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News items like “A whopping 2 lakh gullible investors were cheated…….” amply illustrate the extent of problems and hardships caused by financial frauds related to Ponzi schemes, collective investment schemes (CIS), unregulated deposit schemes, etc. In India, over the years, many Ponzi and unregulated investment schemes have taken place, causing huge economic and financial loss to Indian economy. This paper aims to examine why investment such schemes like Ponzi schemes and CIS become popular, how such schemes got operated in different periods and what could be done to safeguard the interests of investors.

The analysis is done based on secondary data and research work of various researchers, organisation and institutions, which are available in the public domain.

This paper has tried to analyse various characteristics of such fraudulent schemes, like their modus operandi, promotional activity, background of promoters and legal process involved in recouping financial loss of millions of investors. This paper also examines the demand-side factors that are responsible for popularity of those schemes in India. Noting the regulatory changes and other initiative taken by regulatory authorities to control the supply of unregulated investment schemes, this paper indicates potential actions, which could be undertaken to make people aware about the risks and issues related with such fraudulent schemes.

This paper gives an overview about various aspects of unregulated investment schemes, which have duped numerous people at different point of time. To the best of the authors’ knowledge, this research work is original and has not been published in any other journal.

The purpose of this study is to identify the significant demographic and socio-economic characteristics of individuals who are likely to invest in a fraudulent investment scheme. It also quantifies the extent to which financial literacy helps in reducing the odds of investments in such schemes. Based on these findings, it provides policy recommendations to regulators and governments.

This study uses nationally representative data from the “India Assessment of Financial Capability 2018” survey. It further uses logistic regression with a binary outcome variable to assess the individual-level odds of investments in fraudulent investment schemes.

This study concludes that males between 40 and 59 years of age, who are well-educated (are at least graduates), score low in financial literacy, belong to the middle-income group, and SEC A3 households are most vulnerable to victimization by financial fraudulent investment schemes. It finds that financial literacy significantly reduces the odds of investment into fraudulent schemes to the extent of 39.118%.

This study quantifies the extent to which financial literacy helps in reducing the odds of individual investments in a fraudulent investment scheme. As financial literacy has a significant and negative relationship with the likelihood of investment in such schemes, this study provides policy interventions and recommendations to regulators and governments to safeguard the interest of individual investors.