Financing your child’s overseas education through ESOPs

ESOPs are a priceless tool for attracting and retaining talent at start-ups and MNCs. Many of us working here get ESOPs in overseas companies. Since the Indian Rupee has depreciated against other currencies like the dollar over the years, overseas investments may be a good option to help reduce currency risk. And with strategic planning, parents can secure their child’s overseas educational dreams through ESOP benefits. The lumpsum that ESOPs provide, could be suitable to fund the large investments required.

If your company’s ESOPs are overseas, it would help to reduce the currency risk. A lumpsum gain from your domestic ESOPs could also help fund education.

Multiple factors must be considered while signing up for ESOPs. They may not be good for the risk-averse as they are linked to the volatile stock markets. They may also not suit someone looking for liquidity in the near term. Sure, stocks can be volatile. This is why it is important to time the sale of ESOPs. 

The decision to sell the shares acquired under ESOP is like any other investment decision. You need to take into account the capital gains implication as well as the need for liquidity for arriving at the decision. Moreover, whether and when to sell will also depend on the prospects of the company and how the stock is performing.

So, before you decide to liquidate the amount, take note of your three options:

When stocks are performing well.

Sell when the stock is performing well. If your child’s education is a few years away and the stock price of your company is already faring well, it is best you exit the plan and park it in debt options.  

When you expect a better performance in the future.

Alternatively, you may also choose a staggered exit at a few higher prices. But take note of your risk appetite if you decide to do so. Since stocks can be volatile, don’t keep these investments for the last minute.

When stocks are performing poorly.

If the company’s stocks have seen better days, you might as well take a loan to finance your child’s education. When your ESOPs begin to look up, you may exit and square off the loan.

ESOPs can be very successful when implemented in the right situation. They can be a good way to fund your child’s education. They allow their owners to create sustainable and transferable value and a well-prepared and successful exit. However, keep in mind that they can also be volatile. Take heed that you exit it in advance when the stock price is doing well and move it to non-market-linked options. That way you guarantee yourself good returns at an optimal time.

Choose wisely – Annuity options for retirement

ideal retirement image

The hard-earned retirement corpus secured in accounts such as the NPS, PPF, and/or the EPF is the final nest egg for public or private sector individuals who retire after a few decades of continuous service. While certain central government retirees are eligible for pension and lumpsum fund benefits, almost all the private sector employees are not entitled to a pension from their employers and have to fall back on lumpsum (defined contribution plan) corpuses.

As a result, the post-retirement monthly expenditures of the family, most often, depends on corpus inwards from such accounts. There are two important considerations for such corpus inward for individuals – Safety and return on such corpus since this impacts the amount of derived pension on the same for the rest of the life.

Upon retirement, most individuals rely on traditional plans such as a combination of fixed deposits, Sr Citizen savings Schemes and/or plain vanilla Savings accounts to create cash flows for longer duration and this raises several risks of the safety of corpus, interest rate risk and thereby risk of variability of periodic cash flows and the possibility of hardships during retirement years.

Annuities – Should be the first choice for retirement corpus

Annuities should be the preferred choice for retired individuals; however, this product is not very popular due to lack of awareness, perceived lower rate of returns and liquidity issues. Annuities offer the best hedge against the variability of cash flows, against interest rate risks and consistent cash flows for most of the living life.

Today annuities offer a wide range of choices which were not available 5-10 years ago. Flexibility, market comparable rate of return, and wide range of options are available from over half dozen annuity service providers. Besides this, regulations and oversight of annuity providers make this product extremely safe as compared to other market-linked products.

A quick glance of the variety of options from annuity service providers is summarized as below.

Table 1: Choose the option wisely
Annuity for life Annuity for life with return of purchase price on death Annuity payable for life with 100% annuity payable to spouse on death of annuitant Annuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor Annuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these pay-outs would be made to the subscriber’s mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant’s child/ nominee.
Source: NPSTRUST.org.in

 

Which option makes sense?

This depends upon a variety of factor and the retired individual’s objective, dependents, and other personal factors. For instance, for couples with no dependents the easiest choice would be to choose option 1: Annuity for life. Here, they are likely to enjoy higher cash flows or put in lower corpus to enjoy required cash flows. The standard of living could be higher for such couples since this option pays the highest pension as compared with other plans across annuity service providers. Options #2 and #3 might suit retired couple with legal heir (children / grandchildren) where they might want to gift such corpus earned.

Option #4 & #5 could severely impact the current cash flow for the retired individual since the objective is to return the corpus. Unless there is adequate liquidity and other assets these options defeat the very purpose of buying an annuity and therefore can be avoided.

Lessons from the CoVID 19 Lockdown

The CoVID19 pandemic and the consequent lockdown has brought in a humbling experience to many of us, including individuals and/or businesses thought to be foolproof of themselves given their indispensable nature of product or services. Barring food and dailies (groceries) none of the presumed basic services needed to mankind have become affected adversely. Alas, none has been spared. The neighborhood barber/salon or the cobbler who mends shoes right up to liquor barons (barring regulatory risk) and would have thought to be proof from any eventuality have faced different levels of threat during this pandemic. India’s service economy which is almost 2/3rd of the GDP has taken a massive hit. At the business and at individual levels, the lessons the current crisis has have been of very basic nature. On the principles of “risk management” most of the lessons that this crisis offers are rudimentary. A quick look at basic lessons from this crisis.
Cash is King
We need to write this title in large and bold font in our minds and actions. Cash if the blood of any business and a key element of an individual’s personal financial wellbeing. Without enough cash businesses freeze or worse, go bankrupt. Without cash, an individual’s household can face immense hardship and probably make or break the family and household. The current crisis has brought out this basic element of money management to the fore. Many businesses (large and small) and individuals all are strapped for cash during these times, however, people who had planned for crisis level reserve for cash would emerge out of this crisis stronger and would be able to grab opportunities crisis’ bring after they pass. So, what is the lesson from this crisis to us all? Keeping reserve or emergency cash/liquidity, always, is as basic as it should be. For a business, 3-4 months of cash burn should be available to tide over during such unforeseen times, and similarly for individuals, 4-6 months cash for expenses should always be kept at call. People who followed this golden rule will find it easier to tide over the current situation without much hassle.
Health is Wealth
This again is as basic as one can understand. Health is not acquired without effort. To remain healthy – physically and mentally, individuals must put effort into eating good food, resting enough, and working out physically. Similarly, for mental health, individuals require attainment of inner peace, sound conscience, and a positive attitude. All the above is easy to attain if the practice of working towards it is regular and not when the crisis is on the horizon. The second aspect of health is a risk. The first part was risk mitigation by doing many things as explained earlier, the second and the most important part is risk transfer. Despite all the care and work on your health, it could be possible that your health is compromised due to reasons beyond your control; risk transfer helps you to cover health failure without any financial damage. The best form of risk transfer is “health insurance”. And to plan for the same when there is time is again a basic thing to do. Individuals should be prepared to pay a small cost to cover himself/herself and family from any health eventuality. The health risk is real. Recognize and prepare for the same without delay.
Multi-tasking is underrated
The CoVID19 crisis has taught this one thing – one more time. Specialists are overrated and generalists are underrated. The crisis has been easy for generalists. Everyone who depended on a specialist for everything from household chores, outsourcings kitchen (and cooking), and technical staff and many more things, have been rendered faced with a big handicap. People who could easily mold and become a self-service oriented person are having a relatively easier life during this crisis. Multi-tasking on the home front or office front should be the way forward. Cooking, housekeeping, fixing the small things, doing office duties with minimal help and above all ability to learn quickly – technical as well as basic stuff is the key to ever remain relevant. The faster one learns this the better prepared he/she is for the current and future crisis.
Upskilling has no age bar
Why is it that suddenly everyone is rushing to get enrolled for the online course? That is because nobody knows what kind of skills the world would demand, in 2021. People are rushing to upskill/upgrade their knowledge for the fear of being left out once the world re-opens. While that might sound a good thing to do, upskilling and staying relevant is a continuous process. It does not start during the crisis and ends when the world is normal. Leaning a new skill does not have an age bar. To stay productive and relevant an individual must repeatedly upskill and upgrade continuously. This way, the person would be the sought-after individual when the normalcy returns. Corporate / businesses are looking at human talent that is ready and easy to plug/play during difficult times. Upskilling/upgrading requires time and an individual should set the same aside regularly and not just when crisis hits the horizon.

Planning for my child’s Overseas Education?


* – Overseas education is becoming the first option for many people.
* – Research courses, fees, institutes and talk to other parents.
* – Start early- easier to achieve.
* – If possible, you can even have some assets overseas.
* – Plan for accommodation, apart from fees.

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What is the best time to exit my stock options?


* Many clients come to me on how they get it wrong.
* By selling when it goes up, they don’t have the opportunity to sell at the options peak. Sometimes this turns even worse if the market cycle is down in the long term.
* Objectives
– To get the highest price.
– Phased exits by diversifying and monitoring resistance levels.
– Convert paper money to real money.
– It’s very rare that a sector maintains superior return.
– Risk – Working in the same sector.

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What facts should I consider before Investing in debt funds?


Debt Funds have a whole range of options to choose from FRF to Liquid to Income to GSec

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* – Firstly, one needs to decide on the duration. When Interest rates go down, long duration is better whereas when interest rates go up, short duration is better.
* – Secondly, one needs to understand that a credit quality investor tends to go for a high return fund not realizing that they invest in poorer quality bonds.
* – At the current time, when the economy is not in the best shape, it is important to look at credit quality.

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Market volatility with changes


What are the different ways to manage market volatility. There are three ways to reduce risk : firstly, you can reduce risk by diversification. As the saying goes, do not put all your eggs in one basket.

Market volatility with changes.

* The second way to reduce your risk is by increasing the tenure.
– Eg. If you looked at the sensex from inception and calculated the returns on a rolling basis, there was about 35% chance of losing money for a 1 year basis.
* However, if you increase the tenure, to 5 years, you would have lost only about 9% of the times.
* Finally, you can reduce risk by spreading out your investments. You can do this by systematic investing.
* So, if you logically put these two statistics together, if you invested in the systematic mode with a 3 year perspective, the chances of losing money is very very low.
* That is why we believe that disciplined investing in equities with a long term perspective is a recipe for great returns.

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Is a no risk product available in the market


There is nothing like a no risk product. Let me give you and example. We normally consider government bonds are risk free. Investors into government bonds of Greece lost about 50% of their principal.

* Similarly, one feels that bank deposits are safe. However, this actually depends on the creditworthiness of a bank.
Your bank fixed deposits are protected only upto Rs 1 lakh by a deposit insurance.
* The other aspect to keep in mind as is today prevailing in developed countries, is that the returns that you get out of a fixed deposit are so low that they are insufficient to take care of various needs.
* Today, pension funds in Japan have not much option but to invest in equities if they have to deliver any positive return to pay annuities.

Hence, it is important that every individual spends time not only in assessing what the returns a product would give, but also what is the risk of a product. And there is nothing like no risk.

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How do I plan for my child’s higher education?


– For most parents giving your child a good education is a priority.
– You need to have an estimate of the possible requirement.
– It is good to start early, you van look at approximate cost and inflation.
– If you plan for a course like Medical, the amount is much higher.
– Look at how much you need after inflation. Start investing if its higher inflation.
– Use a combination of products and Invest. Eg, Long term risk reduces as you come closer to the end date.

Not sure how to save for your child’s higher education? Anil Rego, Founder and CEO of Right Horizons Financial Services, talks about how you can plan for your child’s higher education.

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Common mistakes in managing money


There are many mistakes people make when it comes to managing their money. Watch Anil Rego, Founder & CEO of Right Horizons Financial Services, give his expert views on these mistakes and how to avoid them.

Talk to our certified “Senior financial planning advisors and wealth managers”.
Common mistakes people make while managing their money

* – In the long term, equities give you the best returns.
* – However, we compare it with fixed deposits, look at it in very short intervals.
* – Buy high, sell low.
* – Goals
* – Understanding risk and return
* – Too conservative, too aggressive
* – Very low risk you may not be able to beat inflation and achieve your goals.
* – Too high risk leads to loss of money.

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