Ponzi Scheme

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Definition: Ponzi Scheme

Ponzi Scheme is a fraudulent investment scheme in which the returns are paid to older investors through the money acquired from the new investors. Investors are enticed to this scheme because they are promised unusually high returns in shorter periods of time at very less risk. The scheme ultimately collapses when new investors stop coming in.

Generally in any investment scheme, the returns are generated by the cash flows / profits associated with an asset. However in this case, the money is not invested in any asset. Ultimately, the flow of incoming money (from the new investors) will stop thus causing the returns that are owed to the older investors to be unpaid. The scheme is named after Charles Ponzi.

An example of the Ponzi scheme was unravelled in the state of Tamil Nadu, India where M S Guru, the promoter of Emu contract farming, ran a Ponzi scheme duping over 12000 investors of money worth at least INR 143 crores. He had enticed the investors by including popular movie stars in his advertisement campaign.

Hence, this concludes the definition of Ponzi Scheme along with its overview.

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