Ponzi Scheme: An Introduction
Make money without any risk, sure shot guarantee, consistent returns. Many investors already made crores…Hurry up. If the lines above ring a bell in your mind, chances are, you have either been a victim, or have at least come across a ponzi scheme.
What is a Ponzi Scheme?
A Ponzi scheme “too good to be true” investment scheme, that promises high returns to investors with minimal or no risk.
Investors unaware of the inner workings, get lured by the mouth watering returns, invest huge sums of money, sometimes their life savings, only to realize that the company that they trusted with their investment, has vanished overnight, leaving investors with nothing but regret.
The name Ponzi was coined after “Charles Ponzi”, one of the most notorious swindlers of modern times.
Ponzi promised huge returns to his investors of 50% in 45 days and 100% in 90 days.
Ponzi was using the money rolling method, where the money received from earlier investors is used to pay the investors who come late, creating a pyramid, until the amount of withdrawal exceeds amounts invested, ultimately leading to collapse of the entire pyramid.
Many Ponzi scheme still exist even today, the format and strategy keep changing, but the anatomy almost always remains the same.
How do you spot a Ponzi scheme?
With the passage of time, ponzi schemes have also evolved, using technology and other sophiesticated means to lure investors.
However, there are some of the most common traits every ponzi scheme has which an investor must look at before investing in a scheme to find if its a ponzi scheme.
Low risk/No risk-High Returns:
One of the most common sign of a ponzi scheme is that they offer extremely high returns at low or no risk, or even in the some cases, guaranteed returns.
Unfortunately, in the world of finance, high rewards comes with high risk. For example, investing in stocks pays high rewards, but is also a high risk game as you may lose all your invested capital.
On the other hand, if you want an investment that has low risk, fixed deposits are best, but their return is very low.
If you are being offered with something that offers low risk and high return or guaranteed high return, then there is a good chance that it is a ponzi scheme.
Vague business model:
Ponzi schemes are usually very complex to understand as they have to conceal a crucial information that can reveal the truth behind them. In order to provide high return on investment, the company has to earn a higher profit.
If you ask a the agent of a ponzi scheme how do they generate such a high returns, they usually respond saying “its confidential” or explain a scheme so complex that it is hard to understand their business model.
The point is, do not invest in schemes and companies where you do not understand how do they generate returns.
Market regulators like SEBI have made it mandatory for every financial scheme to be registered and verified withe them to avoid any fraudulent activities and protection of investor interests. Most ponzi schemes are unregistered as they avoid regulatory compliances.
Not just schemes, but companies that offer such a scheme should also be registered with different market regulators such as a broker or a mutual fund advisor should be registered with SEBI and an NBFC offering a loan or any other scheme should be registered with RBI.
In absence of such mandatory compliances, people should avoid investing in such schemes.
Difficulty in withdrawal:
The last but the most powerful red flag of a ponzi scheme is this. People who run Ponzi schemes hate it when money goes out of the system.
If you are experiencing difficulties in withdrawing money, or if the agent wants you to stay invested and is willing to offer you even higher returns, it’s a sure sign of a ponzi scheme.
Greed is a powerful emotion, it gets us into trouble not just in terms of money, but also in other aspects of life as well.
It is thus important to think rationally, and have realistic expectations from your investment. Remember, the risk and reward are related. So if someone reaches out to you promising 20% return in a month or weeks, it is best to look the other way it will tap you into greed and get you to give in and invest.
Hope you resist the temptation of easy money and chose the path of slow but steady way towards financial prosperity.