Study guide
2.6 Behavioural Biases in Investment Decision Making
NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam
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1 Chapter 1: Introduction & Exam Overview
1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan
2 Chapter 2: Investment Landscape
2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help
3 Chapter 3: Concept and Role of a Mutual Fund
3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India
4 Chapter 4: Legal Structure of Mutual Funds in India
4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI
5 Chapter 5: Legal and Regulatory Framework
5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries
6 Chapter 6: Scheme Related Information
6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures
7 Chapter 7: Fund Distribution and Channel Management Practices
7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor
8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units
8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio
9 Chapter 9: Taxation
9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST
10 Chapter 10: Investor Services
10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times
11 Chapter 11: Risk, Return and Performance of Funds
11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk
12 Chapter 12: Mutual Fund Scheme Performance
12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure
13 Chapter 13: Mutual Fund Scheme Selection
13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts
2.6 Behavioural Biases in Investment Decision Making
Key Takeaways Explain This Topic AI
Loss aversion makes a loss feel roughly twice as painful as an equivalent gain feels pleasant.
Anchoring fixes decisions to an irrelevant reference point such as the original purchase price.
Herd mentality drives inflows into whatever has recently performed, which is usually the worst entry point.
Recency bias projects the latest short-term experience indefinitely into the future.
Overconfidence produces excessive trading and concentrated positions, both of which reduce net returns.
Last updated: August 2026
Why Behaviour Belongs in a Distribution Syllabus
The gap between what funds return and what investors in those funds actually earn is well documented, and it is caused almost entirely by timing: money arrives after a rally and leaves after a fall. A distributor who prevents one panic redemption in a bear market adds more to a client's outcome than any amount of scheme selection. That is why NISM places behavioural biases in the opening unit.
Loss Aversion
Losses hurt roughly twice as much as equivalent gains please. The asymmetry produces a specific and damaging behaviour: investors sell winners early and hold losers indefinitely , because realising a loss makes it feel final while an unrealised loss still feels recoverable.
It also explains the investor who refuses to switch out of a persistently poor scheme "until it comes back to what I paid". The purchase price is irrelevant to whether the scheme is worth holding today, but loss aversion makes it feel like the only relevant number.
Counter: reframe the question. Ask not "should I sell at a loss?" but "if I held cash today, would I buy this scheme?" If the answer is no, holding is a fresh decision to buy, not a continuation of an old one.
Anchoring
Anchoring is over-weighting a reference point that carries no information about future value. The commonest anchors are the purchase price, an all-time-high NAV and a round number.
The classic error it produces is the belief that a scheme with an NAV of INR 12 is "cheaper" than one at INR 340. NAV per unit is a function of how long the scheme has existed and how it has distributed income, and says nothing about how expensive the underlying portfolio is. A 10% gain delivers 10% at either NAV.
Counter: discuss returns in percentage terms and refuse to discuss NAV levels as if they were valuations.
Herd Mentality
Following the crowd because its size feels like evidence. Industry flow data shows it plainly: sector fund inflows peak after that sector has already run, and equity inflows collapse after a market fall. The crowd is systematically late in both directions .
Counter: commit the allocation in advance, in writing, and use systematic investment so contribution amounts do not depend on how the last quarter felt.
Recency Bias
Over-weighting recent experience and projecting it forward. After three strong years an investor believes 20% annual returns are normal; after a 25% drawdown the same investor believes equity "does not work".
It is also the mechanism behind chasing last year's top-ranked fund. Category leadership rotates, and buying the previous year's leader frequently means buying a strategy just as its favourable conditions end.
Counter: show returns across a full cycle including the bad years, and use rolling returns rather than point-to-point trailing numbers.
Overconfidence
Overestimating one's own knowledge and judgement. It produces frequent trading, concentrated bets and dismissal of diversification as unnecessary. Because every trade carries cost and every concentrated bet raises the variance of outcomes, overconfidence reliably lowers net returns.
A closely related bias is self-attribution : crediting gains to skill and blaming losses on external events, which prevents any learning from the losses.
Counter: insist on a written record of decisions and their reasoning. Recorded reasoning is the only defence against rewritten memory.
Other Biases the Syllabus Names
Confirmation bias — seeking information agreeing with a view already held and discounting the rest.
Status quo bias / inertia — leaving a portfolio untouched because doing nothing requires no decision, so allocations drift for years.
Mental accounting — treating money differently by source, such as investing a bonus recklessly while treating salary savings cautiously, though rupees are fungible.
Familiarity bias / home bias — over-investing in the known: one's own employer, one's own sector, one's own country.
Availability bias — judging probability by how easily an example comes to mind, so a widely reported default makes all corporate debt feel dangerous.
The Distributor's Practical Toolkit
- Bias Visible symptom Practical counter
- Loss aversion Holds losers, sells winners "Would you buy it today?"
- Anchoring "Low NAV is cheaper" Talk in percentages only
- Herd mentality Wants whatever is in the news Pre-committed written allocation
- Recency Chases last year's chart-topper Rolling returns across a full cycle
- Overconfidence Frequent switching, concentration Written decision log
- Inertia No review for years Calendar-driven annual review
The common thread is that every counter is a process, not an argument. Biases are not defeated by explaining them to an investor in the moment of stress; they are defeated by decisions made in advance, written down, and executed automatically.