The economic landscape of India has always been financially sound with various financial schemes like savings accounts, FD Accounts, etc. One such financial instrument that has stood the test of time is the Chit Fund.
Chit funds trace their roots back to ancient India, where communities pooled resources to meet financial needs. Over time, this practice evolved into the structured format of chit funds we see today.
The concept gained popularity during the British era and has since become an integral part of India’s financial landscape. In this article, we will discuss what is chit funds, how chit funds work, types of chit funds, and much more.
What is the Chit Fund?
A chit fund is a financial scheme where a group of individuals come together to pool their resources through regular contributions towards a common fund.
The total pool is then disbursed periodically as a prize amount to one of the members through an auction process, to meet their financial needs.
Each member receives the prize amount once during the duration of the scheme, determined by their bidding position in the auction. Chit-funds are regulated by specific laws and are governed by chit-fund companies or organizers.
Chit funds operate under the regulatory framework provided by the Chit Funds Act, of 1982. This legislation governs the functioning of chit funds, ensuring transparency, accountability, and investor protection.
How does Chit Fund Work?
Chit funds work on the simple principle of group borrowing and collective savings. Here is a detailed working of the chit funds-
- For a fund to operate, there must be a group of individuals to come together to form a chit-fund
- Each member of the chit funds is required to contribute a fixed amount periodically, i.e., monthly
- The accumulated amount will be auctioned to the highest bidders amongst the contributors and the lowest bidder receives the amount and he/she pays the funds back over the year until the complete cycle of the chit-fund
- A chit fund company or organizer facilitates the entire process, including collecting contributions, conducting auctions, and distributing pay-outs
Types of Chit Funds
The following are the types of chit funds-
Regular Chit Funds
As the name suggests, this is the most common type of chit funds where members contribute fixed amounts at regular intervals, and one member is selected through an auction to receive the total fund amount.
Foreman-based Chit Funds
In this type, a trusted individual, known as the foreman, organizes and manages the chit fund. The foreman is responsible for collecting contributions, conducting auctions, and distributing payouts.
Prize Chit Funds
Prize chit funds operate similarly to regular chit funds but with the additional feature of offering prizes or rewards to participants through lucky draws or other mechanisms.
Dividend Chit Funds
In dividend chit funds, the total fund amount is distributed among members as dividends instead of a lump-sum payout to a single member. This allows all members to benefit from the chit fund periodically.
Accelerating Chit Funds
In these chit funds, the total fund amount increases progressively with each auction cycle. This encourages early participation and higher bidding amounts.
Specific Purpose Chit Funds
These chit funds are organized for a specific purpose such as education, housing, or business expansion. The funds collected are used exclusively for that purpose, benefiting the members collectively.
Online Chit Funds
With advancements in technology, some chit-funds operate online, allowing members to participate, contribute, and bid through digital platforms. This offers convenience and accessibility to a wider audience.
Benefits of Chit Funds
The following are the benefits of the Chit funds-
- Chit funds provide an avenue for regular savings and investment, allowing members to accumulate funds over time
- Chit funds do not charge interest, members contribute a fixed amount, and the total fund amount is distributed among participants without any interest component
- Chit funds offer members access to a lump-sum amount through periodic auctions helping individuals with liquidity
- Members can choose the contribution amount based on their financial capacity and goals which allows the scheme to be accessible to multiple people
- This type of scheme induces the savings habit among the individuals
- Chit funds operate on a rotational basis, ensuring that each member receives the total fund amount at least once during the tenure
- By pooling funds together, chit-fund members can diversify their risk
- Unlike traditional loans, chit funds do not require a credit check or collateral, making them accessible to individuals with limited credit history or assets
- Registered chit funds operate within a regulatory framework, providing legal protection and oversight to participants and ensuring transparency
Difference Between Chit Fund and Mutual Funds
The following are the differences between Chit Funds and Mutual Funds-
| Chit Fund | Mutual Fund |
| Chit funds involve a group of individuals pooling their money for fixed periods, with each member contributing a predetermined amount periodically. The collected sum is then auctioned and disbursed among the participants | Mutual funds are professionally managed investment schemes that pool money from various investors to invest in a diversified portfolio of securities such as stocks, bonds, or commodities |
| Chit funds facilitate savings and borrowing within the group, providing members with a means to accumulate funds for specific purposes or financial needs | Mutual funds aim to generate returns for investors by investing in a diversified portfolio of assets, thereby offering opportunities for wealth creation and capital appreciation over the long term |
| Chit funds generally entail lower risk since they operate within a closed group | Mutual funds carry varying degrees of risk depending on the composition of the underlying assets, market conditions, and the fund manager’s investment decisions |
| Chit funds are governed by state-specific regulations or Chit Fund Acts | Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds) Regulations |
| Chit funds are often restricted to specific communities or groups and may have eligibility criteria for membership, limiting accessibility | Mutual funds are accessible to a wide range of investors, including individuals, institutions, and foreign investors |
| Chit funds are managed informally by the organizer or operator, who oversees the conduct of auctions, collection of contributions, and distribution of funds among members | Mutual funds are managed by experienced fund managers or asset management companies (AMCs), who employ rigorous research, portfolio analysis, and investment strategies to optimize returns and manage risk on behalf of investors |
| Chit fund contributions are determined by the organizer or the predetermined auction amount | Mutual fund investments can be tailored to suit investors’ preferences, with relatively small investment amounts accessible through Systematic Investment Plans (SIPs) or one-time payment |
Top 10 Most Famous Chit Funds in India
The following are the 10 most famous chit fund which are operated in India-
- Shriram Chits
- Margadarsi Chit Fund
- Mysore Sale International
- Guru Nanak Chit fund
- Kapil Chit Funds
- Government of Kerala Linked Chitty
- Amruthadhara Chits and Finance Private Limited
- Purasawalkam Santhatha Sanga Nidhi Limited
How to Invest in Chit Funds?
You can follow these steps to invest in the Chit funds-
- Research and select a chit fund company with a good track record and reputation, this is the most important step as trustworthiness is extremely important to invest the chit fund
- Enrol in the chit fund and attend the event regularly held by the chit fund where members bid for the total pooled amount
- You’ll have to bid and try to win as the winning bidder receives the prize amount, and the process continues until all members have received their share
- You’ll also have to make regular monthly contributions to the chit fund as per the agreed terms
FAQ
A chit fund is a type of financial scheme where a group of individuals pools their money together in fixed installments to be distributed among the members periodically through auctions.
Chit funds involve pooling money among members for periodic payouts, whereas mutual funds invest pooled funds in various financial instruments to generate returns for investors.
Risks include the potential for default by members, fraudulent schemes, lack of regulatory oversight, and limited liquidity compared to other investment options.
Yes, NRIs can invest in the chit funds.
