Employee Stock Option Plan, popularly known as ESOP, was the favourite of IT companies, especially during the period when IT sector saw a phenomenal growth. Of late, companies in other sectors like financial services, consumer goods, manufacturing etc. too have started following the ESOP policy, rewarding the old employees as a part of retention strategy.
ESOPs give an option to the employee to buy certain number of shares at a pre-determined price. But they cannot be sold immediately, they have a vesting period during which ESOPs cannot be sold. However, a question over here is shall you hold onto your ESOPs or diversify the same across different asset classes?
When it comes to investments and creating a portfolio, diversification is the rule of the game. It means do not restrict your investments to particularly one or two asset classes, rather spread it across different avenues in order to reduce the risk. For instance, if you had parked all your money in a particular company’s stock, and due to some reason share price of that stock falls, then your portfolio faced a high loss since it is not diversified. Whereas if your portfolio had been diversified then the impact of loss would be less and also the positive returns from other asset class will reduce the overall loss.
There are many asset classes and investments that act as a hedge against each other and thus help in delivering higher Risk Adjusted Returns. However, the question is should an investor completely exit from ESOPs; the answer is NO. Though it is advisable to diversify the investments but the same should be spread across different time frame, also at a favorable and higher price range in order to unlock higher profits.
Also, apart from reinvesting the proceeds from ESOPs, you can also choose to close outstanding loans. Loans usually have a heavy impact on one’s monthly cash flow as it requires a regular payout every month. Besides, if the interest rates are rising, it is advisable to pre close the loan since the total outgo in the form of interest would be quite higher. The proceeds from ESOPs can also be used to meet any short-term goals or emergency situation. However, for short-term financial goals, it is advisable to invest the funds in low-risk avenues like debt funds, fixed deposits, short-term funds etc.
The exit strategy should be in a phased manner, wherein at a certain price level a certain percentage of holding is exited. However, these price levels should be determined after a thorough analysis of the stock and its price levels as the sole objective is to cap on the upside move and reduce the downside risk. Also, make a point that a certain percentage of the shares are always held in portfolio.
Key Takeaways
■ Diversify your portfolio across multiple asset classes
■ Keeping your investments in one or two assets is a high risk
■ Exit in a phased manner
■ For short term needs, avoid equities
(The writer is CEO, Right Horizons Wealth Management)