There will be many surprised crorepati techies in India in the next few weeks. The $16 billion (Rs1.07 trillion) Flipkart-Walmart deal in which US retailer has bought out India’s largest e-commerce firm would have just added to the paper profits of those holding employee stock options (ESOPs), except for the announcement of a $500 million (Rs3,363.88 crore) war chest to buy back shares and ESOPs from existing and former employees. One report puts an average windfall gain at about Rs7 crore per person; however, it can come in 2-3 instalments.
How does it feel to wake up with an SMS from your bank saying a few crores have been credited in your account. Do you go on a spending spree or just quit your job? What you do next will become the building block for the rest of your life.
A windfall gain, if channelled properly, acts as a rocket propellant that thrusts you to a better financial future. “Windfalls don’t happen often and for many it’s once-in-a-lifetime opportunity. So it’s important to understand how to leverage the gains to create financial security," said Shyam Sekhar, chief ideator and founder, iThought. Here are four must-do things.
Review your financial life
A windfall gain certainly makes you feel rich but what’s important is that you are able to sustain that feeling. And for that to happen, it’s important to check your attitude towards money and treat it with the same level of fairness or correctness as you do with your salary. In other words, go back to the drawing board and evaluate your financial life.
“There is a tendency to be rushed about how one uses the windfall gain. But you need to think about how you can utilise this money over the next 10 years and not 10 days. Take stock of your financial life, chalk out your goals, think about where you want to be financially in years to come and then think about how you can leverage the windfall," said Sekhar.
Your approach to money need not change just because you have more.
Review your asset allocation
But what might change are your financial goalposts. You may want to achieve some of these goals faster or you may have new goals altogether. “Whenever a big gain materialises, it changes the individual’s mindset as they think differently about how much to allocate towards safety capital, growth, real estate and even towards philanthropy," said Rajmohan Krishnan, principal founder and managing director, Entrust Family Office Investment Advisors Pvt. Ltd.
This calls for a rebalancing of your asset allocation. “Sometimes people may even want to plan an early retirement or re-invest a portion of this gain from unlisted equity back into a venture or a start-up," said Rajmohan.
But, according to Sekhar, it’s important to tread with caution. “Flipkart employees who chose to stick with their stock options took a bet and have made a huge profit. It’s important, therefore, to not use the entire money for another bet like funding a start-up. Set aside a risk capital after reviewing your basic money goals," he added.
Once you have chalked your goals, the asset allocation will have to be suitably altered. For example, if you want early retirement, you will have to cater for regular income.
Fight hard against that spending urge
It can’t be all work and no play, but that indulgence, though well deserved, can’t be at the cost of your financial goals. Spending should come after you have allocated and planned for your goals.
“Windfalls are once in a lifetime gain. One should be more grounded and focus on what part of the current goals can be met and how to invest to have less pressure in future," said Suresh Sadagopan, founder of Ladder7 Financial Advisories.
Focus on cementing your financial future. It is also a good idea to stagger the spends rather than blow everything up in one go.
Don’t trust or entrust blindly
Your gain is an opportunity for investment firms to manage your money and make money on it. While it may be tempting to hire professionals, tread with caution and not entrust a professional with your money blindly.
“Your financial manager needs to understand your goals and then present a matching vision. Investing in a mechanical fashion solely on the lure of high returns is avoidable. Promise of huge returns is a clear red flags that must not be ignored," added Sekhar.
Rahul Dravid, former Indian cricket captain-turned-coach, is the perfect example. He lost Rs4 crore because he bought into the promise of a 40% return by his investment company. It’s important to understand and trust your planner fully because the cost of buying into tall promises is huge.
So even as you pop the bubbly, don’t lose touch with the person you are—after all that person got you here.
What experts say on windfall gains for Flipkart employees after the Walmart deal
Setting aside risk capital is a must: Whenever a big gain materialises, it changes the individual’s mindset as they think differently about how much to allocate towards safety capital, towards growth, real estate and even towards philanthropy.
Sometimes people may even want to plan an early retirement or re-invest a portion of this gain from unlisted equity back into a venture or a start-up.
Reinvestment in listed equity and debt will be a result of how each individual’s priorities evolve. — Rajmohan Krishnan, principal founder and MD, Entrust Family Office Investment Advisors
Look at goals first, then spend: More often, people would want to change the goals in such a situation. But that is not a great idea. One should be a lot more grounded and focus on what part of the current goals can be met and how they can invest the money so that they will have less pressure in future.
After allocating the money to goals, one can indulge in some spending and invest the balance. It should not be indulging yourself first and then looking for goals to invest. — Suresh Sadagopan, founder, Ladder7 Financial Advisories
Think of next 10 years, not 10 days: Windfalls don’t happen often and for many it’s once-in-a-lifetime opportunity. So it’s important to understand how to leverage the gains to create financial security.
You need to think about how you can utilise this money over the next 10 years and not 10 days.
Take stock of your financial life, chalk out your goals, think about where you want to be financially in years to come and then think about how you can leverage the windfall. — Shyam Sekhar, chief ideator and founder, iThought