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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Risk Profiling for Investors

Ms. Kavya Rao, 35, has a stable job, no dependants and a 25-year goal, but in a questionnaire says she would sell her equity funds at the first 10% fall. Her adviser notes she holds a 70% equity allocation from an earlier plan. Which action is most consistent with sound risk profiling practice?

The adviser should reduce equity to a level matching her low tolerance and educate her about volatility. Although her capacity is high, a client likely to sell after a 10% fall may lock in losses, so the lower of tolerance and capacity should guide the allocation.

  1. ARetain the 70% equity allocation because her capacity is high
  2. BReduce equity to a level consistent with her low tolerance, and educate her on volatilityCorrect
  3. CMove her fully into equity because her horizon is long
  4. DRemove all debt to improve expected returns

Explanation

Her capacity is high but her tolerance is low, so the lower measure should guide the allocation to avoid panic selling. Education may later raise tolerance. Keeping 70% equity risks a behavioural exit at the worst time.

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