About the concept of ‘Buy the Dip’

Seasoned investors already know and implement this term. But unlike most of us who are beginning our stock market journey, it might be an unheard concept. Therefore let's learn about what does buy the dip mean.

In simple words buy the dip means, whenever the price of a particular asset (stocks in this case) falls, you can take a small position or add some more to your existing holdings. Purchasing a stock when it drops significantly, for example, 5 to 10%, is a good time to buy as there is a high chance that it will bounce back.

Let’s consider the example of the Indian benchmark index, Nifty. If you maintained a long-term approach to investing in the Nifty 50 index, then buying the dip can be an ideal approach.

Over here is the weekly chart of Nifty50 for the last 10 years. Any minor and significant correction is marked with a vertical black line. These lines denote the opportunities when investors could have invested in the Index.

Unlike regular SIPs (Systematic Investment Plans), buying the dip is a smarter version of the same. Here instead of deploying your money on a regular basis, you buy on any small and big correction. By undertaking this you increase your chances of profits in the future, as well as you, obtain a better average price.

Another added benefit of buying on a dip is, your average cost goes down, compared to a regular SIP. As your average investment price goes down, the overall profit automatically increases.

When and where should you apply the Buy the dip concept.

This concept cannot be employed for every investment instrument. Let see in which cases you can apply this.

1. In Mutual Funds or ETFs

The concept of Buy the Dip is applicable to your Mutual Fund and ETF investments. There is a fund manager who picks good quality stocks therefore you don’t have to do the analysis and research. You can also follow this strategy with your SIPs as well. You can add another chunk of money into your funds through a one-time lump-sum investment to achieve a better average price.

2. In good quality shares

If you only invest in direct equity shares, you can also imply this nature of the investment. But buying on dips should be applied to only fundamentally sound or blue-chip stocks. You should not employ this strategy to penny stocks or other micro-cap companies. This is because these companies may not bounce back after a significant fall. And downward averaging can lead to an erosion of your capital.

3. For your long term investments

Another point that is to be noted while adopting this strategy is, this is applicable only to your long-term investments. You should not imply this on your short and medium-term trades. In the case of a bear market (which can last for months), your capital can get locked, or you would have to take a bigger loss in case you apply this strategy to your trading stocks. Therefore only practice this on stocks and Mutual funds where the investment horizon is more than 5 years.

Bottom line

You should not rely on this strategy alone as markets might not provide a meaningful correction for a prolonged period of time. In this case, you will lose a good rally hence, this strategy should be used as an added strategy on top of your regular SIPs. Hence ultimately your investments will grow, and you would not have to worry about timing the market.