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Three ways to identify a Ponzi scheme

Money manager Robert Marshall-Lee continued to buy Indian stocks even when the Modi govt’s decision to withdraw high-value bank notes spurred a selloff last November. Photo: Hemant Mishra/MintPremium
Money manager Robert Marshall-Lee continued to buy Indian stocks even when the Modi govt’s decision to withdraw high-value bank notes spurred a selloff last November. Photo: Hemant Mishra/Mint

  • No investment can deliver high returns with low risk. Guaranteed high returns are almost impossible. Stay away from companies that ask you to invest, offering 1% returns on investment per day or guaranteed doubling of money fast

NEW DELHI: Investors fall prey to Ponzi schemes regularly. Some months back, the Ahmedabad Police Detection of Crime Branch arrested three people running an online Ponzi scheme online.

The accused had a mobile app called “Victory World". Users were encouraged to invest money, with promised return on investment (ROI) at 1% a day.

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In February, Delhi Police arrested another person, who had been issuing debenture certificates to people, assuring high returns. The amount involved was about 80 crore.

Most Ponzi schemes are very localised – the fraudsters could be running them in a few localities or one city. Of late, these schemes are run online, where the criminals don’t need to interact with someone face to face or have an established office in a specific location.

But identifying a Ponzi scheme is not difficult. Here are a few things that tell you that you need to be cautious with your money.

High returns with minimum risk: No investment can deliver high returns with low risk. Guaranteed high returns are almost impossible. Stay away from companies that ask you to invest, offering 1% returns on your investment every day or guarantee to double your money in a short period.

As a thumb rule, any investment that promises you over 12% annual returns has high probability of being fraudulent. On an average, most investment advisors expect equities to deliver 10-12% annualised returns over the long term. There are hardly any other avenues where returns can be better than equities.

If you look at non-convertible debenture issues of the past two-three months, they offered a maximum of 9-10% returns. These are guaranteed returns.

Investments also take time to double. An investment fetching you 12% will take slightly over six years to double your money, and one offering you 10% will take a little over seven years. Use these benchmarks to evaluate investments from little known companies.

Opaque business model: If you don’t understand a business model, stay away. Fraudsters may use complicated way to explain how their business model works to confuse investors.

Many companies running Ponzi scheme may talk about novel business ideas. For example, they may say that they have a cryptocurrency business that yields high returns.

If you don’t have a comparable business to understand returns, avoid investing in such companies.

Investor chain: Typically, Ponzi schemes get investors by following multi-level marketing model. They may offer commissions to an investor to bring others. It’s definitely a Ponzi scheme if it provides high returns with low risk and commissions for referring others.

Many Ponzi schemes also display company registration certificates and other government-issued documents. Don’t go by these documents, as they can be forged or not relevant to business model.

For example, anyone starting a business can register with the Ministry of Corporate Affairs and get an incorporation certificate. Therefore, evaluate the business model to see if it’s worth investing in.

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