Debt as an investment choice in 2013
When the RBI meets later in January 2013, it's almost certain that the RBI would reduce the repo rates, thus ensuring that interest rates in the economy drop. So, investors in debt would likely get lower yields beginning from early next year.
The ideal strategy for investors who are wary of taking risks of investing in equities is to park money immediately in debt, before the RBI starts cutting rates. The right way would be lock into debt instruments for a longer term, say three to five years to hedge against falling interest rates.
Equities as an investment choice in 2013
Equities are fraught with risk and to be honest, markets have rallied sharpy in the last few months, making equities unattractive. Even if the Sensex was to rally another 10% from here, the risk of it falling from here are higher. Therefore, the risk to reward ratio has decreased at the current levels. Also, there are a whole lot of risks for equities at the moment, including political uncertainty in India, chances of a sovereign downgrade, while globally there are a host of problems in Europe and the impending fiscal cliff in the US.
Perhaps, a year back when the Sensex was at 15,600 levels, it was far more attractive then the current levels of 19,400. In fact, India's fundamentals are weak, with a ballooning current account deficit, fiscal deficit and elevated inflation levels. The right strategy at the moment would be to reduce equity exposure at this stage and add debt.
Gold as an investment choice in 2013
Gold has rallied in 2012 and if the economic fundamentals around the globe improves, be rest assured money will move from gold to equities. Gold has already dropped to a four month low in December, while equities are rising, clearly showing that preference has turned towards equities.
However, if economic fundamentals deteriorate and there is no resolution over the fiscal cliff in the US, or if Europe teeters again, gold is sure to rally.
The right strategy
At this stage it is best to book some profits in equities and move into debt, as interest rates are likely to fall. Should the Sensex levels re-test those 16,000 levels, it would be an ideal time to move from debt to equities. One can also increase exposure to gold, considering that it has now dropped to almost 4 month lows.