All You Need to Know About Chit Funds

There are a variety of chit funds schemes in India such as Margadarsi chit funds, Shriram chit funds, etc. However, many people don’t know about these, and even those who do, often tend to have their reservations for these. This is in light of the many scams and frauds committed by such companies.

Chit fund

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What are Chit Funds? How do They Work?
Chit funds are basically a savings cum investment scheme, wherein the investors or participants agree to contribute to fixed amount every month during a fixed period. The total amount collected is then auctioned for profit to whichever participant needs it the most every month.
The following is a simple example of how chit funds work:
50 people come together and form a group for the chit funds. Each member contributes Rs. 1,000 every month and the end of the month they collect Rs. 50,000. Now, anyone who needs this “kitty” can place a bid. However, unlike how usually bidding works, in this the winning bid is the lowest amount. So, if one person bids Rs. 48,000, another Rs. 45,000, the second one wins.
The difference between the bid and the kitty, i.e. Rs. 5,000 in this case, is then equally divided among the members. So, dividing it by 50, each person gets Rs. 100 back. In other words, each member had to pay only Rs. 900 (not Rs. 1,000).
The same process is repeated every month. The person who needs the “kitty” amount bids for it at a loss, which is for the others to profit from.
Note: Each person can win the “kitty” amount only once during the fixed period. This way, every person gets their investment (with or without a profit depending on how and when they place a bid).
Chit Funds in India
There are mainly three types of chit funds in India:

  • Private Register Chit Funds which comes under the Chit Funds Act 1982.
  • State Government Chit funds such as Mysore Sales International Limited.
  • Unregistered Chit Funds which are not registered with the government or any other organization and are thus not only risky but illegal too.

Chit funds are beneficial as they offer a unique combination of borrowing and saving, and are quite simple too. However, the returns may vary significantly depending on the demand/need for the funds among the members.