2014 is election year, and hence a lot could change in terms of the political economy. This means caution has to be the watchword.

It's that time of the year when every publication gets experts to tell readers where to invest in the following year. 2013 is about to bow out with the Sensex not far from its all-time peak, real estate at unaffordable levels even though few are buying, gold in the dumps at under $1,250 an ounce, the rupee still well on the wrong side of 60-61 to the US dollar, 10-year government bond yields ruling just under 9 percent, consumer inflation at 10 per cent plus, and GDP growth expected to come in at 5 percent or lower.

This was the scenario around early-December, and it is unlikely to change much over the next few months. So, if you have money to invest, or already have invested right, left and centre, what is the prognosis for 2014?

The first thing to remember is that 2014 is an election year - and hence economic outcomes will be held hostage to political developments. Even though there is some talk that the BJP under Narendra Modi is on the upswing, things can change between now and May 2014. And no matter who comes to power after the general election, the government formed after that will have to stick to austerity and focus on reforms. The only question is whether the reforms will come with a bang or in dribs and drabs. If it is the latter, the economic pain will last a while; if there are a lot of quickfire reforms, the economy will revive within 12-18 months (as it did in 1992 after the big bang reforms of 1991), and the markets will start rising in anticipation in 2014 itself.

So here are my predictions on where to invest in 2014 - assuming three basic scenarios. One, where a weak UPA comes back to power; two, where a third front is installed for, say, two years, to be followed by another election in 2016-17; and three, where there is a stabler BJP-led coalition, presumably led by Modi.

Scenario 1: A weak UPA's return is the worst thing possible for investors. Against the backdrop of weak recoveries in the US, Europe and Japan, and China now trying to reform its economy, growth will take longer to revive. In this scenario, the stock market is not going to jump over the moon, and real estate could crash. Gold will be a bit more buoyant, but fixed-interest avenues will look enticing. Tax-free public sector bonds, currently yielding over 8.5 percent coupon, and offering more than 12 percent yields for those in the top tax bracket, are the best fixed investments going. Banks FDs would be the second best, since inflation could start coming down by the second half of 2014.

In short, in scenario 1, one should invest in safe instruments, a bit in equity, a small amount in gold, and zero in real estate.

Scenario 2: A third front government will be unstable, but not necessarily anti-reform. Remember Deve Gowda's and IK Gujral's UF governments in the second half of the 1990s? Despite the fact that Communists were part of that government, we saw small doses of reform, and P Chidambaram delivered his dream budget - which later turned out to be a nightmare, but that is with hindsight.

In this scenario, the mix should be equity plus safe debt, but again no real estate. Gold upto 5 percent of the portfolio is always advisable whatever the government.

Scenario 3: A strong, Modi-led, BJP-led NDA comes to power. If this happens, the markets will boom, not because Modi has a magic wand, but because of sentiment and expectations. This government will have to deliver big-bang reforms, and if it does that, stocks could outperform all other asset classes. Even though growth in 2014-15 may be weak or low, it could revive in subsequent years. The investment cycle will revive, foreign flows will resume, and interest rates will start falling after stabilising.

In this scenario, one should bet more on equity. Real estate could start reviving (but will still need to correct before it is worth investing in), and gold would not look all that alluring. Real growth always kills off interest in gold.

Scenario 4: This is a situation where the BJP comes to power, but with a small and shaky mandate. In this event, one can rule out bold reforms or big changes. At best, we can hope for outcomes similar to Scenario 1 (UPA-3) or Scenario 2 (Third Front).

Currently, Scenarios 2 and 3 seem the most likely, but things could change as we approach closer to May 2014.

But wait, this is not the whole story, for 2014 is a year in which many things could go wrong. As things stand, with the entry of Janet Yellen as the next Fed Chairman, the US central bank is going to keep pumping money into the system. In Japan, Shinzo Abe's efforts to bring back inflation means printing billions of currency notes, creating more macroeconomic instability. They will all be building monetary bubbles, which could burst with some triggering event. As for the eurozone, there is nothing to indicate that economic recovery there has stabilised. And China is in the throes of reform, which adds to uncertainties for the world economy. If China is going to make gut-wrenching changes to its state-controlled system, some of its state-owned enterprises may focus even more on exports and the government itself will have to do more financial engineering in order to keep unviable companies afloat.

There are simply too many uncertainties round the corner to say that any investment vehicle barring safe fixed avenues will yield returns. In India, even safe avenues will look less safe if inflation continues to erode real returns to investors. If this happens, people will end up trying to save even more, which will worsen the slowdown. India's consumption story has weakened during UPA-2 precisely because inflation has eroded disposable incomes even as slow growth has put a speedbreaker on job creation and salary hikes. If this continues, people will put off big-ticket purchases and end up saving even more to prepare for rainy days.

This brings me to Scenario 5 - an all-weather investment plan no matter what happens. When you don't know what can happen for several years ahead, the best thing to do is to diversify you assets more or less equally and hope for the best. This means allocating equal shares to equity, bonds and bank FDs (say, 30:30:30), and the balance to gold (10 percent).

In all scenarios, real estate is almost a no-no. This does not mean you don't buy a house if you can afford it and need one to stay in after retirement, but it means that realty is a loser. Real estate is no longer an investment class in India, given current prices and the huge affordability gap. A home has only use value, and you buy one if you can't rent one or are about to retire and refuse to keep moving house every two years.

In sum, 2014 is not a normal year for deciding investments. It is best to spread the risks.

(This article was first published in The Entrepreneur magazine December 2013 issue)