Let’s start with a story.
Abhishek has just joined Wipro as an IT professional.
His CTC (Cost-To-Company) was 13 lakh, with 8 lakh in-hand. He received 2 lakhs as ESOP (Employee Stock Ownership Plan), which was a joining bonus and 3 lakh as a one-year bonus, again in the form of ESOPs.
Abhishek works hard for the next one year and feels great about working with Wipro. He feels his stock options are wonderful and the company is sure to grow in the foreseeable future.
Most of Wipro’s business comes from US. As time goes by, the value of his stocks go down to 3.1 lakh, in a total of 3 years. Abhishek, being a novice in investing, realizes the impact of global forces on an MNC’s financial health.
What are His Other Options?
Recently Abhishek’s colleagues tell him about Mutual Funds. He invested in Mutual Funds, which converted his money from 5 lakh to 6.7 lakh in 3 years.
Nobel Laureate Richard Thaler writes in detail about this in his book, Nudge.
“ESOPs are just like any other stock which is given by employers as a part of their salary”.
Research shows people have a tendency to feel great about the company they work for. They feel that the company is doing great, and will keep doing so. This is a natural bias towards the company they’re working for.
“According to estimates by economist, Lisa Muelbrook, a dollar in your company’s stock is worth less than half the value of a dollar in a mutual fund.”, writes Richard Thaler in his book Nudge.
This increases your investment to one single stock which can be highly risky for your savings. Investment gurus will tell you diversifying (distributing your wealth in more number of stocks/mutual funds) your investments reduce your risk significantly.
As recommended by Thaler, treat your company’s stock just like any other and then create your portfolio.
Even better would be to invest in mutual funds and reduce your risk further by diversifying your portfolio, because mutual funds are managed by trained investment professionals.
Think about it this way, if you put all your eggs in a single basket, it will increase your risk significantly. Instead, spreading your risk across multiple stocks/funds will reduce your risk. This is where mutual funds come into the picture.
Research shows that employees working in any public company feel that the stocks of their company are doing great, even when it is not. So, be aware to not become a victim of such biases.