It has been a rough ride for exporter Ashwini Kumar. After years of steering clear of the stock market he decided six months ago to take the big plunge by putting Rs 100,000 into equity mutual funds.

At first, it seemed he'd timed it right -- in just three months the value of his investments had zoomed to Rs 115,000 and the Sensex looked unstoppable. Then came the slide.

Today Kumar's Rs 100,000 is down to Rs 85,000. Kumar is gloomy but stoic. "Right now I'm sitting on a loss of nearly Rs 15,000 so there's no point in withdrawing. I'll sit tight and wait for the market to go up again."

In another corner of Delhi, the phone is ringing off the hook in Bajaj Capital CEO Anil Chopra's office. Chopra's key advice has been that all investors who are already in the market should keep their nerve. But he's telling investors with spare cash lying in the bank to lie low, invest in low-interest liquid funds for the time being until it becomes easier to figure out which way the market is heading.

Pity the poor Indian investor. Just when he thought it was safe to get back into the water and put money in the stock market, the markets have done an about-turn and defied all the prophets who were dreaming of the Sensex at 7000 and higher. Now, it's hovering around 4800 and not going anywhere in a hurry except maybe down.

But, as the markets have tanked, one thing has become clear: times have changed beyond recognition for the Indian investor. It used to be that there were high-interest rate schemes where he could put his cash and get returns of up to 13 per cent and higher. Now on one side he is penned in by falling interest rates and the end of fixed-income schemes.

On the other side are the shark-filled waters of the hugely volatile stock market where each day brings new shocks and surprises. Consider this: on Black Monday the market fell to an intra-day low of 800 points, closing at 4505. Two days later it had climbed 500 points. On Thursday, after Finance Minister P Chidambaram met captains of industry the market slid again by another 100 points.

So what should the retail investor do in such a situation -- especially in the short run? Should he tough it out in the market or should he cut his losses and run?

The advice varies with the swings in the Sensex. But with many investment advisors feeling that the market may fall further, several suggest that, in the short-term, liquid funds are the place to be at least until the July Budget.

Says Rajat Prasad, managing director, RR Financials, "Depending upon your risk appetite, you should transfer between 30 per cent to 50 per cent of your equity exposure to liquid funds till the Budget."

Inevitably, some financial advisors are more aggressive. They argue the market is steeply undervalued and there are plenty of great buys out there.

Says the chief investment officer of a leading mutual fund, "This is the best time to buy equities and invest in mutual funds, but people are in a state of panic."

Adds Rohit Sarin, partner, Client Associates, "One must always maintain one's asset allocation. Since equity has gone down, the exposure to equity in a person's portfolio has also dropped. By investing more in equity that balance will be maintained."

Analysts say that even in bear markets, nearly all the major equity funds have turned in great returns. Nobody can expect a repeat of last year's 73 per cent jump in the Sensex. But analysts say if you are in the right equity fund, if you keep your nerve and look at a three-year horizon the future can also look good.

Consider that when the market was in the dumps over the past three years, top-performing funds like Alliance Basic Industries turned in returns of 56 per cent compounded. That means if a person had invested Rs 100,000 in Alliance Basic in 2001 it would now be worth around Rs 268,000.

Don't forget, of course, that the bull market has sent NAVs and returns shooting upwards in the last one year. The Alliance Basic NAV went up from Rs 8 in April 2001 to Rs 10 in April 2002 and Rs 12 in April 2003. Then, of course, it shot to Rs 30 in April 2004.

Most financial advisory managers continue to bet big on equities and mutual funds. In the last year returns from pure debt funds have turned unattractive but equity funds including monthly income plans and securities are still recommended as the flavours of the season. "At least the dividend is tax free and the returns continue to be way above any other instrument," says a broker.

But first look at the short run. The Budget is of course going to be the next trigger and will decide which way the markets are headed. Says Chopra, "The markets are likely to be volatile till the budget. The budget will give a direction to the market and stabilise it." His advice to new investors is to put their money in liquid funds for the next month or so.

Inevitably, Chopra advises investors who are already in the market to stay put. "Nobody has ever made money by trying to time the market. You are bound to fumble. Give yourself a long-term horizon and returns are going to be high," he says reassuringly.

Bulls like Sarin argue that the Indian market is undervalued by 10 per cent to 15 per cent and so investors will be wise to increase their equity exposure by 10 per cent to 12 per cent. "The exposure should be increased through fresh capital as every time you switch from debt to equity you pay charges," says Sarin.

So how does the investor play the new game in a way that maximises safety but also mixes it with a dash of risk? That was easy to answer till the mid-'90s when only the most aggressive investor dabbled in the stock market. The rest just put money in safe investments such as Public Provident Fund, RBI Bonds, Infrastructure Bonds, Post Office schemes and the like. Returns then were as high as 13-14 per cent.

Interest rates have fallen but investment consultants still recommend that a sizeable chunk of a portfolio should be in such safe instruments.

Says Atul Karve, partner Blue Chip Investments: "At least you can invest in these instruments over a period of six to eight months," he says. High net worth individuals account for around 1 per cent of Blue Chip's 2,000-odd clients.

The most popular of these 'safe' instruments are still the 6.5 per cent tax-free RBI bonds. These bonds gave returns on 10 per cent till 1996. This came down to 9 per cent and then 8 per cent and then in 2003 it was reduced to 6.5 per cent. However -- keep in mind that inflation is at 4 per cent -- the return offered by these instruments is still attractive.

So if you invest in RBI Bonds your Rs 10,000 will become Rs 13,770 after five years. The returns are guaranteed and cannot be changed retrospectively. So even if the interest rates are changed in the forthcoming budget, these bonds will continue to give 6.5 per cent returns.

In fact, about two months ago there was a rush to buy RBI bonds precisely because investors were worried interest rates were about to fall further. In April Rs 3,800 crore (Rs 38 billion) worth of RBI bonds were sold. That's a hike of 23 per cent from March.

Bajaj Capital alone sold nearly 34 per cent more RBI bonds in April than it did in March. Says Chopra, "There was fear among investors the bonds might either be scrapped or interest rates reduced in the next Budget. So there was suddenly a rush to buy more bonds."

But with interest rates on safe investments falling, advisors feel that the investor will have to turn to the market sometime or the other. Says Pawan Ghavri, senior manager, Wealth Management, Bajaj Capital, "Sooner or later investors will have to enter the market if they want high returns. The sooner they enter the higher the chances of getting better returns."

What about investors looking for a third option? Would Karve suggest his clients should buy real estate? Karve argues real estate is not for everybody, especially for those looking at it as a pure investment.

"Unlike land which will appreciate, an apartment 10 years down the line will not appreciate as much, as new, more swank houses come up. Frankly, the present market volatility does not give investors the incentive to invest in real estate except for utility purposes," he adds.

Gul Teckchandani, CIO, Sun F&C Asset Management Company doesn't buy this. "Real estate prices climbed in the mid-90s but have flattened out. But with home loans easily available, demand for this will continue to grow," he says.

Surendra Hiranandani, co-promoter of Hiranandani Constructions believes the current demand for real estate is independent of the stock market. "Even the inquiries are steady and good as they are largely driven by low interest rates which make home loans easily accessible," he says. Even if rates rise slightly they still will be close to historical lows.

Are there other options for the small investor? How about the bullion market? While there are many who think gold is a safe bet, financial advisors don't agree. Says Karve, "It's for people with huge surplus cash and good liquidity without regular returns. It's also for those with black money who can afford to block their cash."