Ponzi Schemes: A scheme that you should stay away from!

What is Ponzi Schemes

What is a Ponzi scheme?

A Ponzi scheme is a fraudulent investment scam that promises its investor very high returns as compared to the market with very little risks involved in it. The operator of the scheme begins by inviting an initial set of investors and collecting money from them and paying them their returns from the money invested by subsequent investors.

The scheme leads the investors to believe that their profit is coming from real investments or the real sales of the product. They remain unaware of the fact that their profits are generated by other new investors who invest their money into the scam. A Ponzi scheme can run for as long as the money keeps pouring into the scam. As soon as the investors stop investing in it or there are no new investor joinings, the scheme collapses. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.

Despite increasing awareness and tight regulations, investors continue to fall for such extravagant schemes. Even highly vigilant people, who are otherwise wary of investing funds in well-regulated places, find the lure difficult to resist. In India, the names of Rose Valley Group and the Saradha Group are most commonly associated with the Ponzi scheme scam.


The term “Ponzi Scheme” was coined in the 1920s, after a man named Charles Ponzi. He first carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors’ money to make payments to earlier investors and to himself.

However, the first recorded instance of this sort of investment scam can be traced back to the mid-to-late 1800s and was orchestrated by Adele Spitzeder in Germany and Sarah Howe in the United States. In fact, the methods of what came to be known as the Ponzi scheme were described in two separate novels written by Charles Dickens, Martin Chuzzlewit, published in 1844 and Little Dorrit in 1857.

How does it work?

A Ponzi scheme requires an initial investment from the investor with a promise of higher returns than the market. They use attracting verbal guises such as “High return program”, “offshore investment” to describe their income strategy. It is also common for the operator to take advantage of a lack of investor knowledge.

The basic principle of a Ponzi scheme for a layman is “to rob Ajay to pay Gajendar“. Initially, the operator of the scam pays high returns to attract investors and entice current investors to invest more money. When other investors begin to join in, a domino effect begins. The operator pays a “return” to initial investors from the investments of new participants, rather than from genuine profits.

The main idea behind such a scheme is to keep getting more investors to invest their money into the scheme and to keep the cash flow moving. So, the operators of such schemes pour quite a lot of their own resources into attracting new investors because the scheme would essentially fail if the cash flow stops coming. This is called a fraud because the operators dupe the investors as they have no actual intention of investing the money anywhere or returning the money to the investors.

Hypothetical scenario

To better understand this, lets assume a fictional character. We have an operator of the scheme Nilesh, who gets few people to invest their money in his scheme. At the end of the month, the investors get very good returns, which are better than the market’s returns. These investors now tell about this scheme to their family and friends and suggest them to invest as well. So, Nilesh maintains the cash flow.

However, Nilesh does not pay these investors from profits earned, but he pays from the money invested by the subsequent investors. At a later stage, Nilesh simply sends a statement to the investors instead of paying them back and also tries to minimize the number of withdrawals made by them. This keeps on going till some investors stop investing more and the flow of cash stops and that is when the scheme collapses and Nilesh either flees with the money or gets arrested.

An Indian case

Source: https://thelogicalindian.com/

There is a curious case in India where a Noida based company, which allegedly used illegal Ponzi schemes to raise funds for bike taxis and used the names of aggregators Uber and Ola. In this Ponzi scheme scam, the operators offered them five different plans under schemes with different packages and promised monthly returns, all after an annual one-time investment. Investors alleged that in the plans they were asked to deposit amounts starting from Rs 62,100 with the firm that promised to purchase bike taxis on their behalf with the name of Ola and Uber and help them register with the transport office. The purchased bikes were to run in NCR and parts of UP. The money earned was to be used to pay the investors as returns.

Investor also said, while the initial deposit was for booking a bike, investors were promised Rs 10,100 as monthly return on that. ” There were different plans depending on the number of bikes purchased. A basic plan of Rs 62,100 for one bike and 1,24,200 for two bikes with promised monthly returns of Rs 10,100 and 20,200 respectively. The other plans for purchase of more than two bikes promised bonus along with the monthly returns.

While the company paid them for few months, the payments stopped after that. The bikes never went on the road, some bikes were placed as samples to fool the investors.

How to protect yourself from Ponzi schemes?

According to the data, many Ponzi schemes share similar characteristics that should be taken as “Red flags” for investors.

  • High investment returns with little or no risk.  Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Any “guaranteed” investment opportunity is often considered suspicious.
  • Overly consistent returns. Investment values tend to fluctuate over time, especially those offering high-value returns. An investment that continues to generate regular positive returns regardless of overall market conditions is considered suspicious.
  • Be skeptical- It is often said that ‘If it too good to be true, then it probably is.’ If someone offers extraordinary returns with minimal risk, we should try to question if it is possible.
  • Unregistered investments. Ponzi schemes typically involve investments that have not been registered with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
  • Secretive or complex strategies. Investments that cannot be understood or do not give complete information.
  • Difficulty receiving payments. Clients have failures to receive a payment or have difficulty cashing out their investments. Ponzi scheme promoters routinely encourage participants to “roll over” investments and sometimes promise even higher returns on the amount rolled over.
  • No information on downsides- One of the major features of such scams is that there is an evident lack of transparency. These schemes promise high returns and almost always beat the markets with very high return margins so the investors never get any news about the downsides or losses in any particular year or month, which should raise a red flag in the minds of the investors.

Stay Satark. Stay Vigilant.

2 thoughts on “Ponzi Schemes: A scheme that you should stay away from!

Leave a Reply

Your email address will not be published. Required fields are marked *