Investing strategy for next 6 months: Buy bonds, sell stocks

After an almost-vertical near-30 percent rally since February lows, Indian shares appear to have reversed trend, retracing about 5 percent from the top.

Analysts have warned that a potent mix of worrisome factors -- ranging from local valuations and nervousness over earnings to global factors such as Fed rate hike and European banking crisis -- will keep investors on tenterhooks in the near term.

Yesterday, foreign investors as well as domestic mutual fund managers told CNBC-TV18 that they foresee some pain for stocks even as they all agreed that a correction would not be deep.

Noted DSP BlackRock fund manager S Naganath said the global market is likely staring at volatility in the second half of the year.

"One should be quite cautious now as far as global equities are concerned," he said. "The possibility of 5-10 percent correction minimum between now and the end of the year globally for equities [is high]."

However, there is another area of the market, which has seen a strong rally alongside stocks: bonds.

From a peak of 7.9 percent six months ago on the government's benchmark 10-year bond, yields have now fallen to about 6.7 percent.

The 1.2 percent fall in the yield has resulted in sharp capital appreciation for bond holders as yields and prices are inversely related. (Falling yields make older bonds, fetching higher coupons, pricier.)

But economists and fixed-income experts believe that while the rally in the bond market may pause it is far from done.

A falling inflation environment -- retail prices fell to a 13-month low yesterday to 4.31 percent -- means the Reserve Bank may able to cut rates at least once more in the next six months. The benchmark repo rate currently stands at 6.25 percent.

Further, steps by the central bank to infuse more liquidity into the banking system have caused the spread between the repo rate and the benchmark yield to narrow. A further narrowing, coupled with a 25 basis points cut, could mean the 10-year could slink lower to the 6 percent mark, say analysts.

Financial planners say stock-picking and a proactive asset allocation strategy should not be the approach for most investors. They're better off making a financial plan, starting a SIP and sticking to it.

But for those wanting to take some risk and having a shot at earning an extra buck, shifting some allocation from stocks to bonds appears to be a strategy worth looking at for the near term.