About Chit Funds

Chit Fund is a saving scheme practiced in India. It originated 1000s of years ago. It was started as informal association of traders and households with in communities. It enables poor people to convert small savings into lump sums.

Easy to join as there is no formalities needed

High Promised Return

Option of small deposit

It is a borrowing cum savings instrument

  • A chit on the other hand can help an investor by paying him an competitive interest rate than banks.
  • A Fixed deposit is accepted for a pre-determined time period.
  • The interest is paid in the form of dividend.
  • Interest paid by banks range between 7.5-9.5%.
  • If an investor has lump sum amount, he can invest the same in another chit.
  • A fixed deposit is illiquid.
  • Can use those funds for any planned or unplanned expenditure or wait until the end of the chit and enjoy higher dividends.
  • The principle amount cannot be used by the investor for any unforeseen expenditure.
  • If the investor opts for a cumulative interest group, the entire amount is returned only on maturity of the fixed deposit.
  • The same money can be invested in a chits and the investor can earn more than bank rates.
  • Under this scheme, the customer deposits a minimum amount (normally fixed) every month and bank pays the interest at the pre- determined rates (which is usually lower than that for fixed deposits).
  • He can also borrow against the chit which is not possible with a recurring deposit.
  • At the end of the period i.e. on maturity date, the customer is paid the maturity value i.e. principle deposited and the interest payable.
  • The current rate offered by banks is around 8.5%. This is subject to government regulation.
  • If an employee is smart, he can plan his purchase of a car using a chit.
  • Tremendous growth in the banking sector has seen an explosion of personal loans given to young salaried employees in the information technology, BPO and other sectors.
  • The interest cost, paperwork and sureties required are much lesser in comparison with a personal loan.
  • This segment has higher disposable income and is willing to spend on cars, motorbikes.
  • Banks/financial institutions charge an interest rate anywhere between 12-24% on personal loans.
  • If the investor opts for a cumulative interest group, the entire amount is returned only on maturity of the fixed deposit.
  • He need not make any financial calculations whether the returns gained from the stock market may be more than what he would have gained from a less risky financial instrument, like a chit.
  • Investing in the stock market requires a lot of personal time and effort.
  • After purchasing the stock, the investor cannot be unworried. He must keep a track of the stock market and the company in which he has brought stock and keep a constant tab on whether he in must hold or sell the stock.
  • Even an investor who wants to invest for a five year time period must keep himself abreast with the happenings of the stock market.
  • Investing in a chit is similar to a SIP, where the investor would invest money monthly into a chit fund group he chooses.
  • Systematic Investment Plans or SIP’s is a financial scheme where investments are made daily, monthly or quarterly.
  • The monthly installment would vary depending on the competition in the group.
  • These investments are invested by the fund company in the stock markets. Every fund has a Net Asset Value (NAV).
  • There is no entry or exit fee charged and the risk involved in investing here would be very low in comparison to a mutual fund.
  • It is important to note that the NAV is entirely dependent on the market conditions prevailing at that time.
  • There are chances where the current value of investment is less than the actual cost of investment.
  • There are entry and exit loads i.e. charges which have to be paid by the investor to join or exit the fund.
  • To sum up investing in a mutual fund carries moderate to high risk depending on the market.
  • A smart investor would want to use the SAVE-BORROW-PAY mantra instead of BUY NOW – PAY LATER.
  • It induces him to spend more than he can actually afford with the BUY NOW – PAY LATER mantra.
  • He would save at a higher interest cost, borrow at a lower cost and rescue himself form unnecessarily exorbitant interest costs.
  • The bank allots a higher credit amount without giving much thought to the paying capacity of the customer.
  • This is possible by having financial discipline and by planning, investing and saving and borrowing using chits.
  • The customer falls into this trap by buying more than he can afford, paying the minimum balance at the end of the month, transferring remaining balance to the next month. This becomes a vicious cycle.
  • Little does the customer realize that he is charged exorbitantly almost up to 40% when the credit card balance is revolved in this manner.
  • He gets caught in the credit card debt trap.

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