At the dawn of 2005, the investment horizon presents a dilemma for anyone who is scouting for options to park his money. After a stomach-churning ride on the bourses, it's going to be hard to place bets on the new year.

The stock market is at an all-time high after the dream run of the last two years. Real estate prices have also vaulted by up to 40 per cent in well-chosen residential neighbourhoods in the metros. The interest rates on debt instruments have come off their historic lows and the price of gold is at a 16-year high.

These pose two questions for the investor: Is there any upside left in any asset class, and where can one invest in 2005?

The stock market is breaking records every day. The year began with the sensex breaching the 6,000-mark but paused for breath after the unexpected general election results that showed the door to the NDA government. But slowly, as reason replaced fear, stocks surged again.

Foreign institutional investors (FIIs) also bought into the dream run. As the dollar continued to weaken, FIIs started shifting to non-dollar assets, especially in emerging markets like India. Their net purchases stood at $8 billion (about Rs 35,000 crore) for the year ? the highest ever annual inflow for India.

So far, it is looking good. The dollar remains unattractive and FIIs seem enthused by the India story. Last year, in another record, 122 new FIIs registered to trade in Indian markets, including several pension funds, which are typically stable.

Experts say an annual growth of 6 to 7 per cent, which is good for an economy, is sustainable over the next decade. Nilesh Shah, chief investment officer, Prudential ICICI Mutual Fund, says, ?It is the long-term demographic change that is happening to society. The profile of the Indian population is positive for consumption, which will drive growth.?

Observers say that this market is not expensive. The sensex is trading at 16 times its projected 2005-06 earnings. On historic earnings, the sensex?s PE is way below its valuations during the market?s previous two highs ? 24.3 in February 2000 and 45.5 in September 1994.

If FIIs move out for reasons that have little to do with India, like a resurgent dollar, it will only be a buying opportunity for the long-term investor.

Like last year, investing in an index is unlikely to be as profitable as handpicking stocks, as demonstrated by the mutual fund experience last year. Although the sensex virtually finished the year where it started from, actively managed diversified equity funds, on an average, delivered 19 per cent return for the year.

Says Shah, ?Year 2005 will be a reflection of bottom-up companies rather than top-down sectors. Within a sector, one would have to buy good companies and the returns will come from company rather than sector selection.?

At current prices, valuations cannot be termed cheap. Nevertheless, many stocks reflect the high growth expectations from the company. Midcap and small-cap funds are a proxy exposure to this set, but they should not form the core of your portfolio. Says A. K. Sridhar, executive director, UTI Mutual Fund, ?Owing to the risk factor of such stocks, it should not have more than 30 per cent of your equity holding.?

A hunting ground for fast-growing companies are sectors on the upswing. According to broker Ajit Day, ?This is the outsourcing brigade, namely IT, pharmaceuticals and auto ancillaries, which continue to strike big deals and grow 25-30 per cent a year. There?s a good chance that textiles might join them.?

Sridhar says, ?We are bullish on the basic and core industries like cement, steel, engineering and power. The services sectors should do well too.?

It is also possible to find value plays in stocks and sectors that have fallen out of the market?s favour because of temporary concerns. One such sector is banking, where the threat of rising interest rates on bond portfolios has overshadowed the smart increase in lending by banks. Another can be oil PSUs, which are reeling under the burden of rising subsidies forced by high oil prices. As and when oil prices fall, both stocks become good buys.

Going by the issue filing and statements of intent from companies, issues worth Rs 60,000 crore are in the pipeline. The long list of companies on the bourses include stocks from unrepresented sectors like airlines (Jet Airways) or thinly represented like retail (Shopper?s Stop) and telecom (Hutch, Reliance Infocomm and Idea).

There is also a clutch of PSU banks and companies from the media and insurance sectors. But do not walk in blind. Do not invest in companies you do not know about.

Lastly, stay true to your asset allocation. In a bull market delivering phenomenal gains, it is tempting to go overweight on equity.