Safety First And Capital Protection Are Watchwords For Investing In 2025

What is the right investment strategy to adopt for 2025? The answer is “it depends.” It depends on your age and risk-taking ability. If you are in the initial part of your career or earnings potential, it would be all right to remain invested in stocks. At the very least, you need not alter your current planned asset allocation based on your risk-taking ability. 

This is because you have many years more to recover from any market crash or prolonged value destruction. If 2025 turns out to be a bear market year, you will also gain when the market starts rising again along with India’s growth revival, when that happens. On the other hand, if your time horizon is shorter, and retirement (or an end to your earning years) is on the horizon, the best strategy is “better safe than sorry.” Capital protection should be on your mind in 2025.

But “better safe than sorry” is not a bad strategy even if you have decades of earning potential ahead of you. Reason: 2025 is going to be one of those years of great political and economic uncertainty, starting with Donald Trump’s presidency. While there is a good chance that the two ongoing wars in Ukraine and West Asia will taper down even if they do not end completely, if Trump starts imposing tariffs and China retaliates, global growth will slow down, and even India can’t do as well as expected. 

Internal social tensions are rising everywhere, including in America and Europe, not to speak of India. Countries in Europe and Asia (Japan, China, India) will seek to increase defence spending in preparation for the next crisis, and this means growth will be constrained by heightened military spending. There is no real probability of stocks getting a fillip from an improvement in the growth climate anywhere. Not least because inflation is still not gone.

So, what are the best options for 2025 given that most people will need to preserve capital rather than accept the possibility of huge value erosion if the markets decline or crash?

Debt funds and bank deposits are obviously the best options, for a few good reasons. Bank deposit rates are still high right now and debt funds are giving returns that are at least above the headline inflation rate. Even for those in the higher tax brackets, bank interest rates in the relevant tenures are in the range of 7.5-8.25 per cent with “safe” public or private sector banks. These rates will yield a post-tax return that is at least around the November retail inflation rate of 5.5 per cent. If the rates start easing, the returns will be positive.

On the assumption that rates will have to fall in a world that is slowing down in 2025, returns on debt funds will also improve as the prices of underlying bonds rise to adjust for falling rates. 

Gold is still going to remain a good bet, as it is a safe haven currency that beats inflation over long holding periods. According to goldprice.org, the yellow metal has given an average annual return of over 11 per cent over the last 15 years, and only in three of those years has it given negative returns in rupee terms.

With sovereign gold bonds now out of favour with the government, which has begun to balk at their cost, exchange traded gold funds (ETFs) are an option, not to speak of physical gold. Current returns on gold ETFs are in high double digits, and the chances are they will still return a positive yield in 2025, even on current high levels.

The downside risk comes from the possibility of the world suddenly becoming a much saner place, where the big wars end and the US and China behave like responsible global powers. But no one is betting on that in a world led by Donald Trump and Xi Jinping.

When it comes to equity, I would bet on hybrid funds with a large debt component. These funds will do less well if equity soars, but better than the rest in a bear market where rates start falling.

The simple rule for 2025 is this: don’t bet the farm too soon, unless you see real sanity emerging in global and domestic politics and economies are doing much better. 2025 is the year to focus on capital protection and cash — one means cash in safe avenues like bank deposits. Liquid funds may also be a good option. One can be wrong, for markets are always unpredictable.

The worst thing that can happen if you choose safety over risk is that you miss out on an unexpected upside that nobody could forecast. But you still have your money with you to invest for returns when that looks safer.