Understanding Ponzi Scheme and Checklists to safeguard yourselves

Salam aleikum, everybody. I welcome all of you to this short video of mine in which we will be speaking about the recent spate of incidents which have taken place in Bangalore as well as Hyderabad with regards to some investment schemes. And many of you have been asking me to give you an understanding of what a Ponzi scheme is, and I don't wish to get into the technicalities here because I would understand that most of the investors would not understand technical things, but let me give you some characteristics of what a typical Ponzi schemes look like. Firstly, as far as the operation of a Ponzi scheme is concerned, many people ask is so and so's scheme a Ponzi scheme. The

reality is a Ponzi scheme is only known when it gets busted, the Ponzi schemes reality really comes out when the investors stop investing with them. And that is really when you will see them going through that financial crunches, and how do they tackle themselves in this financial crunch that really gives us an idea about what kind of a business operation they were running. Secondly, another important feature that you will find in a Ponzi scheme is that investors who come in in the first month are promised huge amount of returns. But there is really no business model behind this returns which have been given. So returns have been promised to the tune of three to 5% per month, but there

is really no business model which is generating that money. So your question would be how is it that they are able to sustain giving three to 5% return every month, the reality is, what they do is they thrive on getting more and more investors hooked on to the scheme. So the ones who have invested in the first month will be paid out three to 5%, from the investors who join in in the second month. And then those who joined in the first two months would be paid in the third one from the investors who are joining in on the third month. So basically, there is no real business model here. The only model that exists here is that investors who invest their money that is the source of returns which

are being given. Another important feature that is important to point out of a Ponzi scheme is that there's a high amount of investment returns which is promised. Now if you look at the kind of returns that a market based stocks would give you, which is exposed to market risk would be in the tune of 10 to 15%. over a long term period. If you try to analyze that in a shorter duration, you might see that the particular year there have been negative returns or in some year, there have been positive returns to the tune of 15 to 20%. But over a long period horizon when I talk of long period, I'm talking of anything in excess of three to five years, you will see the returns getting

averaged out to somewhere between 10 to 15% per annum. So that's the kind of returns that the stock gives you and we consider direct equity direct stocks to be under the high risk bracket. So the high risk investment, which is supposed to give you a huge amount of returns can only be 15% per annum. But what kind of scheme is this, which gives you three to 5% per month that comes to the tune of 36 to 60%. So you need to really be careful when you come up with these schemes, which is promising you three to 5% return. Another important point that I wish to point out and where people fall trap into the trap is they look at the

registration of the particular company. So if a company is registered under the Indian Companies Act, or the Indian Partnership Act, they feel that the company is going to give them a guarantee of the return on the money. The reality is that being registered with any government does not mean that the returns are safe or secure. Or for that matter, they have a business model. Today if you wish to start a company all you need to do is just go get a few number of requisites met and you can set up your companies whether you have a business or you don't have a business running, you can still have your company set up after that you can start doing what you wish to do. So please don't get carried

away with this. When you talking about investment schemes, investment schemes must be regulated. And some of the regulators that regulate schemes are you have Sebby, the security Exchange Board of India, which manages a lot of your mutual funds and direct equity related schemes. Then you have IR D which manages or regulates your insurance schemes, you have RBI which is continuously regulating banking. So, you need to know whether these teams are under any regulation. Further, you need to ensure that the companies where you're investing the money, they have an independently audited book of accounts. Now, if you're joining them as investors as partners, it means you have a right to know

whether the books of accounts which is being filed in the with the income tax are independently audited by well maybe one of the top four

auditing firms that we have today, the PIR PricewaterhouseCoopers, Ernst and Young KPMG

and Deloitte. So these are some of the companies which are there. They are independent firms. They are large auditing firms are the books of accounts being audited by these large auditing firms. If the business operation is huge, if you're getting 30 to 50 to 60% return per annum, it means the operations are huge, they can easily meet the expenses of one of these top four companies, or the big four companies identify all of these points which are so crucial, the books of accounts are not being shared, I went through one of the terms in agreement of one of the schemes, which categorically signs you up as a partner, but says in the terms that the books of accounts of the

business will not be shared with the investors or other inverted commas, the partners, you as a partner has no have no right to the books of accounts. Why? Why is there no rights to the books of account? To me, the books of account is a very important aspect, especially if it is independently audited by one of these big four auditing firm, it is kind of a confirmation to the business that they are running. Another important feature of a Ponzi scheme is a secret investment strategy, a secret business model. And let me tell you, my respected friends, I have interacted with few Sharia scholars within inverted commas who prefer to call themselves as Sharia scholars and that we have

approved a certain scheme. They told me that a full on scheme so and so scheme has been approved by us. When I asked him what is the business model to it? So the answer was the business model is a secret. Trust me there is nothing called secret today. What is secret in today's world? I mean, if there is a business model with a secret, you really need to be on a goldmine. Yeah, and in fact, most of these companies who are giving you secret business model claim to be managing gold, etc. Not all.

Maybe a few of them are good. And that is why I've been very, very careful. I have not tried to name any companies in this video or in my past posts. It's up to the authorities in question, to check the books of accounts, carry out the necessary

audit, which are there in place to ensure that there is a proper business model to generate sustainable returns. But coming back to the secret investment strategy, anyone who comes and tells you this is our business model, but they don't provide you the books of account. Or when I when somebody who goes up and inquires more detail, they say it's a secret business model. This is absolutely nonsense. There is no nothing called secret business model in today's day and age. So if someone comes up with you with a high investment returns a secret investment strategy. These are the points which should actually make you stop and ponder. What is the scheme where the business model

is not known. But the returns are high. Now coming to the investors who invested the money? And why is it that they are now complaining? And really I really wish to ask them why are you complaining today, because many of the investors when I interact with them, they come and tell me we have put in all our money, we sold off our land we sold off our property. Women have been saying that the soul of the jewelry, people who have retired, they said all our retirement savings, we put it in that scheme because it was giving us three to 5% per month. Now it's all stopped, it's not coming away. This is called foolery This is called foolishness on the part of the investors. And I say this is

foolishness with due respect to all of those who have invested the money. I don't wish to undermine any one of you. But please understand, there is something called risk allocation. You have to spread your risk across different asset classes, you can't put your risk all into one basket. So that is why you need to ensure that you firstly have a proper need analysis done and need analysis to ascertain what your financial needs are. Is it that you need the money after one year three year five year 10 year? What's your time horizon? If you tell me you need your money after 10 years, I know I can sufficiently take more risks with that money to generate higher returns. But if you tell

me you need the money in six months, I really can't do much about that money because in the short term the risk components are always high. So I will try and advise you to keep the money in a safe instrument or perhaps just keep the money holding into your account and use it after six months for whatever needs you have. So identifying your financial objective is so important and in people can have so many multiple objectives. So this divide your objectives or rather, segregate your objectives into short term needs, midterm needs and long term needs. After having segregated your financial needs. Let us understand what your risk taking capacity is. You're a man who cannot take

risk. You're a man who is who prefers to go in for safe instrument, but suddenly a scheme comes up and you all jump into it. That's not how you do your investment. First ascertain your risk capacity. Your risk taking capacity will give you a fair idea about how much is your risk.

appetite, your risk tolerance? Once you know your risk tolerance as a investment consultant, I can advise you, how can you spread your risk across different investment asset classes? How much you should invest in real estate? How much you should be therefore, investing into gold? How much you should be investing into mutual funds, how much into direct equity, or how much you should be investing into totally non risky investments rather than just keeping it into your savings or current account that requires a proper risk tolerance. So my question to all of you who have invested in investment schemes, promising high returns, did these companies or schemes give you a

proper needs analysis? Did they conduct a risk appetite for you? They didn't because they are not investment schemes. They are basically basically schemes which is just interested in collecting money from you. This is the job of a consultant. So you should actually hire an investment consultant before you put in such a huge amount of money. Okay, let's come back. After you've done all of this, the segregation of asset classes where you invest your money is so important. And I was making this point A while back that many people have put all their money into these so called high risk generating high return generating schemes.

When that scheme falls, you lose all your money. But if you would have spread your asset class across, or other your investments across different asset classes, that would have given you the liberty to taking risks with some amount. And ensuring the larger amount of your investments is in two different instruments, which can give you a more steady and sustainable returns, rather than being greedy and looking for three to 5% return per month. Another very important point, which I wish to make over here is as far as gold is concerned, gold, if you ask any investment consultant, he will tell you that no investor should have more than 10% exposure into gold or gold related

instruments. So many of these schemes where people have jumped in and invested their money, they should ask themselves that if they money is going into bullion, and so on, and so forth, how much of their total investable amount has gone in with them, is it more than 10%. And you'll be surprised to know people have invested 50 to 82. As I said 100% of the entire savings with such scheme. This is craziness, because gold is an extremely volatile instrument, it is called as a hedge against inflation. I don't want to again go into the technicalities here, as I understand most of you who are viewing it are non from the non finance background. So please keep this in mind that gold is a

high risk investment. And the strategy with them should be not to have more than 10% exposure at any given point of time. So if you have more than 10% of your total investments in gold or gold related instrument, that's high risk. 10% is high risk, people are investing 100%. So this is another important point which I wanted to make.

Most important, don't fall into the trap of what is called halaal returns. These are part of the strategy that is being used in order to fool all of us. So don't just jump in, if you see something called halaal. Don't just jump in, if they use Arabic terminologies like ijarah mudaraba masataka, don't get yourself confused. Alright. And, in fact, take a step back, make sure that the schemes that is being where you're going to invest, they are properly vetted by Sharia scholars within inverted commas, the ones who have really the authority and understanding of what is finance for what finances, most of the Sharia scholars who have been claiming that they have approved such

certain schemes, they probably are very good in the field of Hadith. They're very good in the field of fact, but beyond that, they have no basic knowledge of finance and economics, finance and economics knowledge does not come early from reading books, it comes from studying under learning teachers, just like Islamic Studies does not come just merely through reading books, it comes through studying under different scholars. Likewise, the knowledge of finance and economics comes when you study and expose yourself to learning under people who are much far more knowledgeable than you are. So make sure that the ones who approve a scheme have a background I mean people who have no

background they are confirming that so and so schemes are good and people jump in people who are not educated are conforming so and so schemes are good and people jump in

know the difference between a brand ambassador and a Sharia scholar, a brand ambassador will naturally come out and support a scheme because his job is to promote a scheme whereas a Sharia scholar is somebody who does not have any vested interest with the scheme. Remember a Sharia scholar does not belong to any investment firm. His accountability is to Almighty Allah and therefore his responsibility should be to ensure that if investors are investing their money, they have been advised in a proper manner in an appropriate manner. I have been approached by many so called with an inverted commas collars I would rather prefer to call them straight

Wouldn't have knowledge about four to five years back to join certain schemes where the owners and the CEOs are today in, in the prison. These scholars, when they approached me, they told me that we are promoting the scheme, and so on. So we'll get in touch with you and you can sign up for certain theme you can invest your money. Today, the same students of knowledge are within inverted commas, scholars have totally disappeared from the scene, they have laid the hands off, they say that we have nothing to do with so and so schemes. The same people who approached me and asked me to invest with certain scheme, humble Li did not. But many of you have done investment with such schemes, the

same gentlemen have pulled out. I mean, this is what I want to point out that make sure that there are learned people in a certain setup before you invest your money with them. In conclusion, however, I wish to just let you know that you have to understand that money is a fitna it's a trial it's a test from Allah subhanho wa Taala. If you have put in your investment money, and if you fear that the money may now be lost because of certain schemes turning out to be Ponzi. Put your trust in Almighty God, don't lose your faith, don't lose your hope, number one. Number two, understand, a person should never retire from their life. So you should be continuously working on generating more

copies for yourself. So if God has given you some skills, try utilizing that skill to generate more money for yourself. Don't lose hope, have faith in God, the real test for calamity the real test for patience is when calamity befalls. It is no point being patient when

calamity has fallen and a substantial amount of time has passed. And

you've already become patient over a period of five years. And now you say Alhamdulillah I was patient. No, the real test for patience is when a calamity befalls the moment the calamity befalls you are supposed to be patient, so don't be impatient. There's no point turning up in the offices in the shops have these schemes and trying to break them down or abuse the staff etc. There is absolutely no point in doing all of this. This is the time to be patient and repenting to Almighty God for making such hasty decisions with your money. Because remember, amongst the things that you will be questioned on the Day of Judgment, and I shall be questioned on the Day of Judgment is where

did we earn our money from and where did we invest our money? So we must therefore think back and reflect into our own actions and repent to Almighty God and seek guidance from that we shall conclude a Salam aleikum wa rahmatullah