There are many ways to save money and Indians are particularly known for saving money than spending it. We prefer to save money than to invest and a chit fund is a rotating saving cum investment scheme that is prominent throughout the country.
Incidentally, chit fund, also known as chit, chitty, or kuree is more than a century old Indian financial system.
Scores of Indian prefer Chit funds as it is an excellent financial instrument for both – saving and borrowing money. It is recognized by the Government of India under the Chit fund Act of 1982.
Investing money in chit funds gives a good return on the investment. But there is always a threat of some financial emergency and chit funds come to your rescue there as well. The funds can also be used during an emergency or otherwise.
What is a Chit Fund?
A chit fund is a type of savings where you deposit a certain amount of money every month with
The person who is managing the entire chit fund. The money can be collected periodically every month or at the end of the cycle.
The fund may be organized formally by a financial organization or informally by friends, family, relatives, or neighbors. Essentially, a chit fund may also be considered saving for a specific purpose.
A chit funs has several investors known as subscribers and the group of people contribute periodically towards the chit value.
The payment duration is equal to the number of subscribers. Finally, the amount collected is given to any one of the subscribers via reverse auction or lucky draw (lottery system).
If not by a lottery system, the fund is given to the person via reverse auction wherein the person who bids the lowest bid gets the money.
The remaining amount that he has foregone is equally divided amongst the remaining subscribers as a dividend after having deducted the foreman’s charges or commission.
Note that the winning bidder will still have to pay the monthly investment even after having won the amount until the closure of the chit fund.
Chit funds begin at a pre-decided date and will exist equal to the number of investors who will contribute to the pot every month.
An auction of the pot is held every month and the lowest bidder wins his bid while the subscribers get the dividend post the deduction of foreman’s charges.
Let us better understand how chit fund works with example
Say your monthly installment for the pot is Rs 5000 and the chit fund is made of 20 subscribers. The pot in the first month will amount to Rs 1,00,000. Then a reverse auction is held and the winning bids for the lowest amount of Rs 90,000. The remaining Rs 10,000 is equally distributed among the remaining subscribers as a dividend after paying the foreman his commission.
Thus, it’s a win-win situation for all the members. The process is repeated every month and a subscriber can bid only once throughout the entire period of the chit fund. Besides, the winner is required to pay his installment till the end of the chit funds total period.
Chit funds are also a lending system because subscribers can avail a large amount even before having paid the full amount of money.
Meanwhile, chit funds act as a saving scheme since every subscriber contributes every month, receives a dividend, and will eventually also end up placing a winning bid sooner or later.
Some chit funds operators skip the reverse auction system and jump straight to a lucky draw. They instead put the names of the subscribers in the pot. A name is pulled out and the person gets all the money. Incidentally, this is the process from which chit fund derives its name.
Is Chit Fund Profitable?
Chit funds come with their due share of risks but it also has many profits, especially for small businessmen, housewives, and low-wage workers. Chit funds can be used for different purposes including consumption, emergency, investment, business, and savings.
Some of the other profits of chit funds are
- Saving and investment tool
- Easy and quick access to money
- Less or no paperwork
- No collateral
- Emergency Cash
- High Dividend
- Low interest
- Flexibility of use
- No questions asked