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

Ms. Kavya Nair inherited Rs 10 lakh and treats it as 'free money', investing it entirely in speculative small-cap stocks, while she keeps her salary savings of the same size in a bank fixed deposit and refuses to take any risk with it. Kavya's total wealth is Rs 20 lakh. Which approach by the adviser best addresses the behaviour while remaining consistent with behavioural finance principles?

The adviser should present a consolidated view of her Rs 20 lakh and set asset allocation on total wealth, goals and risk profile. Her treating inherited money as free and salary savings as untouchable is mental accounting, which causes inconsistent risk taking.

  1. AEncourage her to keep the separate accounts since mental accounting always improves discipline
  2. BShow her a combined portfolio view of the Rs 20 lakh and set the asset allocation on total wealth and risk profileCorrect
  3. CMove the entire Rs 20 lakh to small-cap stocks because she has shown risk appetite
  4. DMove the entire Rs 20 lakh to fixed deposit because she values safety

Explanation

Her behaviour is mental accounting: money is treated differently depending on its source. A sound response is to debias by looking at total wealth and setting allocation to her overall goals and risk tolerance. Keeping the silos or moving everything to one extreme ignores her actual risk profile.

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