A new online fraud worth Rs 3,700 crores has been busted recently by Uttar Pradesh special task force. Around 7 lacs people have been cheated in the name of ‘Earn Rs 5 per click’ investment scheme.
This was a classic example of a very smart online fraud structure where you first make a lump sum investment in the company scheme, and you get a chance to earn a daily income by liking facebook pages. You can also add people under you (more money comes in the company) and you get benefits from that.
Structure wise it’s very similar to speakasia where you earned money by taking the survey’s and here you get it by click on the pages.
A company was set up with the name of “Ablaze Info” whose board of directors named Anubhav Mittal, Shreedhar Prasad, and Mahesh Dayal are arrested. They had set up various websites to dupe people like socialtrade.biz, freehub.com, intmaart.com, frenzzup.com.
How this scheme worked?
There were 4 schemes where you had to pay a joining fee ranging from Rs 5750 to Rs 57,500 and you got X number of clicks each day which assured you get Rs 5 for each click, making sure you get a monthly income.
There was also a bonus for adding more people under you (2 people) and some more benefits apart from that. It was a classic case, where few people join the scheme, get the assured income for 1-2 months and by then they bring more people by word of mouth, who bring more money in a company which makes sure that the fraud company has more money to pay everyone …
This continues for a few months/years and once there are thousands of people at the bottom who brought millions in the company, that’s the time when the company either runs away with all the money or they are caught by the law as it happened in this case.
Members trying to add other members
Every MLM scheme works on the basis of referrals and most of the people were trying to add others under them to get the bonus and added benefits which come out of referrals.
People started approaching their friends and other relatives to join this “business” and you can see in the video below how one of the people who was part of this is explaining the business model and is so convinced about it himself.
Why most people get duped in these kinds of fraud schemes?
You will find a lot of people who still believe in this kind of schemes mostly because they are not duped themselves and have experienced earning income consistently from these companies, but that is true for a small minority of people who join this fraud business early, because that’s the time when the company properly pays money without fail
The problem happens when the user base is quite big (in this case, 7 lacs) and then it becomes almost impossible to sustain the madness. Here is how the MLM business looks like
In the video below you can see how this one guy is so convinced about the authenticity of this social trade business and feels that the crackdown on the company because govt can’t sees poor people earning lots of money.
Do you know anyone who was cheated by Social trade company? What do you think about these kinds of MLM schemes?
Are you investing in equity mutual funds or planning to invest?
GREAT!
While you might have done your research and reading about investing in a mutual fund, but I am sure you still do not have 100% clear idea about what does it mean to invest in a mutual fund. In this article, my attempt is to make you understand what exactly you should be expecting out of your investments in equity mutual funds.
A lot of investors are approached by advisors and agents who sell equity mutual funds to them in the name of “high returns”. But investors are not informed about the risks associated with it. Because of this most of the investors redeem their investments if markets fall or if the returns are not that great after a year or so and hence lose out on getting the benefits of mutual funds over the long term.
This happens because in investors’ mind a mutual fund is all about “getting high returns”.
So it’s very important to clear all the wrong notions about equity mutual funds and set a clear understanding of them in your mind so that you get the best out of your mutual fund’s investments.
What are Equity Mutual Funds?
This article is all about “Equity Mutual Funds” and not any kind of mutual fund. One of the biggest myths is that
Mutual Funds = Stock Market
NO!
There is various kind of mutual funds, ranging from super safe mutual funds (like liquid mutual funds or debt mutual funds) to high risky funds (like mid-cap funds and equity mutual funds). Below is a
3 important points to know before you invest in equity mutual funds
So in this article, I am listing various important points you should know if you are investing in equity mutual funds or planning to do the same.
#1 – You are investing in diversified businesses
Investing in an equity mutual fund is not like putting money in a fixed deposit or real estate. When you invest in an equity mutual fund, it invests your money in a portfolio of companies.
Equity Mutual funds are a way to invest in a number of stocks using one single investment and get it managed by an experienced and well-qualified fund manager.
For example, Birla Sun Life Frontline Equity had 80 stocks in its portfolio as on 30th Dec 2016, as per the money control website. This means that if you are investing in these mutual funds, you are actually investing in 80 companies.
You own 80 businesses
Your returns or loss depends on 80 different company’s performance over time. Think about it.
Below is a partial list of companies in the fund.
Now when you know that you are actually invested in 80 different companies, it’s important to know that returns from your mutual funds actually come from the returns from these companies stocks performance over time, it’s the average of these companies.
Below is a very good video, where it’s explained how business create wealth over the long term in Indian context
#2 – You are investing for long term
No business earns exceptional returns over the short term. Now as you know that you are actually investing in a business when you are investing in equity mutual funds, that too in multiple companies, the great returns will come over the long term.
Some companies will not do great, some of them will do average and some of them will grow exceptionally. And when you do the average, you will get very good returns.
The best part is that the chances of great returns are much higher because you are diversified across various sectors, companies, management, and size.
76 times return in 20 yrs period
Let’s talk about a Franklin India Bluechip Fund which started in 1993. It’s been 23 yrs now since inception.
Over the first 20 yrs (from 1993 to 2014) the fund has given 76 times return. It turns out to be 24% CAGR return and by any standard its mind-boggling returns, especially because it’s for 20 yrs compounded.
10 lacs invested became 7.6 crores.
If this same 10 lacs was invested in Fixed Deposits, then in 20 yrs it would have grown to 67 lacs.
So its 67 lacs vs 760 lacs.
Sadly, investors don’t wait in mutual funds
Sadly, this 76 times returns do not reflect in most of the investor’s portfolios because investors don’t think long term and think short term. If for some years, the fund does not perform well, they want to move to something else which gives them awesome returns.
Businesses go through various cycles (success and failure, good and bad). So you need to wait for a very long term to see some amazing returns.
If you are right now invested in equity mutual funds, it’s very important to understand that you will not get great returns over the short term (2-5 yrs). Trust your mutual funds and keep investing and over time you will reap the benefits.
“Mutual Funds investments are subject to market risk, please read the offer document carefully before investing”
You will hear this line often in the mutual fund’s advertisements on TV. A lot of first-time investors who do not understand equity investments think that “Market Risk” here means that their money is at risk and they can lose all their money by investing in the stock market or mutual funds.
Mutual Funds are Volatile
That might be true with one particular low-quality stock. But with mutual funds, it’s far from truth. Dozens of quality stocks portfolio which is monitored regularly can bring in some ups and downs in the short term, but your money will not be lost at all.
All you can expect is VOLATILITY with your mutual fund’s investments. Your investment value can go up one day and then down one day, and then again down another day and again down 2nd day and then boom… UP on the third day and then again down and again up and up and up …
I hope you got the point.
But you need to understand a very important thing. Volatility is an inherent part of mutual funds investments as it’s investing in stocks, but it’s more of short term phenomena. You need to sit tight and look at the long term trend and how it moves.
Example of HDFC Top 200 fund
HDFC top 200 is one of the most well-known equity mutual funds which has created great wealth for its investors. Its NAV rose from Rs 10 to Rs 372 in 20 yrs.
It’s a great return over the long term, but the journey was not simple. Its NAV went up first, then came down and then again up and down. See the ups and downs in the below chart for 20 yrs
Did you notice how tough it would be for someone to not exit and stay invested?
If deep down the fund value is growing. This can be measured by check how the moving average is trending. If you do the average of 2 months NAV and then 3 months and 5 months and keep increasing it, you will see the trend is up and that’s what is the most important take for an investor.
Let’s see how the moving average trend looks like for this same fund over 20 yrs period
Don’t look at the fund performance and NAV movement every day or month
The volatility in the stock market will keep hitting your emotions and tell you – “Hey, it’s better to sell your funds and be safe”. The biggest problem with mutual funds is that its NAV is available on the daily basis.
What would happen if you were allowed to see your mutual funds NAV and its performance only after a period of 5 yrs? What if an investor who had invested in HDFC top 200 long back in 1996 was able to find out how its fund had performed every 5 yrs?
Below I have plotted the NAV data for the month of Oct for 1996, 2001,2006,2011 and 2016. See how it looks like
This tells us that if we stay with our funds (provided they are chosen properly and reviewed from time to time) can help us grow a massive amount of wealth.
So stop looking at your mutual fund’s performance in short terms like 3 months or even a year.
3 more critical information you should know
Mutual Funds investments are highly liquid – If you redeem your mutual funds, you can get back your money in 3-4 business days in case of equity mutual funds. In case of liquid funds its just 1 day, so for short term requirements you can keep some money in liquid funds, but most of your long term goals related investments should be in equity mutual funds
Post-tax returns on mutual funds are better – As of now, the long term capital gains in equity are tax-free, which means that after 1 yr of investments, any profits are not taxable. So this is another advantage of investing in equity funds
You can change your investments any time – Other than tax saving mutual funds, almost all the mutual funds can be switched to other mutual funds if you want. So if your fund does not perform well, you can switch it anytime to another fund
I hope you got some great insights into your equity mutual funds investments and how you should behave as a mutual fund’s investors. It’s very different from investing in Fixed Deposits or PPF or any other kind of investors and your expectations should be very different.
Let me know if you have any more points to discuss or ask in the comments section.
No, I am not sharing my personal opinion here in this article.
I am actually telling you about 451 people who have shared their personal data with us in a survey we conducted some time back and we are presenting you the data in this article. That data will help you know how others think and what are their numbers and that way you take a decision for yourself.
You mainly have to decide following 3 things when you buy your first car
Should I buy a brand new car or a 2nd hand car?
How much should I spend on my first car?
How much loan should I take?
451 people shared their data about their car ownership
We asked few questions in our car survey like their first car value (when they bought it), their per month income when they bought it, If it was a brand new car or a 2nd hand one, what was the % of loan they took, and some more questions regarding what they feel about the car.
I will share all that data in this article.
Point #1 – Should I buy a brand new car or a 2nd hand car?
Most of the people who buy their first car, generally go for a brand new car, however, some people also prefer to buy a 2nd hand car to start with and then upgrade it later to a new car in the future.
In my own case, I bought the 2nd hand car because I wanted to make sure that I am aware that I make a rough use for all my belongings and its better to first buy a 2nd hand car. Also, I had my budget constraints.
80% of buyers prefer buying a new car
Around 80% of the survey takers, shared that their first car was a brand new car, whereas 20% bought a 2nd hand car as their first car. The average cost for a brand new car was close to 6.78 lacs and in the case of 2nd hand car, it was close to 3.05 lacs.
Pros buying New Car
The special feeling of ownership with pride
The latest technology, with current features
Peace of mind, as you know there are no issues with car
Cons of Buying New Car
Much Expensive compared to a used car
Much higher depreciation (Try to sell it in 6 months and see the price you get)
Takes away a good part of your wealth
More pressure on your cash flow if taken on Loan
Pros buying used Car
Cheaper and Most of the times can be bought without a loan
For how many years are you planning to own the car?
If you are planning to own a car for just 1-3 yrs, it’s better to go for a used car. However, if you have a view of 5-6 yrs or more, then better go for a new car.
Also if you are tight on your budget and still want to buy a car, you can explore the used cars and after a few years you can upgrade to a better car. However, if have the capacity of buying a new car, you should go for one.
Below is a short video which shows you what all to check if you are planning to buy a used car
Point #2 – How much should I spend on my first car?
Now comes the next important point, which is how much should I spend on the car you are buying. A person earning Rs 10 lacs a year can buy a car costing Rs 5 lacs also and 20 lacs also if they want. However what is the right amount to spend on your car purchase?
Is “Car” mere a machine that moves you from point A to point B, or is it much more for you?
What is the role of the car in your life?
How passionate you are about driving, fancy cars etc
How many times of your income should your car cost?
A good way to look at the potential car value you should buy is the X times of your monthly income. If a person thinks that he should not spend more 6 times his monthly income on the car and if he earns Rs 80,000 per month, then he should buy a car worth not more than 4.8 lacs.
If he feels it should be 10X, then not more than 8 lacs should be spent on the car. However the problem is no one really thinks this way when it comes to decision making, so let’s see what were the actual numbers for various groups!
As per our survey data, those who bought a brand new car, for them this ratio was 9.7 on average (their car value was 9.7 times their monthly income)
And for those who bought a 2nd hand car, it was 6.4
Your Salary and what you feel “car” is?
What will be your car value will surely be
We also calculated the same ratio for those whose monthly salary was above 1 lac and below 1 lacs.
If you see the whole data above , you will figure out that if you are buying a brand new car, or if your salary is above 1 lacs per month or if for you a car is much more than a machine which takes you from point A – B, then you ideal money to be spent on your car is anywhere from 9-12 times your current monthly income, else if none of the above is true, then you can go with 5-7 times of your monthly income.
It’s just a benchmark and a rough direction based on what hundreds of people do.
Point #3 – How much loan should I take?
Do you know that as per our survey 75% of the people who bought a 2nd hand car, did not take any loan?
Only 1 out of 4 people took a loan which was on average half the value of the car (to be exact, it was 52%).
However, when it came to those who bought a new car, 69% of them took a car loan and their average loan was 2/3rd value of the car price (rest 1/3 was down payment)
The amount of loan you take will depend on the price of the car, your capacity to pay the downpayment, your views about debt in life. I personally think a person should have the capacity to pay for full car value and only in extreme cases one should go for a car loan as its a depreciating asset anyways.
Burdening yourself with more EMI does not fit my philosophy that too for a car. This is truer if you still don’t own a home or if you have not yet started investments for your long term wealth creation.
Below is a detailed information salary-wise and also thinking wise.
You will find two kinds of car buyers. One who feels that car is nothing more than a utility which does a job of taking you from point A -> point B. They are not that passionate about cars in general and view the car as just another possession.
Where as on the other hand, there are people who feel CAR is an important part of life. There are various life moments that are linked to your car. Your exotic vacations, long drives and many events in life will not be possible (most of the times an expensive one).
Who is right or wrong?
None of the groups are wrong or right, its a view and everyone has the freedom to express what they feel about cars.
Coming back to car loan, I feel you should first try to avoid the car loan totally if possible for you, and if not, then you should take less than 50% loan only.
This is a guest post by one of our readers and our financial planning client Mr. Rahul Udare from Mumbai.
He is CA by profession, and he has created a 45 min excellent video for beginners on the topic of Income Tax. This video below will help anyone understand various things related to income tax and returns and how everything works.
Govt has clarified that the “service charge” is optional and customers can refuse to pay that if they feel like.
For some years, most of the restaurants and hotels have started charging “Service Charge” along with the other taxes in their bills and us customers due to lack of understanding feel obligated to pay it.
However, the govt has issued a notification today which clearly mentions that if the customer is not satisfied with the experience at the hotel or restaurant, they can choose to not pay it. Below is the video clip of this news
Govt Notification
“A number of complaints from consumers have been received that hotels and restaurants are following the practice of charging ‘service charge’ in the range of 5-20%, in lieu of tips, which a consumer is forced to pay irrespective of the kind of service provided to him,” the ministry said in the notification below
Note that the Hotel Association of India has themselves clarified this point.
Why do restaurants charge “Service Charge”?
For those who don’t know this, the service charge was mainly introduced to replace the tips given to the workers (waiters etc), so instead of your giving the tips, the restaurants charge a fixed charge (5% – 20%) and its distribution among the employees.
However, there is no strong proof that most of the restaurant owners actually distribute it among employees. Also irrespective of the service and experience, the customers pay this service charge.
But now after this clarification has come, you can freely tell the restaurant that you will not pay this charge if you didn’t have a good experience at the hotel or restaurant.
I got a fraud call recently and I was able to record it.
The person at the other end was posing as RBI officer and said that because I have not linked my Adhaar card with my bank account, they are getting closed and if I want to save them from not getting blocked, I will to do some verification on the phone call.
Watch the video below which as my recording!
Never reveal your critical information on a phone call
Never share the following things ever on a phone call with anyone
If you listen to the audio, you will realize that the person on the other side many times told me that the CVV number and account number is my personal information should not be shared with anyone. They do this to give a feeling that we can trust them and they are really some official people.
However, these people do not realize that their way of speaking and the language is such that it’s hard to believe that they are really some authorized person.
The EPFO department (Employees Provident Fund Organisation) reduced the EPF interest rate to 8.65% today. The old interest rate was 8.8%.
This interest will be applicable for the deposits made for financial year 2016-2017. Which means that all the deposits which were made after 1st Apr, 2016 by the employers will be earning the interest of 8.65% only, and not 8.8%.
While an interest rate of 8.62 per cent would allow the EPFO to keep a surplus of around Rs 22 crore, fixing the interest rate at the present rate of 8.8 per cent would have left it with a deficit of Rs 700 crore, EPFO’s income projections showed.
According to sources in EPFO, the lower interest rate is on account of poor rate of return on investments made by the EPFO on all fronts.
You will notice that the bank deposits interest rates were also reduced recently and this move might be in tune to that decision, as it’s tough to provide high interest as the money availability is high.
Can you name a billionaire who didn’t start a company?
Or a $ millionaire for that case?
In this article, we are going to talk about various ways people become RICH. No, it’s not a tutorial on how to become rich, but just a conversation on are various ways using which people have become rich. Maybe you will get some idea of which path you want to take or try for yourself.
#1 – Starting a successful business
One of the ways, most people become rich is owning a successful business. Yes, think of any rich person and chances are that they own a business. It can be a tech company, a big store or some kind of traditional business, but it’s BUSINESS.
A job gives you linear income and growth. The business gives you exponential growth and income over time, along with the huge risk of losing the money. That’s the primary reason why most of the people are into jobs and not business.
My point is simple. If your goal is to be in the middle class or higher middle class, you can continue doing your job. However if your dream is to own that exotic villa, or to drive the most amazing cars and never worry about money all your life, you need to own a business, otherwise, it’s going to be really tough to get rich (apart from other 9 points)
#2 – Let someone else run business and get a share
A lot of people have become extremely wealthy by investing money in other business and just holding the shares for long. No, this is not stock investing.
I am talking about funding others’ businesses and keeping a share of ownership to cash on in the future. This is definitely not very common or an easy thing to do. The failure rate is very high, but many people have become very rich through this method.
Paytm Founder sold 40% equity for 8 lacs many years back
For example, you have heard about PAYTM. Right?
You know it’s now a multibillion company and its owner is already a billionaire. But did you know that years ago, there was a guy who helped paytm founder with Rs 8 lacs and in exchange took 40% of the company and exited the company with a couple of 100 crores?
Watch the interview with Paytm founder Vijay Shekar Sharma, where he shares about his journey and this incident (Just click the video and watch the next 1 min)
It’s not always the case that you have to start the business, the main point is to be part of a business and contribute in the journey of the business since the start when it was not successful.
Most of the people who joined large companies as employees got equity in the company (ESOP’s and stocks) and years later when the company becomes big, they all became rich.
Take Infosys for example, It was a business owned by a few people, but those who stayed with Infosys and contributed for its growth over years were rewarded and now they are quite RICH.
At Infosys, drivers, electricians are millionaires
The Infosys management has over the years rewarded selected staff belonging to the C, D and E grades with shares for faithful service and excellence in work. By the time Infy began skyrocketing in value, 67 of these people including eight drivers, owned enough stock to make them very rich men indeed. Kannan’s portfolio of 2,000 shares when multiplied by the latest share value makes for a huge value statement
#3 – By Inheritance
Another way a lot of people become rich is when they inherit a lot of money from their parents or some relative. As per this report, around 31% of ultra-rich people in India have inherited their wealth, which is quite a good number. Every 1 out of 3 people in an ultra-rich category is rich through inheritance.
However, this option is not applicable to most people like us.
#4 – Become a highly paid top executive
If you are very clear that you do want to own a business and will keep continuing doing the job, then your salary is the most important factor which can make you rich. No, we are not talking about packaged of Rs 10 lacs or 20 lacs here.
We are talking about packages which some top executives earn at important positions in the company. They are people like
CEO
Managing Directors
Vice Presidents
Top Managerial Positions
Top-Level Professionals (Doctors, Lawyers)
It comes only when you are really out of the class in what you do. If you have skills to manage the company or help a company excel at something, you can reach these top positions, but it takes quite an amount of hard work, smart moves and a bit of luck too. Many professionals earn very high salaries like examples below.
Here is another example of a high salary –
It’s not always the case that you own a business to earn high income. To run a company or business many skills are required and if you have that in you, you can help someone else to build and manage the company in exchange for your skills.
As per this report, around 42,800 have reported an income of Rs 1 crore per annum in India. You now have to set yourself to be in that club
#5 – Speculation or Gambling
This is not a recommendation, but a lot of people become rich by speculation or gambling. This has more to do with Luck and smart thinking at times, but not with hard work.
I do not want to label speculation as BAD, because speculation takes guts and courage and those who take that route also get lucky at times and make a lot of money. There are two kinds of speculation
Blind Speculation – A speculation where you are just shooting in the dark. Things like buying lottery, horse race etc is pure speculation and unless you get lucky, you will lose your time and money. A lot of people are into these speculative and gambling activities
Calculation Speculation – Then there are many situations where you have to take a very calculated risk, where the risk is still high, but then the return potential is huge and clear at times. These are high risk, high return situations where if you take a chance, you can get really lucky.
One can get lucky, only when you take a risk and speculate. Speculation is seen as a bad word, but one can’t deny that it also has a brighter side to it. If you want to innovate something, you need to speculate on the fact that it will become successful.
#6 – By Investing money regularly – the boring & long route
In the end, if you feel you are not made for the above 5 points, then the only way to get rich is to invest your surplus money on regular basis and that too in high return instruments like equity mutual funds or stocks and wait for a long time to become rich.
The big problem is that there is too much-delayed gratification here. If you start your investments today, you can’t expect to get rich in just a few years which is possible in other ways mentioned above.
You need to have time on your side and extreme discipline. On top of that, you need to invest a good amount of money. You can’t expect to become rich by doing just Rs 4,000 SIP in an equity fund. You need to invest a good amount like Rs 20,000 or Rs 50,000 per month (at times Rs 1 lacs per month too) to accumulate a good amount of wealth.
So, the only option left for most of people to become rich (that too in future) is only by investing their money and that will happen only if you earn a good income because only then you will be able to invest a good chunk left out of it.
Let us know what do you think about the points mentioned above?
Today we will talk about the issue of duplicate UAN, which has confused a lot of employees. A lot of people have contacted us that 2 UAN were generated for them by their past employer and current employer and now they have no idea what is to be done in this case.
You can see following question which was posted by one of the reader of this blog.
Hello Manish,
I left my previous company on 1st April 2014 and joined new company on 7th April 2014. Now problem is I have been allotted UAN no. from both employer. I want to withdraw whole amount of EPF (Employees’ Provident Fund) of previous employer.
So kindly guide me what to do in this situation?
Why does multiple UAN get allotted?
UAN (Universal Account Number) as you all know, is a single unique number for each EPF member for all this EPF accounts under them. You can see the UAN as the folder (UAN) which has various files under it (EPF accounts)
Before we discuss how to solve the duplicate UAN problem, I want you to know how two UAN are generated and why does it happen?
Reason #1 – Not disclosing old UAN number
A lot of employees do not want to disclose about their past employment, hence they do not quote their old UAN number to new employer. In that case, the new employer will generate a fresh UAN for the employee. This is one of the reasons for having duplicate UAN number.
Reason #2 – Past employer did not furnish ‘the date of exit’ details in the ECR
ECR or Electronic Challan cum Return is an electronic return filed by employers to EPFO to submit your EPF payments and other things. In this, they mention “the date of exit” for those employees who have left the job. So incase due to some issue the employer does not mention this date of exit.
This is another reason why another UAN gets generated by new employer. I have no idea why that happens, but this is the reason which is mentioned by the EPFO in their recent circular which talks about the issue of multiple UAN allotment
How to solve the two UAN problem?
Note that each person should have only one UAN number (like PAN), hence if you have multiple UAN, it’s not allowed and creates problem in the EPF system, because is no proper track. Hence, as soon as you come to know that there are multiple UAN assigned to you, you should cancel one of the UAN (mostly the old UAN) or should try to deactivate one of them
Process to deactivate old UAN
Step #1 – The first step if that you should start the EPF transfer for all the EPF’s which are not under the latest UAN generated. This can be done using the OTCP portal of EPFO . I am not going in details here, but first you need to make sure all the old EPF’s are transferred and linked to the new UAN.
Step #2 – In the next step, the EPFO system will automatically identify those UAN for which the EPF transfers have happened and completed. Once they find the idle UAN, they will automatically deactivate that UAN. You don’t have to do anything here. This deactivation process will take place from time to time as per decision taken by EPFO. Once the deactivation happens, your old member id (your old EPF accounts) will be linked to new UAN.
If you are already sure that your past UAN does not have the EPF linked to them, then you can mail your old UAN number along with recent UAN to your employer and to [email protected] . They will verify your UAN’s status and deactivate the old UAN.
Let us know if you have more clarity on this subject or if you have already completed the process for the benefit of other readers.
Today we will talk about various aspects of ESPP Plan? We will also see if it really makes sense to invest in your employers ESPP plan or not, and what are the pros and cons of that.
For those who have no idea about ESPP, its full form is Employee Stock Purchase Plans and It’s mainly an offer from your employer to buy the stocks of the company at some discounted price.
How does ESPP Plan look like?
Let me give you a rough idea of how an ESPP plan looks like. Under this plan, your employer might offer the discount of 15% of the stock price, and you can contribute some part of your salary for purchase of ESPP.
This might run for 3 or 6 months and then at the end of the period, all the money which you have paid, will be used to purchase the stocks at a discounted price (It might be the current market value or the lowest of the period, it all depends on your companies offer plan)
So you get the stock at a discounted value
You invest the money for X number of months
The stocks are purchased at the end of 3/6 months period
You get the stocks on your name
Is ESPP Plan worth?
Now let’s come to the main point. Is investing in ESPP plan worth? Should you do it? Is there any catch?
Below is an example of Salesforce ESPP plan, where they are offering 15% discount and the offering tenure is 12 months (employee will pay for 12 months), while the purchase will happen every 6 months.
Now the main question is – “IS IT WORTH?”
and the Answer is ALMOST ALL THE TIMES.
Yes, most of the times, it makes sense to invest in ESPP plan because you get the stocks at a good discount and if you sell it off after they are allotted to you, you will make a good enough profit (15-20%) in most of the cases, unless things go really bad.
In some cases, you might want to think hard before you invest in ESPP plan offered by your employer.
Point #1 – At the end of the day, you are buying a Stock
ESPP is nothing but a plan where you buy a STOCK. Hence the price of the stock will move up or down. So if the stock does not do well, you will not be able to make good profit and your hard earned money will not give you the desired returns.
Imagine a stock which is on decline or not doing well. Your ESPP plan will give you the stock at 15% discount of the lowest price (mostly the latest price) . Not every time, people sell it off immediately, and keep holding it. Now if the stock price does not come above your purchase price and you kept on holding it, you might suffer good amount of loss.
Look at Yahoo, as an example (I worked there for more than 3 yrs). Imagine people who bought ESPP of Yahoo and kept on holding it? Even if they got it for discount, does not mean that they will make profits.
So don’t get emotional and look at your company stock and see if as an outsider. Check out what are the future prospects, Is it promising? Does your company find its place in most of the mutual funds portfolio?
Point #2 – Your Income and Profits come from same company
You earn your income from your company, and now your portfolio is also linked to same company. If the company is doing very well, your income will rise and so will your portfolio value. But what happens if things go bad?
What happened to Satyam?
What happened to Enron?
What happened to Yahoo?
If someone worked in companies above, they lost their jobs. And at the same time, their stock prices were either worthless or reached the lowest value and they suffered huge losses. The snapshot below was taken from this website, which talks about Enron collapse.
The point is, when you invest in an ESPP plan, all your eggs are in same basket. If things work out and your company does well (Google, Facebook), you will enjoy the benefits of promotions, income rise and your stocks value rise, but in the other case, it will be the opposite and it’s not going to be the best situation.
Conclusion
At the end, you need to ask yourself about the prospects of your current company where you work? Do you think it’s going to be great in coming times? If Yes, then not just ESPP, you can even go for ESOP’s and other plans from your employer.
