But is this strategy worth your time and effort?
Investors often cite examples from the past, where markets have bounced back from the worst of the crisis. To put it in perspective, market recovery post Global Financial Crisis in 2008 and the Covid-induced crash in 2020 make a stronger case for ‘buying the dip’.
But how well will you be rewarded?
Let us dig deep and find out how much extra you can earn from this tactic and is it really worth it. To understand this, we analysed four scenarios:
● Investing only on dips
Scenario 1: Investing Only On Dips
What would have happened if you had bought the Sensex only during its ‘dips’ over the past 10 years, from March 1, 2013, to March 1, 2023? For our analysis, we have considered a “dip” as a 2% drop in the Sensex’s closing price from the previous day. During this period, there were 121 such dips.
To keep things realistic, let’s assume that you invested a day after the dip. Buying an exchange-traded fund (ETF) on the same day as the dip may not be possible for most investors. Investing through index funds is the most preferred way, but investors must adhere to the cut-off timings for equity funds. Hence, investing the day after is a more realistic assumption.
Let’s say you invested Rs 5,000 every time the market dipped 2%, your XIRR returns (extended internal rate of return) come down to 12.95%, as shown in the table below.
XIRR helps you calculate your overall returns when there are both inflows and outflows in an irregular manner during a specific period.
Scenario 2: Regular Monthly SIPs
Now, if you were not interested in the complexities of monitoring the markets and opted for a SIP, your earnings would have been slightly lower. Investing in a 10-year SIP would have fetched you 11.29% annual return, (check table below).
Scenario 3: Combining Regular Monthly SIPs & Buying on Dips
If you combine both the strategies, i.e. invested in monthly SIPs and also bought the dips, you would have made 12.37% per annum and outperformed the simple SIP (check table below)
Scenario 4: Lump-sum Investments
A lump-sum investment approach would have earned you a lower return. Assuming that you make an annual investment of Rs 60,000 at the start of every year from 2014 to 2023, your XIRR would have been around 10.87%, (check table below).
What Should You Do?
Buying the dip has generated better returns than regular SIPs albeit marginally. But, it must be recalled that this strategy needs constant monitoring of the market over the full investment tenure. This can be challenging for most of us as missing out on a few dips can hit the aggregate returns.
Hence, regular SIPs are a more realistic option. If you look at the returns, there is hardly any difference in both cases. You can also consider the combination of the two, regular SIPs and buy the dips. This way, you will have a disciplined approach with regular SIPs and can make extra returns when the market is down.
It may be noteworthy that the study was based on the past 10 years, and past returns do not guarantee future performance. Considering the market volatility, it makes sense for most of us to stick to the SIPs. Remember, discipline is as good as luck if you stay invested for the long-term.
(The author is COO, ET Money)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)