Chit funds are a type of collective tool in which there are two participants: the organiser and the member. A number of participants come together and decide to pool a specific amount of money each month for a predetermined period of time. A financial product known as a chit fund combines borrowings and savings. For more than a century, it has been a component of the Indian financial system. At the most basic level, a chit fund is a group of individuals or subscribers agreeing to make a fixed monthly contribution to a corpus for a specified length of time. After deducting the organiser's commission, the leftover money is divided equally among the remaining members as a dividend after this amount is auctioned to the lowest bidder.
How Do Chit Funds Operate?
In a chit funds schemes, a number of people make periodic payments toward the chit value for a duration equal to the sum of the subscribers' or members' subscriptions (investors). The money is given to a person who is picked at random or through an auction.
An individual who consents to get this lowest amount (with the lowest bid) receives the funds via an auction allotment method. As a reverse auction mechanism, it is known. After deducting the fees and commission paid to the foreman, the winning bidder's forfeited amount is divided equally among the remaining bidders. A dividend is the sum that each bidder receives.
Even after deciding to accept the winning proposal, the bidder will keep making investments. A chit fund begins on a particular day. Members continue to contribute to the pot on a monthly basis. Subscriptions may then bid for the value in an open auction that follows. A participant who is willing to accept the lowest sum wins. In that month, he or she receives the chit fund.
What Characteristics Define Chit Funds?
The main characteristics of chit funds are listed below for your knowledge before investing!
- The accumulation of deposits from each member results in the creation of a lump amount.
- They provide lower-income households with a source of funding.
- Compared to moneylenders, these funds give you a cheaper interest rate.
- They have a predetermined value and time frame.
- These chit finance functions as microfinance organisations.
- Chit fund schemes are a mashup of credit and savings plans.
Types of Chit Funds
Financial institutions, unregulated participants in the money market like dealers, money lenders, or individual financiers arrange chit fund schemes. Groups of friends, relatives, or neighbours may also propose plans. There are three different types of chit funds categories in which you can invest:
- State-operated Chit Funds:
This group of chit funds includes those that are run by state governments. Since the government manages this money, the likelihood of losses is low and company operations are open. State-run chit fund businesses include Mysore Sales International Limited (MSIL) and Kerala State Financial Enterprises (KSFE).
- Registered Chit Funds:
These are privately operated chit funds that have been registered with the Registrar of Chits and are governed by the state governments in accordance with instructions from the Reserve Bank of India and in accordance with the Chit Fund Act of 1982. Since they are supervised by a legal framework, which completely eliminates any risk, these are regarded as safe.
- Unregistered Chit Funds:
These chit funds are run by a group of friends, family members, peers, or coworkers. Investment in unregistered funds is seen as dangerous because they are not governed by any laws. Unregistered chit funds are extremely popular throughout India despite the personal risk involved with investing in them since they are typically created by close groups of friends and the majority of their subscribers know one another.
However, as the risk increases with the amount of money involved, involvement in these funds should be avoided. The organisers' strict money management practices also increase the risk.
Now that we know which form of chit finance to choose, let's examine the top reasons why we should invest in chits:
- Chits are Special:
The only financial product that permits both saving and immediate borrowing is this one. The interest rates on the borrowing are also significantly lower than market rates.
- Lower Risk, Higher Returns:
The risk is minimal and the returns range from 12% to 14% if you choose a private registered chit fund company like Navachethana chits company PVT ltd.
- Personalised according to need:
There are numerous chit funds schemes that can be customised based on your needs or your ability to save money. You can decide what suits you best and visit Navachethana chits company PVT ltd.
- Regulated:
The Registrar of Chits controls chits finance. So it is safe to invest since there is legal protection.
- Maintaining an Investment:
In chits, the prize money is always greater than the overall cost of the plan. It aids in maintaining an investment.
- Contextual Understanding:
Everyone can easily understand the idea behind chits with the help of Navachethana chits. It is a practical choice for everybody.
- Multiple Purposes:
You may use these funds for a variety of things, including your children's education, religious rituals, festivals, weddings, and medical costs. You may also use them for travel, shopping, and other expenses.
- Low interest rate:
The rate of interest is decided upon by bidders jointly; it varies from auction to auction. In addition, chit funds charge borrowers lower interest rates than other lenders.
- High Dividend:
Compared to the interest earned on investments in various deposit schemes, investors receive a dividend that is relatively greater.
- Urgent Cash:
If you need to cover an unexpected bill or have a financial emergency, you can get fast cash. Following the payment of your initial instalment, you have the option of borrowing the pot.
- No questions asked:
A borrower is not required to explain why they are taking out a loan.
As chit fund schemes typically have short maturities and cheap subscription amounts, investing in them can be profitable. Chit funds also create investments to meet certain needs. Regular instalment payments help you manage your finances more efficiently.
In the world of chit funds and chit finance, Navachethana Chits has established itself and grown steadily. It can perhaps be regarded as the top chit fund provider overall. Along with chit funds, Navachethana Chits also offers microfinance to our current chit fund business clients in 1-2 days, ranging from 50,000 to 10 lakhs with extremely simple documentation, such as emergency rapid gold loans, loans against LIC policies, and business loans.
Navachethana Chits top concern is to protect our clients' funds, therefore we take extra precautions to make sure their investments are secure.