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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice

Caselet: An adviser's client invested Rs 10 lakh. Equity fell 15% in a quarter, and the client now wants to move all to liquid funds. The adviser's agreed asset allocation is 60:40 equity:debt and the portfolio drifted to 55:45 after the fall. The client says markets will keep falling because they fell this quarter. Which approach is most consistent with good practice in behavioural finance?

The adviser should rebalance to the agreed 60:40 allocation in the Investment Policy Statement and explain that expecting the fall to continue is recency bias, while reviewing whether the client's actual risk capacity has changed.

  1. AAccept the switch to avoid client regret
  2. BRebalance to 60:40 per the Investment Policy Statement, explaining that extrapolating recent trends reflects recency bias, and discuss any change in risk capacityCorrect
  3. CMove to 40:60 to match the market's direction
  4. DAsk the client to stop receiving statements permanently

Explanation

The client shows recency bias and panic. The adviser should return to the documented policy, rebalance, and revisit only genuine changes in risk capacity or goals. Following the emotion or trend abandons the plan, and withholding statements is not a sound solution.

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