Today everyone wants to save money whether for future pursuits, family planning or retirement planning. There is nothing new in the concept of returning an individual’s investment in a very short period. Chit Fund is one of the same kinds. Chit Fund is the type of saving schemes which very much popular among businessmen whether holding small or medium businesses, homemakers, etc. It is a quite risky option to save money.
Chit fund is basically a transaction which can be called chit, chit fund, chitty, kuree etc.
What is a Chit Fund?
Chit is basically a deal which a person enters into with a specific number of persons that each and every one of them will equally deposit a certain sum of money over a definite period by way of installments and each member in turn as specified at the time of agreement be entitled to prize amount as determined by auction.
it is a type of scheme for saving under non banking finance companies practiced in India and is regulated Chit Fund Act, 1982.
Some financial institutions can conduct such kind of scheme or it can also be conducted between friends, businessman, relatives and sometimes it is conducted for specific goals or sometimes for short term savings purpose trader, by keeping a certain portion of it for himself for other expenses, and later he drew that money for the principle of equity.
Types of Chit funds in India
1.Chit funds run by state government
In some states the Chit funds are also conducted by the state government and these Chit funds are purely transparent. Mysore sales international limited and Kerala State Financial Enterprise are some of the examples.
2. Registered Chit Funds running privately
Those chit funds which are registered under the Chit Funds Act 1982 and working separately without any interference of government comes under this category.
3. Unregistered Chit Funds
There are many chit funds running across the country which are not registered even though they are illegally running those chit funds but one can find it between the families, relatives, small businessmen, etc.
How does Chit Fund work?
Suppose a person starts a chit fund company first he has to get registered with the authority and to submit the full amount of the chit which is decided as security.
Let us suppose a chit fund starts with 100 members with contribution of Rs 20,000 per month
100 × 20,000 = 2,00,000
After collecting, the amount is placed for the auction among the members. The lowest bidder will get the prize amount. Let say a member bids lowest to 50% which means 10,00,000 will be given as prize to the lowest bidder as a prize.
Now the remaining amount i.e. 10,00,000 from which let say the auctioneer’s commission is 10% then the total remaining amount is 10% of 10,00,000= 1,00,000
The total amount which remains is equal to Rs 9,00,000. This amount will be distributed among the rest of the members where each member will get 9091 as the remaining members are 99. So the effective contribution for the first time is Rs 10,909 approximately. This process will continue till each member get the prize amount from the total collected.
Risks associated with Chit funds
- The Chit Fund Manager can deceive the members
- Those members who have won their prize can disappear or can make frauds in further installments
- No guarantee of profit
- No predetermined fixed returns
It is always better if we invest in the chit funds which are existed before. the Ministry Of Corporate Affairs has a list of chit funds which are registered. so the investor need to check before he invests.For those who are seeking loans in future the chit fund is a bit costly but convenient way of borrowing but so many major risks are associated with it. For those who are seeking a side or small amount of savings can consider Chit Fund as a convenient source. So it is for sure that the investors need to be extra careful while joining the Chit Fund. One must first ensure that the company is registered under the authorized body or not.
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