Home/Blogs/5 Tips For Using The Investment Score To Build A Healthier Portfolio

5 Tips For Using The Investment Score To Build A Healthier Portfolio

pms in financepms in stock marketpms investments
Published Date: 25 Apr 2024Updated Date: 27 Dec 20246 mins readBy MOFSL

Introduction

Investment scores are numerical representations of an investment's risk level. They are derived from various factors, including volatility, market trends, and economic indicators. These scores help categorise investments into different risk buckets, such as low, medium, or high risk. By assigning a score to an investment, it becomes easier to compare it against others and against an investor’s risk tolerance.

Let's discuss how this score helps create a healthy portfolio.

 

Importance of investment score 

 

  1. Strategic asset allocation

This score helps in strategic asset allocation by evaluating the potential performance of different asset classes, such as stocks, bonds, and cash. 

For example, let’s say you have Rs 1,00,000 to invest. You are looking for a good mix of investments that align with your goal of retiring in 20 years and your comfort with moderate risk. An investment score might rate stocks high for long-term growth potential but also high risk, bonds as lower risk and lower returns, and cash as shallow risk but with the lowest returns.

Considering these scores, it would be advisable to distribute 50% of your portfolio to stocks, 30% to bonds, and 20% to cash. This mix aims to balance the potential for growth through stocks with the stability of bonds and the safety of cash. 

 

  1. Disciplined investing through Systematic Investment Plans (SIPs)

The investment score helps you pick a promising mutual fund. Once you have decided on a fund, you can start a SIP, investing a fixed amount at your chosen frequency. This disciplined approach ensures you invest regularly, regardless of market fluctuations. 

When the market is down, your fixed sum buys extra units at a lower price and fewer units at a higher price when it is up. This strategy, known as rupee-cost averaging, smooths out the risks and can lower the average cost of your investments over time.

As months turn into years, your investments benefit from compounding, where returns are reinvested to generate their returns. 

 

  1. Identifying portfolio gaps 

Portfolio gaps are areas within an investment portfolio that may be underperforming. These gaps can reveal overexposure to specific sectors, under-diversification, or misalignment with your risk tolerance.

An investment score highlights these gaps by providing a comparative analysis against benchmarks or ideal portfolio compositions.

For example, if you have a high weightage in equities, with a concentration in IT stocks that exposes you to economic downturns, your investment score will show you these gaps. 

 

  1. Tax efficiency

Tax efficiency is a strategy that aims to minimise tax liability and maximise after-tax returns. Investments are considered tax-efficient if they are structured in a way that reduces tax obligations.

To illustrate the interplay between investment scoring and tax efficiency, let’s consider an example of two mutual funds: Fund A and Fund B. 

Both funds have similar investment scores. Fund A is noted for offering short-term capital gains but is tax-inefficient. Fund B, being a tax-efficient scheme, focuses on long-term gains. 

Suppose both funds achieve a pre-tax return of 10% over a year. For an investor in the 30% tax bracket, the after-tax return for Fund A would be 7% (10% - 3% tax), while for Fund B, it would be 9% (10% - 1% tax), assuming long-term capital gains are taxed at 10%. Despite having the same investment score, Fund B provides a higher after-tax return due to its tax efficiency.

 

  1. Risk evaluation

Risk evaluation involves identifying and assessing the potential risks involved in an investment. It involves analysing the likelihood of an adverse outcome and its impact on the investment’s returns.

For example, suppose you have a moderate risk tolerance and want to invest in a diversified portfolio. Your financial advisor conducts a risk assessment and determines your risk score, which is 60 on a scale of 100, where 100 means the highest risk.

The advisor then evaluates various investment options and assigns scores to them based on their risk characteristics. A government bond might score 20, while a tech startup’s stock might score 85, reflecting high risk. The advisor seeks investments that align with your risk score of 60.

 

Conclusion 

Investment scores are not static. They change as the market conditions and the portfolio’s composition evolve. Also, these scores can differ based on the scoring methodology used by different platforms or financial advisors. However, the core principle remains the same. They are meant to assess and improve the investment portfolio’s performance and alignment with the investor’s objectives. â€‹â€‹â€‹â€‹â€‹â€‹â€‹

You must review this score regularly and act promptly upon the insights it provides for a goal-oriented investment strategy.

 

Trending Blogs: Invest in Small Cap & Mid Cap Mutual Fund & Stocks | US FED’s rate cut announcements | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | RBI Monetary Policy Committee Meet 2024ITC Share Surge After BATs Block Deal | Impact of RBI Circular on Currency Trading

 

Related Blogs - Top sugar stocks to invest in India in 2024 | Best liquor stocks you can add to your portfolio in 2024 | 5 Best Banking Stocks to Invest in 2024 | Top 5 hotels stocks to buy in India in 2024

 

Popular Stocks:  ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

 

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C