What is the best strategy for long-term investors amid volatility: cash, debt or equity?

Volatility is expected to continue in 2023, most experts believe, especially in the first half of the year. Most market analysts see sluggish growth in the benchmark in 2023 as macro-growth-inflation dynamics remain uncertain and will likely continue to influence market momentum in 2023. Earnings risk and higher market valuation will also influence the market sentiment. Another important point to note is that the rate hike cycle is not over yet. While the hike will not be as sharp as in 2022, rate hikes are likely to continue as long as inflation is under control.

Against this backdrop of rate hike and macro uncertainty, what should investors do? Should they stick with equities, or move towards more fixed income assets or even hold cash? Let’s see what different experts say:

Amar Ranu, Head – Investment Products & Advisors, Anand Rathi Shares and stock brokers recommend long-term investors to stay in equity through the MF route.

“India is a growing market and hence, the opportunity is immense in terms of equity markets; however, the journey will not be linear and will come with its own set of volatility. In terms of global positioning, India is better positioned than peers and hence, the potential to create wealth in India is high in the medium to long term,” Ranu said.

He advised long-term investors to stick to equity, primarily through mutual funds as it offers diversification and professional management. He predicted that given the backdrop of double-digit nominal GDP, a mix of diversified multi-cap funds, mid-cap funds and small-cap funds can expect returns of 13-15 per cent over the medium to long term. However, he cautioned that in the entire wealth creation journey, one should be mindful of asset allocation which should be as per the risk profile of the customer and based on that, one should also allocate loans. He said that some part of the cash can be used for strategic allocation in case of any interesting investment opportunity in future.

During this, Deepak Jasani, Head of Retail Research, HDFC Securities Advised: At present, if investors are overweight on equity due to price appreciation, they would do well to reduce their equity stake and raise cash. They can also deploy the cash in debt which is currently offering good yields.

For investors who are underinvested in equity, any time is sufficient to top up, however a staggered purchase would be advised for them. They can also review their equity portfolio and take some profits from stocks that have performed very well in the last two years and raise some cash for deployment after a decent correction. Similarly, they may consider exiting stocks (irrespective of profit or loss) which have not performed well in these times, after examining the reasons for the underperformance.

Jasani added that given the attractive rates on fixed-income instruments, this is also a good time to allocate an appropriate amount in a debt portfolio for 3-7 years.

“Investors need to conduct rebalancing of asset allocation and portfolio review on a regular basis. This enables them to book profits when markets are high and invest in equities when valuations are low. Portfolio Review From this, they will be able to continuously weed out non-performing and opt for better quality stocks,” suggested the expert.

Sunil Damania, Chief Investment Officer, MarketsMojo They believe that holding cash is the worst possible strategy. Why? Because it fails to account for long term inflation. On the other hand, if you invest on bank FD, then the returns will be less than the inflation rate. As a result, the maturity value of money is much less than the rate of inflation, which makes no sense, the market expert explained.

He proposes to invest in equity, “Historically, Indian equity markets have given an average return of 13-14 per cent. These returns are non-linear. Some years have given positive returns, while others have given negative returns. However, over a period of five years, equity has the potential to outperform both debt and cash. Consequently, investing in the stock market makes a lot of sense,” Damania said.

He further pointed out that in terms of global development, India has been an outsider. One of the primary reasons is the flexibility and pro-activeness of the central government in supporting reforms and measures to strengthen the Indian economy. As a result, India will be an outsider in the next five to ten years, and hence he recommends investing in the stock market for the long term.

Kotak Institutional Equities Noted that generally, asset classes (bonds, equities, real estate) see lower returns in an era of high interest rates compared to much higher returns in an era of low interest rates.

“Expensive valuations of the Indian market and ‘growth’ stocks pose a risk to market performance. We expect de-ratings across multiples of ‘growth’ stocks as the market moves through 2023 with (1) ‘higher’ rates reconciles and (2) limited acceleration in economic growth,” it said.

Meanwhile, in a recent report, global brokerage house Goldman Sachs pointed out that while recent re-pricing in stocks and bonds has offered new opportunities for traditional 60/40 portfolios, potential enhancements are available when looking for alternatives.

“The adjustment to a high inflation regime has been painful, with the traditional 60/40 portfolio delivering historically poor returns in 2022. Nevertheless, we think the opportunity set has reset, positioning itself with fixed income Diversification has been re-established as an important driver of cash flow,” it recommended.

The brokerage advised investors to adjust their equity exposure to reflect the renewed cross-asset competition by focusing on quality, profitability and leveraged positions. In fixed income, it suggests adding duration to address reinvestment risk. Goldman also proposed diversifying existing risk with alternative investments to access unique sources of potential returns.