‘Thugs’ have been duping gullible investors from a long period of time through different methods. They come up with a very lucrative plan offering high rate of return, collect a large amount of money from small investors before they disappear. One of the very popular method used by them is Ponzi schemes. Most people think that Chit funds and Ponzi schemes are the same but the truth is that different motives working behind the two make them different.

Chit Funds

Ramesh is a shopkeeper and needs money for his daughter’s marriage, which is arranged after a few months. He is a trusted person amongst his friends in the market and his relatives. He calls his friends and relatives to start a chit fund. Every month each member would contribute a fixed amount to the pool of fund. And each month one of the members will be randomly assigned, through a chit or lucky draw, with the collected lumpsum. No member will be eligible to receive the amount twice in a single term of the chit fund, which normally equals the number of members in the fund. For example, if there are 20 members then the fund will work for 20 months. Many a times a person like Ramesh, who started the fund, will keep the first month’s collection. This way he can meet his immediate needs.

So, you can see that the fund is started with some trusted members in the group who are less likely to deceive. No one knows who is going to be the winner of the month because the system works with lucky draw.

This type discussed above is unregistered chit fund because it is not registered under the law. On the other hand, there are funds which are registered with the Registrar of Firms Societies and Chits. These registered funds are more organized and considered to be more trustworthy.

Shriram Chits is the largest operating chit fund in India. It started its operations in 1974. Today it has around 40,00,000 customers and 12,000 employees in its 1000 branches and service centers in Andhra Pradesh, Karnataka, Maharashtra, Puducherry and Tamil Nadu. It has been managing assets worth Rs.13,500 crore.

There is one more type called Online Chit Funds. The members have to create online accounts, periodically pay the money online, participate in online auction and receive the prize money.

Ponzi Schemes

On the other hand, there are ‘thugs’. They come with some scheme which generally focuses middle class or lower middle-class families or in other words the lower income group. These small investors are always in the need for money and are attracted towards such offers. The offer is to invest a small amount like Rs.10,000 and you will get Rs.1000 each month for an unspecified time period, just an example. If you refer other members to the scheme, you will get extra benefits like more money each month. It is this money collected from a large group of people which is then moved in a circle.

As new members join the scheme every day, the money collected from the new group of investors is used to pay the old group of investors. This scheme works as long as the new investors are getting lured to pump in money. As long as the money coming in to the scheme is more than the money going out, the scheme works perfectly fine and everyone who is involved will be happy. The day this circle reverses and the money coming in is less than the money going out, the scheme stops paying the investors.

Saradha Group Financial Scandal has been one of the most popular Ponzi scams in India. A major financial scam caused by the collapse of a Ponzi scheme run by Saradha group (an umbrella company with 200 private players). The scheme was the brainstorm of a businessman named Sudipto Sen who started it in the first decade of 21^st century. The group used various methods like endorsements and organizing events to popularize the scheme. The group collected more than 2500 crore from over 1.7million investors in a few years. The scheme failed in April 2013. It was not just a financial scam but also a political scandal as politicians from various political parties were involved in this scheme.

Even after the fundamental difference mentioned above the term chit funds and Ponzi schemes are often used interchangeably. Whatever the nomenclature, any scheme which is aimed at cheating people deserves a stern action from the government and compensation to the small investors.

How Investors can avoid Fraudulent Schemes

We all know the ever-growing needs of the low-income families. They would do anything from participating in a family chit fund to investing in a Ponzi scheme. But before they put their hard-earned money in any chit fund or scheme, they should check the credibility of the company where they are investing. If they have to invest, it is better for them to invest in an organized chit funds such as state-run chit funds. The greed of investing in a Ponzi schemes offering high rate of return, where they have no knowledge about the company or group can make them bankrupt. Investors should avoid altogether the schemes that incentivize referrals.

That’s it for today. We will come up with more informative articles in the coming days.

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