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

Caselet: Mr. Iyer, 52, has seen his equity mutual funds rise 40% over two years. He now wants to move his entire debt allocation into equity, saying 'equities never fall'. His agreed policy allocation is 60% equity and 40% debt, and his portfolio has drifted to 72% equity. Which adviser response is most consistent with managing his recency and overconfidence tendencies?

The adviser should rebalance toward the agreed 60:40 allocation and refer to the documented investment policy statement. This counters recency bias and overconfidence, enforces discipline, and keeps risk aligned with his risk capacity as retirement approaches, instead of extrapolating recent equity gains.

  1. ARebalance towards the 60:40 policy allocation and document the rationale using his investment policy statementCorrect
  2. BAccept the request since his portfolio has performed well
  3. CMove to 100% equity gradually over five years
  4. DAsk him to follow the latest top-performing fund category

Explanation

Recency bias leads him to extrapolate recent returns. A pre-agreed investment policy statement and rebalancing back to 60:40 enforces discipline and protects against a drawdown near retirement. Increasing equity or chasing winners reinforces the bias and ignores risk capacity at age 52.

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