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 dip: Differences

It can be said that SIP and “buying the dip” represent opposite ends of the investment spectrum. SIPs rely on consistency and steady investments, aligning with long-term investment objectives and enabling investors to benefit from compounding.

On the other hand, “buying on dip” places an emphasis on seizing opportunities during market downturns. This approach requires a keen understanding of market trends, and economic indicators, and the ability to act swiftly when the chance arises. While it can lead to potentially better returns if successful, “buying on dip” can also expose investors to greater risks and requires a high level of market knowledge.

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.

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.

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.