:
| Total investment | Value of investment | XIRR |
| Rs 6,05,000 | Rs 11,36,360 | 12.95% per annum |
Also Read about: Mutual Funds vs ETF
Scenario 2: Regular monthly SIPs
Now, say a finance expert advises Mr. A to follow a more straightforward approach to make regular monthly SIPs of Rs. 5,000. Mr. A follows his expert’s advice and invests consistently every month for 10 years. The table below shows his returns:
| Total investment | Value of investment | XIRR |
| Rs 6,00,000 | Rs 10,78,737 | 11.29% per annum |
Do you have an active SIP? Calculate your expected return and total wealth accumulated using our free SIP calculator.
Scenario 3: Regular monthly SIPs + Buying on dips
Intrigued by both methods, Mr. A now decides to combine them. He invests:
- Rs. 5,000 monthly through SIPs and
- An additional Rs. 5,000 whenever the market drops by 2%
This hybrid approach requires more effort, but the results are impressive:
| Total investment | Value of investment | XIRR |
| Rs. 12,05,000 | Rs. 22,51,889 | 12.37% per annum |
Scenario 4: Lump-sum investments
Still not satisfied, Mr. A went to his uncle, who advised him to make a lump-sum investment of Rs. 60,000 at the start of each year for 10 years. Mr. A follows this strategy as well and got these results:
| Total investment | Value of investment | XIRR |
| Rs. 6,00,000 | Rs. 9,22,628 | 10.87% per annum |
Now, considering all four scenarios, these strategies provided the highest returns:
- Buying only on dips (12.95% XIRR) and
- Combining SIPs with dip-buying (12.37% XIRR)
Also, regular SIPs turned out to be an easy-to-manage strategy, offering good returns of 11.29% XIRR. Making lump-sum investments had the lowest returns (10.87% XIRR), largely due to the challenges of market timing.
Also Read about: SIP vs Mutual Fund
Assessing the challenges and potential benefits of SIP and buying on the dip
SIP vs DIP is a popular conundrum among investors. While, SIP offers consistency and ease, “buying the dip” requires active market monitoring but can yield higher returns. By understanding the challenges and benefits of these approaches, investors can choose a strategy that aligns with their:
- Financial goals
- Risk tolerance
- Investment horizon
Let’s understand both SIP and DIP better:
Benefits of SIP (Systematic Investment Plan)
- Discipline
- SIPs ensure regular and automatic investments.
- They help you stay consistent, which is essential to achieve financial goals.
- Reduced cost price
- By regularly investing a fixed amount, you buy more units when prices are low and fewer when prices are high.
- This averages out the costs of acquisitions and lowers your ultimate holding cost of the asset.
- Convenience
- You don’t need to worry about timing the market.
- That’s because investments happen automatically with minimal manual intervention.
Challenges of SIP
- Fixed schedule
- When you choose SIP, investments occur regardless of market conditions.
- Due to minimum control, you sometimes miss better investment opportunities.
- Potential lower returns
- In an SIP, you do not monitor the current market conditions.
- In other words, you do not actively try to buy at the lowest prices.
- If the market drops significantly, you continue to invest the same amount.
- Due to this consistency, you miss the opportunity to invest more money when prices are very low.
- This results in lower overall returns compared to someone who buys more units when prices are at their lowest.
Benefits of buying on the dip
- Higher returns
- When you buy on the dip, you purchase investments at lower prices when the market is down.
- As the market recovers, the value of these investments also increases.
- This leads to comparatively higher returns.
- Market savvy
- Buying on dips is a strategy that relies on your ability to recognise when the market is undervalued.
- By identifying these opportunities, you can make more profitable investments.
Challenges of buying on the dip
1. Timing the market
- To succeed with this strategy, you need to:
- Constantly monitor market movements and
- Make accurate judgments about when to buy
- This means you must have a good understanding of the market and spend time keeping track of its fluctuations.
2. Inconsistent investing
- Unlike SIPs, which involve regular and disciplined investing, buying on the dip can be irregular.
- You might invest infrequently, which can lead to missed opportunities if you don't consistently identify the best times to buy.
High-return mutual fund categories for smart investing
| Equity Mutual Funds | Hybrid Mutual Funds | Debt Mutual Funds |
| Tax Saving Mutual Funds | NFO Mutual Funds | Multi Cap Mutual Funds |
Which is better - SIP vs. buying on a dip?
The choice of the best strategy between SIP and DIP depends on various factors, such as risk tolerance and market knowledge. To make a better decision, let’s learn when to prefer SIP or DIP:
When to prefer SIPs?
SIPs are ideal for investors who prefer a disciplined and regular investment approach. This means you don't have to worry about market conditions and can stick to a regular investment schedule.
You can go with SIPs if you are looking to achieve long-term financial goals such as:
- Saving for retirement
- A child's education
- Building an emergency fund
Furthermore, regular investments help build a habit of saving and investing. It can help you become financially disciplined and stable.
When to prefer buying on the dip?
This strategy is best suited for investors who are actively involved in monitoring the market and are comfortable with handling short-term fluctuations and risks. Hence, if you carry a higher risk appetite and want to earn higher returns, you can go with this strategy and buy investments at lower prices during market drops.
Furthermore, to effectively execute this strategy, you must have strong market knowledge. That’s because it’s not just about buying when prices are low but also understanding when they might recover and increase in value.
Conclusion
Both SIP and DIP have their advantages and challenges. SIPs are ideal for those seeking a disciplined and consistent investment approach. They are perfect for long-term goals like retirement or child’s education as they provide steady returns with less stress about market timing.
On the other hand, buying on the dip is suitable for investors who actively monitor the market and are willing to take higher risks to earn higher returns. This approach requires good market knowledge and the ability to identify the right times to invest.
It is essential to acknowledge that the best strategy depends on your risk tolerance, investment knowledge, and financial goals. Combining both methods can be an effective way to maximise returns, as we noticed in Mr. A.'s example.
Are you looking for top-performing mutual funds with strong historical performance? The Bajaj Finserv Platform has listed 1,000+ mutual fund schemes online. Compare them today and use the mutual fund calculator to chart your investment journey.
