NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Risk Profiling for Investors
Ms. Kavya Nair, 35, has a stable income, no debts, and a 20-year horizon for retirement, but a risk-tolerance questionnaire shows she is very conservative; she sold all her equity mutual fund units during a 20% fall last year. Her adviser's assessment is: risk capacity = high, risk tolerance = low, and behaviour in the actual downturn = low. Which recommendation is most consistent with sound risk profiling?
The most consistent recommendation is a moderate allocation that respects her demonstrated behaviour in the downturn, while using her high capacity and long horizon to include some equity. The adviser should educate her about volatility and review the profile periodically, rather than pushing heavy equity or avoiding it entirely.
- AAllocate heavily to equity because capacity is high and the horizon is long, ignoring her past behaviour
- BPlace everything in bank deposits permanently because tolerance is low
- CChoose a moderate allocation, favouring the demonstrated behaviour over stated capacity, while educating her on long-term volatility and revisiting the profile periodicallyCorrect
- DAsk her to choose any allocation without discussion, since the adviser's duty ends with the questionnaire
Explanation
Revealed behaviour in a real downturn is strong evidence of low tolerance, so a very high equity weight risks panic selling. Yet her capacity and long horizon justify some equity exposure, hence a measured allocation with education and periodic review. Pure deposits would sacrifice growth needed over 20 years, and abandoning discussion breaches the adviser's suitability duty.
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