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

The year 2022 ended on a positive note for the market with the benchmarks delivering 4 percent gains. However, it hasn't been an easy ride in a year of the Russia-Ukraine war, rising inflation, aggressive rate hikes by global central banks, concerns regarding global growth and more.

Volatility is expected to continue in 2023, most experts believe, especially in the first half of the year. Most market analysts see muted growth in the benchmarks in 2023 as the macros-growth-inflation dynamics remain uncertain and will likely continue to influence the market movement in 2023. Earnings risks and elevated market valuations will also impact market sentiment. Another key thing to keep in mind is that the interest rate hike cycle is not over yet. While the hikes will not be as steep as in 2022, the rate hikes are still likely to continue till inflation is under control.

Amid this backdrop of rate hikes and macro uncertainty, what should investors do? Should they stick with equities, or shift towards more fixed-income assets or even hold cash? Let's see what different experts say:

Amar Ranu, Head - Investment products & Advisory, Anand Rathi Shares & Stock Brokers suggests long-term investors stick to equity via MF route.

"India is a growing market and hence, the opportunity in terms of the equity market is immense; however, the journey won’t be linear and it would come with its own set of volatilities. In the context of the global situation, India is placed better relative to peers and hence, the probability of creating wealth in India is high in medium to long duration," Ranu noted.

He advised long-term investors to stick to equity, predominantly through the Mutual Fund route as it offers diversification and professional management. Given the backdrop of double-digit nominal GDP, one can expect 13-15 percent returns over the medium to long term with a mix of diversified multi-cap funds, mid-cap funds and small-cap funds, he predicted. However, he cautioned that in the whole wealth creation journey, one should be mindful of asset allocation which should be as per the risk profile of the client and on the basis of that, one should allocate to debt too. Some portion of cash may be used for tactical allocation in case of any interesting investment opportunity strikes in the future, he added.

Meanwhile, Deepak Jasani, Head of Retail Research, HDFC Securities advised: At the current juncture, if investors are overweight on equities due to value growth, they would do well to trim their equity portion and raise cash. They could also deploy the cash in debt which is currently giving good yields.

For investors who are under-invested in equities, any time is good enough to top up, although a staggered buying would be advisable for them. They may also review their equity portfolios and take some profits out of stocks that have outperformed very well over the past two years and raise some cash for deployment after a decent correction. Similarly, they can look to exit stocks (irrespective of profit or loss) that have not performed in these good times after checking the reasons for the underperformance, he said.

Given the attractive rates on fixed-income instruments, now is also a good time to allocate appropriate amounts into a debt portfolio for 3-7 years, added Jasani.

"Investors need to regularly conduct rebalancing of asset allocation and also portfolio reviews. This will enable them to book profits when markets are at a high and deploy monies in equities when valuations are low. By portfolio review, they would be able to weed out consistent non-performers and opt for better quality stocks," suggested the expert.

Sunil Damania, Chief Investment Officer, MarketsMojo believes that keeping cash is the worst possible strategy. Why? Because it fails to account for long-term inflation. On the other hand, if you invest returns on a bank FD would be less than the inflation rate. As a result, the money's matured value is far less than the inflation rate, which does not make sense, explained the market expert.

He proposes investing in equity. "Historically, Indian equity markets have given 13-14 percent returns on average. These returns are non-linear. Some years have produced positive returns, while others have generated negative returns. However, over a five-year period, equity has the potential to outperform both debt and cash. As a result, investing in the stock market makes a lot of sense," noted Damania.

He further pointed out that in terms of global growth, India has been an outlier. One of the primary reasons is the central government's resilience and proactiveness in supporting reforms and measures to strengthen the Indian economy. As a result, India will be an outlier 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, lower returns are seen across asset classes (bonds, equities, real estate) in an era of higher interest rates compared to very high returns in an era of low-interest rates.

"The expensive valuations of the Indian market and of ‘growth’ stocks pose risks to market performance. We expect a de-rating in the multiples of ‘growth’ stocks as the market reconciles to (1) ‘high’ rates through 2023 and (2) limited acceleration in economic growth," it said.

Meanwhile, in a recent report, global brokerage house Goldman Sachs pointed out that due to the recent re-pricing across stocks and bonds has offered renewed opportunities for the traditional 60/40 portfolio, with potential enhancements available when looking to alternatives.

"The adjustment to a higher inflationary regime has been painful, with the traditional 60 / 40 portfolio delivering historically poor returns in 2022. Even so, we think the opportunity set has been reset, with fixed income reasserting itself as a critical driver of diversification and cash flow," it recommended.

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