ESOP Concentration, Credit Card Debt and a Five-Year Home Goal
Ms. C, 29, earns ₹18 lakh a year and has ₹6 lakh in savings, ₹25 lakh in vested ESOPs of her listed employer and ₹50,000 in a savings account. Her ESOPs are about 40% of her net worth. She wants to buy a home in five years with a ₹25 lakh down payment and retire at 60 with ₹1.5 crore. She has no term insurance, no health insurance, and ₹1.2 lakh of credit card debt at 36% per annum. Her monthly surplus is ₹40,000 after expenses and ESOP tax withholding. She believes equity always beats debt over five years and wants to start a ₹35,000 monthly SIP entirely in a mid-cap fund. She has not set aside anything for emergencies and her employer's share price has fallen 25% in the past year.
1. What should be addressed before starting the ₹35,000 mid-cap SIP? Prioritise the actions with reasons.
Read the worked answer
First, stop the plan to commit almost the entire surplus to one mid-cap fund. Build an emergency reserve of three to six months' expenses; ₹50,000 is insufficient. Second, clear the ₹1.2 lakh credit card debt at 36% per annum; repaying it is a risk-free return far above a realistic expected return and improves cash flow. Third, arrange health insurance and term insurance; without them, a medical event or death would force ESOP or home-fund liquidation. Fourth, deal with concentration: 40% of net worth in one employer's stock plus salary from the same employer is a double exposure. Fifth, separate the five-year home down payment from long-term retirement money. A ₹25 lakh down payment in 60 months at about 7% requires roughly ₹35,000 per month, but that money should be in debt or arbitrage, not mid-cap equity. Only the remaining surplus after these steps should go to long-term equity. Document each priority and its effect on the plan.
2. Design a goal-based allocation and explain how the ESOP position should be handled.
Read the worked answer
For the home goal, use a five-year bucket in short-duration debt, arbitrage or a target-maturity approach; do not rely on mid-cap equity for a dated purchase. For retirement, use a diversified core equity portfolio through index or flexi-cap funds, plus debt that increases as retirement approaches. Keep the ₹35,000 SIP split across goals rather than labelling it all mid-cap. For the ESOPs, review vesting, insider-trading windows, tax on sale and the employer's share price volatility. Set a staged diversification plan, for example selling a fixed percentage each year or at price bands, and reinvesting proceeds across sectors and asset classes. Do not treat ESOPs as the emergency fund. Use a written investment policy statement covering target allocation, rebalancing bands, lock-in and tax constraints. Monitor annually and after any salary, debt or family change. The plan should show that the five-year goal is protected before the retirement goal takes equity risk.