Invest in the stock market

I spoke to a young girl the other day, who had just started working her first job and she very proudly mentioned that she has opened a demat account. I said well, now what. She was looking for tips to invest. This is what most of us do, we want to excel in something which we are not good at. Investing directly into the stock market requires time, effort and money. Now if you are working or in business, you do not have the time to do this. So then just pay an expert and let him do the job for you. Whenever there is a leaking pipe in the house, you too can repair the leak, but you still call a plumber and pay him. But when it come to your own finances, you start being penny wise pound foolish. Instead of opening a demat account and trying to become a financial expect, let a financial expert guide you. This way you can spend more time on doing your best at what you are good at, be it your job or business.

One of the best things a financial advisor would suggest is Mutual Funds depending on your goal and time frame. Why Mutual funds? The main reason is diversification, no other fund will help you diversify your risk other than a mutual fund. The Fund manager’s job is to identify sectors and company’s which are doing well and will keep doing well. Whenever there is a downturn he knows when to get out. This helps you maximize your returns. If you look at most of the good funds, the fund manager would have beaten the benchmark. But to identify a good mutual fund is the job of the financial advisor. You can go by so many rating sites but all of them do the rating based on past performance. A good advisor would be meeting the fund managers and then making up his list of funds which he advises to his clients.

The advantage of mutual funds is that it is not just shares, but also bonds or debt funds. So you do not become a good investor by just opening a demat account and buys shares based on tips, It is a lot more, you need to beat the benchmark and be able to reach your goals in the defined timeframe. As I told the girl, your time starts now, you need to decide if you want to make or lose money or want to work towards achieving your goals, and the choice is yours.

Employee Stock Option Plan (ESOP)

These days in campus interviews, majority of the firms which come for placements are startups. Most of the students I have spoken say we would like to join a startup as the learning opportunity is greater and the chances of making a windfall is even higher. Which is true, if the startup you have chosen to join makes it big. There are many such examples available in the market. The biggest dream a startup sell’s is ESOP’s and that is the reason the joining CTC looks big, compared to other companies. Remember that these stock options would make you a rich person only on paper, as converting them to cash would take a lot of time and conditions. First you have to remain with the organization till the vesting period, secondly, unless the entity is listed, you do not have any exit option and have to rely on what the organization says is the worth of the option. Thirdly the ESOP conditions are not easy.

I know of a young smart lady, who joined a startup for internship, there was a big bonus they had promised, but as the days came closer, she realized that she was not even halfway close to receiving the bonus. The chances of a startup closing are much higher, therefore the value of your ESOP will be worth zero unless the company really makes it big. In case it’s time to buy the shares based on your ESOP, be careful if the company has not been listed, as if it does not list, you would end up holding dud papers. ESOP’s are given by these organizations for 2 reasons, one they cannot afford to give high salaries, because they are short of cash and secondly it works as an employee retention tool. Now the tax aspect.

Tax is to be paid on the date when the ESOP is converted to Shares, i.e. you decide to put in money, this really hits you hard, as you need to put in cash and you are also taxed for the difference between vesting price and market value (book Value). Again when you actually sell the shares, it is taxable as capital gains. You would be lucky if you the shares are listed on the exchange, as if they are listed and you sold within a year of the shares being vested, it is short term capital gains taxable at 15% and if after a year, then tax free. The situation is different, if it is not sold on the exchange. The short term capital gains is taxable as per your tax slab and long term would be taxable.