What is the concept of 'Buy the Dip', Should you apply it?

Short Answer

Buy the Dip represent an investing strategy wherein you add on to your existing investments in the case of any small or major market correction. This strategy is beneficial for long-term investments as it helps to reduce the overall cost and also increases the overall profitability.

Detailed Answer

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.

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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.

Tagged With: long term investingmutual fund investingsystematic investment planrupee cost averagingexchange traded fundnifty
Categories: Investment
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SIPs or a Systematic Investment Plan is a great tool to build money in the long run with a minimum time period of 5-10 years. It offers multiple advantages like a low minimum capital requirement, averaging benefit, formation of investing habits, etc. However, the most adequate time to stop your SIPs is when your financial goals are met or when you feel to change the objective of your investments.

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Why are ETF or Exchange Traded Funds not popular in India?

Exchange traded fund is a freely marketable security which tracks a particular index, commodity, bonds or combination of assets. they aren't popular as there is no additional tax incentives, not enough liquidity, under performs most of the time, lack of choices, lack of institutional interest, costs are low but not enough and lack of awareness.

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For significant returns, one can look forward towards stock funds, real estate investments, dividend stocks, target-date funds and so on. Each one of these investments does offer something better to investors based on their capital of investments made.

Can I buy 1 share of Nifty or Bank-Nifty?

Nifty is an index comprising of the top 50 companies in terms of the market capitalization of the NSE (National Stock Exchange). Bank Nifty, on the other hand, comprises 12 top banking stocks of the NSE. These indices are an attractive option for investors as they track the performance of the most valuable companies of the NSE. Know if you can purchase one share in these indices.

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