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Sunday, Jun 23, 2002

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Investing in your employer is risky

B. Venkatesh

MANY salaried people tend to invest in fixed deposits in their employer-companies. My friend, who is one such person, explains that he does so because he perceives that his money will be safe with his employer.

Is it advisable to invest a sizeable proportion of your savings in your employer-company? No. The reason is due to with the concentration risk and the benefits of diversification.

You increase your risk by investing in one instrument. Suppose you invest all your savings in Satyam, and the stock falls sharply, you will lose a lot of money. Instead, if you divide your money among a bank fixed-deposit, Satyam stock and, say, ICICI safety bonds, the chances of losing money on all three investments are low.

You have reduced your chances of losing money because the factors that drive a bank to default on its deposit is quite different from, say, the factors that will drive down Satyam shares in the market.

Now, consider the case of investing in employer-companies.

Your salary depends on the prospects of the company concerned. If the company does not do well, you might even lose your job!

When your entire income is dependent on your employer, why enhance the risk by investing your savings in the same company, even if your employer is a blue-chip firm?

Employees of Enron did the same mistake. They bought more shares of Enron because they thought that the company was doing well.

When the company collapsed, they lost their livelihood and their savings as well!

Of course, you may well argue that your company may not go bust. And that might well be the case.

Nevertheless, you might be better off by investing elsewhere rather in your own company. It is better to avoid "overexposure" in one company, however good the company is.

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