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I am interested in Litigation - chamber or firm. However, I am considering preparing for DJS, primarily because I think I will have a good command over theoretical knowledge of the law if I go through the rigorous preparation of it. And, I can always move to litigation after graduation. Is this the correct approach?

Alternatively, I have the option to join a good chamber as a long-term intern and slog there.

What should I do?

[Side question: Would having long-term internship experience at chambers help me get a job under the disputes team of a law firm?]
Not much since theoretical knowledge can only be perfected through practice which will also help you in comprehending what to study and how to approach
In my opinion, sticking ONLY to theoretical learning is as bad as sticking only to the practical aspects. You should balance both out.

Prepare for judiciary, but do intern alongside. While your theoretical knowledge would be useful when/if you enter litigation later, as a fresh associate, you would be expected to make yourself useful by a lot of tasks that you just won't grasp through books. Go intern, pay attention to court procedure, learn how filing and drafting works. If you intern for long, pay attention to strategising aspects of a case - this would also aid your knowledge for DJS.
That is the ideal and desirable option, but the thing is that coaching classes stretch to around 6-7 hours per day at least. With such a hectic schedule it would be almost impossible to manage internships.
Find a senior who expects you to work only one or two days a week. Obviously, such a senior will pay you less or not at all! Make sure that your name appears on your senior's vakalatnama and also in the order sheets of the court - this will help you in proving your experience in the event you can't get through the DJS exam and have to look for alternative jobs or retainerships. Rest of the week, focus solely on your studies! Get previous years' question papers and do writing practice answering them.
I may be able to accommodate someone in my office on such basis. Subject, of course, to competence.