Regular SIPs vs buying on dips: Which is better?

Posted On: 18 July 2023

One can invest in the stock market using different strategies. Two of the most commonly used methods are the “SIP” and “buying the dip”. These approaches need contrasting steps – while SIPs (Systematic Investment Plans) involve a regular, pre-defined investment, “buying on dip” means that you enter the market only when the prices are down.

Both methods can propel investors to build wealth over time, but they differ significantly in their execution and underlying principles. Here, we will outline the concepts behind SIP and “buying the dip”, exploring their distinctions, advantages, and challenges. Thus, by drawing a comparison between these investment approaches, investors can make informed decisions based on their financial goals, risk appetite and time horizon.

Table of contents

What is systematic investment plan?
What is buying on the dip?
Regular SIPs vs. buying on dip: Differences
Potential benefits and drawbacks of SIPs
Potential benefits and drawbacks of buying on dips
SIPs vs. buying on dip: Which is better?

What is systematic investment plan?

A Systematic Investment Plan (SIP) is a disciplined investment strategy where an investor invests a fixed amount at regular intervals in a mutual fund. The frequency of investment could be monthly, weekly, or daily. The idea behind SIP is to accumulate wealth “systematically” and take advantage of rupee-cost averaging.

With the SIP approach, an investor will be able to buy more units when the prices are low and fewer units when the prices are high. As a result, the average cost of acquiring units tends to be lower over time. This approach can mitigate the impact of market volatility, making it a preferred choice for risk-averse investors who seek long-term wealth creation with relative stability.

What is buying on dip?

“Buying on dip”, on the other hand, is a strategy where investors wait for significant market declines or corrections before entering the market or increasing their position in specific assets. Therefore, when prices "dip" due to market fluctuations, economic factors, or other events, investors see an opportunity to purchase assets at a discounted price.

This strategy is suitable for seasoned investors who actively monitor the market and have a higher risk appetite. Unlike SIPs, “buying on dip” requires investors to time the market correctly, which is challenging even for the most experienced of investors.

Regular SIPs vs buying on dips

Let’s compare the potential differences in returns from buying the dips versus SIPs in four scenarios. Let’s assume the following*:

Investment period: 12 months.
Amount to invest: Rs. 1,20,000.
Market fluctuations: The market dips by 20% in months 3, 6, and 9, and recovers fully after each dip.
Expected average return: 12% annually (adjusted for market dips and recovery).
Share/unit price at the start: Rs. 100 per unit.

Scenario 1: Buying on Dips Only

Month	Amount Invested	NAV	Units Acquired
3	₹40,000	₹80	500
6	₹40,000	₹80	500
9	₹40,000	₹80	500

Total units purchased: 1,500 units.
Value at the end of 12 months at ₹112 NAV (12% gain from ₹100): 1,500 × Rs. 112 = Rs. 1,68,000

Scenario 2: Systematic Investment Plan (SIP)

Invest ₹10,000 each month for 12 months, totaling ₹1,20,000.

Month	Amount Invested	NAV	Units Acquired
1	₹10,000	₹100	100
2	₹10,000	₹100	100
3	₹10,000	₹80	125
4	₹10,000	₹100	100
5	₹10,000	₹100	100
6	₹10,000	₹80	125
7	₹10,000	₹100	100
8	₹10,000	₹100	100
9	₹10,000	₹80	125
10	₹10,000	₹100	100
11	₹10,000	₹100	100
12	₹10,000	₹100	100

Total units purchased: 1,275 units.
Value at the end of 12 months at Rs. 112 NAV: 1,275 × Rs. 112 = Rs. 1,42,800

Scenario 3: Combining Both

Use ₹80,000 for SIP (₹6,666 per month) and ₹40,000 to buy on dips.

SIP Component:

Month	Amount Invested	NAV (adjusted for dips)	Units Acquired
1-12	₹6,666 × 12	As per scenario 2	~850

Buying on Dip Component:

Month	Amount Invested	NAV	Units Acquired
3, 6, 9	13,333 × 3	₹80	~500

Total units purchased: ~1,350 units.
Value at the end of 12 months at Rs. 112 NAV: 1,350 × Rs. 112 = Rs. 1,51,200

Scenario 4: Lumpsum Investment on First Dip

Month	Amount Invested	NAV	Units Acquired
3	₹1,20,000	₹80	1,500

Total units purchased: 1,500 units.
Value at the end of 12 months at ₹112 NAV: 1,500 × Rs. 112 = Rs. 1,68,000

*Please note that this scenario and these numbers are hypothetical. In reality, markets may fluctuate significantly from day to day.

As we can see, buying on dips and lumpsum on a dip yielded higher returns but require precise timing and significant market knowledge. Even a momentary delay in executing a transaction can change the potential returns, and there is no way of knowing if the market will rise or dip further. Meanwhile, SIPs are easier to execute and mitigate market timing risk.

Regular SIPs vs. buying on dip: Differences

Aspect	SIP	Buying the Dip
Approach	Steady, consistent investments	Opportunistic purchases during market downturns
Goal	Aligns with long-term investment objectives	Seeks to capitalise on short-term market fluctuations
Key benefit	Benefits from compounding over time	Potentially higher returns if executed correctly
Requirements	Regular investment discipline	Keen understanding of market trends and indicators
Risk Level	Lower risk than buying on dip due to consistency	Higher risk; depends on market timing
Execution	Automatic and regular	Requires swift action and decision-making

Potential benefits and drawbacks of SIPs

SIPs has their own set of advantages and challenges.

Advantages of SIPs:
- One of its significant benefits is the habit of disciplined investing, where investors invest a fixed investment amount regardless of market sentiment.
- SIPs remove emotions from investment decisions and encourage investors to stay invested during both bull and bear markets.
Drawbacks of SIPs.
- SIP might not be the best fit for all situations. In prolonged bear markets or when the market is in a continuous downtrend, SIP investments may lead to losses or take an extended period to recover.
- Additionally, the potential gains from SIP investments may be lower than “buying on dip” during strong bull markets.

Potential benefits and drawbacks of buying on dips

Advantages of “buying on dip”
- “Buying on dip” can be potentially highly profitable when the long-term price trend of a security is positive, especially for fundamentally sound assets.
Drawbacks of “buying on dip”
- While potentially rewarding, this approach has significant risks. Timing the market is notoriously difficult and even experienced investors can get it wrong.
- It requires a substantial amount of research, analysis, and readiness to act swiftly. Failing to accurately identify the bottom of a dip can result in missed opportunities or losses if the market continues to decline.

SIPs vs. buying on dip: Which is better?

Determining whether SIP or “buying on dip” is better depends on various factors such as an investor's risk tolerance, investment horizon, and market expertise. There is no one-size-fits-all answer, as each approach caters to different investment styles and objectives.

Generally speaking, SIPs are ideal for those seeking a disciplined and systematic approach to wealth creation, particularly for long-term goals like retirement planning, children's education, or creating an emergency fund. It can help minimize the impact of market volatility and provides a sense of financial stability.
“Buying on dip”, in contrast, suits investors who actively follow the markets, can identify potential investment opportunities, and possess the risk appetite to handle short-term market fluctuations. It can be more rewarding in certain market conditions and for those seeking to capitalise on short-term market movements.

Conclusion

While SIP offers the benefits of consistency, discipline, and long-term wealth creation, “buying on dip” works on seizing market opportunities during significant declines. Investors should carefully evaluate their financial goals, risk tolerance, and time horizons before choosing between these approaches. Thus, while some investors may prefer the reliability of regular purchases, others may seek opportunities to enhance their gains. Investors can also use mutual fund calculators, such as an SIP calculator or a lumpsum calculator, to help with investment planning. If you're opting for a top up SIP, where you increase your SIP contributions by a fixed percentage periodically, you can use an SIP top up calculator to visualise the potential impact of such an approach.

FAQs:

What is SIP and how does it differ from buying on dips?

SIP is a regular investment plan where a fixed amount is invested at specified durations, promoting disciplined investing. Buying on dips involves capitalizing on market declines to purchase investments at lower prices.

What are the advantages of SIP compared to buying on dips?

SIP promotes disciplined investing regardless of market conditions, reducing emotional and impulsive decisions. Buying on dips requires active market monitoring and timing, which can be challenging and risky.

Is it advisable to combine SIP and buying on dips?

Combining SIP and buying on dips is a matter of personal choice and risk appetite. SIP offers consistent investing, while buying on dips entails market timing skills. Some investors may choose to use both approaches to diversify their investment. However, it's important to carefully evaluate individual investment goals before making final investment decisions.

What is SIP and dip?

SIP involves regular, fixed-amount investments, promoting disciplined investing, rupee cost averaging, and compounding for potential long-term growth. "Buying the dip" focuses on investing during market downturns to potentially capitalise on lower prices but requires accurate market timing and carries higher risk.

Is it a good strategy to buy the dip?

"Buying the dip" can be a potentially beneficial strategy, but it's not without its risks. While it can offer benefits such as lower entry costs, it also carries risks like market timing challenges, the potential for further declines, and emotional decision-making under volatility.

What are the risks of buying the dip?

"Buying the dip" involves risks such as difficulty in accurately timing the market, the potential for further declines, and emotional challenges like panic or overconfidence during volatility. It also carries opportunity costs, as funds tied to declining assets could be better utilized elsewhere, and the risk of value traps where assets appear undervalued but continue to lose value. This strategy requires market expertise, emotional discipline, and a high tolerance for risk, so it may not be suitable for all investors.

Is buying the dip profitable?

The profitability of "buying the dip" depends on factors like market conditions, market timing skills and investment horizon. It can be profitable if the market recovers in time but can lead to losses if the market declines further during the investment period.

What is a suitable SIP amount?

The suitable SIP amount depends on factors like financial goals, income, risk tolerance, and investment horizon. An SIP calculator can help you determine a suitable investment amount depending upon these factors.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.