Every asset has gone through the roof. So where should you invest?

Almost every asset class – stocks, bonds, gold, silver and of course real estate – has delivered solid gains in the past few years. You could have thrown a dart five years ago to choose an investment and done very well. 

I’m happy for you, and hope you continue to ride the highs that various assets seem to be hitting almost every month. (In case you are thinking of selling your holdings, read this).  

Today, however, we will delve into a more pressing issue.

If you have spare money, where should you invest it now? 

Suddenly, the bull markets everywhere don’t seem that great, do they?

Let’s try to think through this, asset by asset, starting with gold. 

Heavy metal

Unfortunately, gold is seen as a momentum play these days. 

What’s worse is that I have spoken to people who compare gold to stocks, and believe they made the right choice by investing/punting on gold. Well, the fact that the outcome worked out for you does not necessarily mean the logic was sound. 

Gold and stocks are at the two opposite ends of the risk-return-needs spectrum. Confusing one with the other, in general, could lead to big disappointments over time. 

Also read | Budget 2024: Capital pains and other long-term letdowns

You see, historically, we all bought gold as insurance (some still do). It was something that could help us tide over tough times, whatever their cause. The fact that it also generated a return was a secondary benefit. 

So, in my view, go back to thinking about gold as something you buy to tide over bad times. And yes, junk the whole momentum play idea. 

How much you should buy will vary, of course, but in general I have found that a 5% to 10% allocation suits everyone. 

If high gold prices make you hesitant, buy it over a few months. And then hold it forever. 

Realty bites

Second, let’s talk about real estate, starting with land, which has caught the fancy of many.

I think buying land in a far-flung suburb of a city or town with the hope that the price will go up is like buying a small cap stock with little idea about the company. But the potential payoff is huge, so you take a punt. There’s a difference, though. In case of a small cap stock you’ll probably punt a few lakhs. For land, though, you’re probably looking at tens of lakhs. 

Punting on land can have life-changing consequences for many. And that’s precisely why one needs to tread with caution, especially now when the market’s hot. If you do decide to jump in, be sure to cover your bases. This means, among other things, picking a good location, and then building a large margin of safety into the price. 

Residential real estate is similar, and in most cases generates suboptimal returns – sometimes even less than a fixed deposit! 

Also read: Ignoring market noise is difficult but not impossible. Here’s how to do it.

Think of these assets from a needs perspective. If you need it, buy it. And be sure to avoid debt. If you cannot, do the next best thing – repay it as quickly as you can.

This leaves us with commercial real estate, where the ticket size generally puts it out of reach for most – at least the kind that has the potential to survive this hybrid-work, online-commerce world. So, let’s leave this for now. 

When it comes to real estate, don’t get carried away with the recent jump in prices. Higher prices imply relatively lower future returns. Look at it through the lens of your needs. If you have a lot of surplus funds, you could perhaps consider investing in property. Still, do the math. You will find that more often than not, you would be better off investing in an FD! 

Debt row

Third, let’s take up deposits and debt funds. 

Interest rates today, some believe, are at the top of the cycle and will start to fall in the coming year. For a moment let’s assume they are right (they almost never are, on both the quantum of change and and the timing, so beware). 

If this is the case, then perhaps it’s a great time to lock in a long-term FD. Ditto for debt funds, which will benefit as yields on debt decline (lower yield means higher bond prices, implying a capital gain).

Other than the prediction that interest rates will fall, there is a big issue with deposits that you need to factor in. 

Also read: Missed the market rally? Learn from the Warren Buffett playbook

Even though the returns have become lucrative, they are perhaps just about beating actual inflation (as against the measured inflation that is published). While this may preserve the value of your investment, it will not necessarily help grow it. Such an investment may work for retirees who are using up their funds, but not for long-term investors. 

Debt funds, too, are not risk free. They can be very volatile as interest rates move and as the creditworthiness of the debt they hold changes. Like my ex-boss used to say, debt can often be even more risky than equity. Think about that. 

In essence, even though debt may be at a tipping point as the interest rate cycle starts to turn, it may be wise to tread cautiously. 

Generally speaking, stick to fixed deposits for emergency funds. Avoid debt funds, other than liquid funds for liquidity needs. Even with liquid funds, choose those that take almost no risk. 

Stocking up

That brings us to the big one – equity. 

India is among the most expensive markets in the world today. Two immediate conclusions can be drawn from this.

One, future returns are going to be muted compared to past returns. Prashant Jain, arguably one of India’s most successful money managers over the past couple of decades said this in a recent note to clients: “Markets therefore offer compounding prospects in line with earnings growth and should deliver around 12% CAGR over the long term. These markets are thus suitable for the patient investor". 

Two, the markets have a mix of very expensive, expensive, well-priced, undervalued, and grossly undervalued stocks. This is true at almost any point of time in a market. 

So, to be able to make solid risk-adjusted returns, you need to be far more skilled than you perhaps needed to be in 2020. Then, almost anything you bought did well. Today, skill matters. 

If you have that, well and good. There are enough attractive opportunities in the market today – what you need to do is find them. That’s not easy.

The other alternative is to find a fund manager who can do it for you. There, too, the field is muddled. Many fund houses are busy pushing risky funds onto investors. Others are playing the momentum game, fearing they will be left out of this rally. But if you look hard enough you can find perhaps the one or two funds that are well-suited to you. Ideally, these will be flexicap/focused funds managed by a talented, experienced team. Choose experience, and leave the rest to the fund manager. 

Also read: India is booming. But you still need international exposure

Staying with equity, there are two other aspects that need to be discussed. 

One relates to momentum, which is, crudely put, the idea that the stocks that are rising will keep rising (of course there is more to it). I think this approach to investing is brilliant – I just don’t know anyone other than a broker or advisor who has actually made a lot of money with it. Perhaps I need to broaden my search. 

The other, of course, is trading in the futures and options (F&O) market to lever up returns. Well, the flip side of lever up is lever down. And in a hot market like this, swings can be extreme. So if you don’t have the appetite for seeing your investments wiped out, it’s best to steer clear. 

Also read: A dummies guide to controlling derivatives trading

Overall, every asset class is calling out for your surplus funds, with big returns to show for themselves. But how you should allocate your money is perhaps a far more difficult question today than it has been in recent years. 

This means you should have one mantra when choosing an investment – be cautious.

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477. 

You should always consult your personal investment advisor/wealth manager before making any decisions.