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

Ms. Kapoor receives a Rs 5,00,000 bonus. She keeps it in a savings account for 'fun money' and spends it freely, yet she refuses to touch her Rs 5,00,000 retirement corpus even when her home loan carries a high interest rate that she could prepay. Which statement is most accurate about her behaviour and the adviser's best response?

She shows mental accounting, treating money in different mental buckets as non-fungible. The adviser should guide her to see all money as fungible and assess the entire balance sheet, including comparing the loan interest cost with expected returns, without necessarily liquidating retirement savings.

  1. AShe exhibits mental accounting; the adviser should help her view money as fungible and evaluate the whole balance sheetCorrect
  2. BShe exhibits availability bias; the adviser should show her recent market returns
  3. CShe exhibits regret aversion; the adviser should recommend selling the retirement corpus
  4. DShe exhibits conservatism bias; the adviser should avoid discussing the loan

Explanation

Treating the bonus and the retirement corpus as separate, non-interchangeable buckets is mental accounting. Since money is fungible, the adviser should encourage a holistic view, including comparing loan cost with investment returns. Other options misidentify the bias or propose inappropriate actions such as liquidating the retirement corpus.

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