Chit funds are saving schemes that have been a part of India’s financial system for more than a century now.
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How do chit funds work?
I have created a team of 10 people who will contribute Rs 10,000 each to make the final corpus of Rs 1,00,000 at the end of the month. Now, one of the team members bids Rs 20,000 as the maximum discount which means the prize money is Rs 80,000 (post deducting the discount amount). Since I have started this concept, so I will charge 5% as a commission of the total chit value, i.e., Rs 5,000. In this scenario, the winner will take Rs 75,000 home as the final prize money.
What are the features of chit funds?
- Microfinance institutions.
- Pre-defined value and duration.
- The contributed amount is a lump-sum amount.
What are the types of chit funds?
- State-run funds: State governments manage these funds. The chances of losses are minimal and business processes are transparent in these funds.
- Registered funds: Private players who are registered with the Registrar of Chits and regulated by the state governments under the Chit Fund Act of 1982 manage these funds. Hence, these offer minimal risk.
- Unregistered funds: A group of friends, relatives, peer groups, or colleagues manage these funds. Your investment is risky in these funds as they are unregulated funds.
What are the advantages of investing in these funds?
- Works both as a savings and a borrowing tool at the same time.
- Lets you borrow a lump-sum amount without any collateral.
- Offers services at a much lower rate of interest offered by banks.
- They are easy to start and join.
What are the disadvantages of investing in these funds?
- Higher risks involved in unregulated funds.
- Regulated funds are not always secure.
- People invest without any lack of literacy.
- The person who borrows first generally gets the lowest amount.
- There is a risk of payment defaults by team members which may impact the overall cycle.
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