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Due to consumer disinterest caused by the rise of potential scams over the years, modern-day investors who are new to the market may require a more detailed explanation of what a chit fund is. As a result, its popularity has declined among individuals.
Chit funds originated back in the pre-independence era. This financial method helped our ancestors develop good financial stability and was considered an alternative investment option by pooling money. But over the years, due to a lack of transparency and trust, many began taking advantage of other people’s misery by misusing and conducting potential scams. The rise of fraud activities lost its credibility among common individuals.
If you live in a neighbourhood or community, having a chit-fund can promote financial stability, discipline, and encourage you to save a fixed amount on a set date. This process may increase your financial independence and that of your neighbours. However, before engaging in a chit-fund financial plan, it is crucial to understand what the chit-fund plan is and how it works.
Therefore, we have created this comprehensive article containing all information about the chit funds. Keep reading to learn more about Chit Fund, including its financial concept, benefits, challenges, and others.
A chit fund is a financial instrument used to facilitate a financial arrangement in which a group of people gather and pool a fixed sum of money at regular intervals for a set period.
This is carried out under the understanding that the entire amount will be rewarded to one person, who is either selected by auction or lucky draw, raised during each interval. This process is carried out until all the members receive their share of the pooled money.
To ensure everything goes smoothly, a chit-fund company or a foreman oversees all the responsibilities, from collection to record-keeping.
As mentioned above, a chit fund is a financial scheme where a member of the chit fund group gets all the money pooled, by auction or lottery mechanism, by all the members during regular intervals.
The working of a chit fund is a process that requires discipline and dedication. The basic mechanism of chit funds is given below:
The chit-fund plan is set up by either an individual or a financial institution. The chit-fund organiser invites a fixed number of people to join the chit-fund.
The Chit Fund’s foundation is established by determining the total chit amount, period, and monthly contribution.
Each member of the chit-fund group contributes a set amount of money to the common pool at regular intervals.
The pooled amount is distributed through an auction or lottery. In an auction, subscribers bid for the lumpsum amount they wish to receive. The winning bid is lower than the lump sum amount. The difference between the lump sum amount and the winning bid is distributed among the members or used to cover managing expenses.
Special purpose Chit funds are typically made for a special purpose, for example, a family occasion or any other event. Special purpose chit funds can be relatively started a week before the event.
Organised Chit Funds require to have monthly or weekly meetings to declare the winner. The organiser writes the names of subscribers in a slip and puts them down in a box.
Then, the group leader draws a slip randomly from the box, and the person with the name on the slip receives the lump sum amount. After that, the winner will no longer be eligible to receive the amount. Although, he/she must continue to contribute and attend meetings.
The system of Chit Fund couldn’t resist the essence of the digital world despite being a traditional saving method. Online Chit Fund is a chit fund scheme that facilitates online. Individuals can now participate in Chit Funds plans online. All the processes, from contribution to payment, are made via digital payment methods.
Registered chit funds are plans organised by financial institutions registered under the Registrar of Societies, Chits, and Firms and are regulated by the Reserve Bank of India under the Chit Fund Act of 1982. Registered Chit Funds are more reliable and secure.
Unregistered Chit Funds are those types of Chit Funds that are not registered or regulated under any government entities or financial institutions. Unregistered Chit Funds mainly involve a group of friends, colleagues, or family.
A Chit fund does not attract any interest like traditional loans. Neither does it contain any extensive paperwork, making it cost-effective for accessing funds.
This is an easy method to save your income. They can regularly invest a fixed amount monthly.
Regular investing can help develop financial discipline and make more informed decisions.
Unlike other investment plans, this Chit Fund scheme enables one to easily access the lump sum amount with minimal investment.
Investing in Chit Funds involves carefully understanding the concepts and landscape of the Chit Fund model. The following is the step-by-step guide to start investing in Chit Funds.
Learn all the basics and working principles of the chit-fund scheme. Get insight on various things that can impact a chit-fund plan.
Research and analyse various chit-fund plans. Choose a chit-fund plan that aligns with your goals and is registered with regulators.
Enroll in the chit fund plan to start investing. Make regular deposits as per the predetermined date to stay in the chit-fund plan.
Carefully monitor the records of the chit-fund plan. Ensure that it is stable to continue investing. Stay in touch with the organiser for updates.
Understand the process of withdrawing from the chit-fund plan. Adhere to the existing policies to avoid any penalties.
The goal of the chit-fund investment is not primarily to generate returns. Instead, it is an excellent option for saving money and obtaining credits. Individuals participate in chit-funds to receive a lump sum of money.
It is important to ensure the reliability of the chit fund scheme to turn it into an ideal investment. Appropriate chit-fund plans are often considered a decent alternative investment option.
A Chit fund can develop a solid saving habit, but at the same time, it can also result in loss due to various factors such as mismanagement and fraudulent activities. Understanding the landscape and nature of the Chit fund plan may help in minimizing the losses.
Do’s
Don’t’s
Chit funds are financial instruments that allow people to pool money at regular intervals for a set period. Originating in pre-independence times, they promote financial stability, discipline, and saving. They work through an auction or lottery mechanism, with winning bids lower than the lump sum amount.
Benefits of chit funds include no interest, easy savings, financial discipline, and easy access to the lump sum. To invest in a chit fund, one must understand the plan, choose a reliable chit fund, invest and participate, monitor and manage the plan, and understand exit strategies.
It is essential to ensure the chit fund is registered under appropriate regulatory authorities, evaluate the risk involved, and avoid misuse to ensure that the chit fund is a good investment.
Hashim Manikfan
Hashim Manikfan is a professional financial content writer with extensive experience in creating engaging and informative articles on a wide range of financial topics. With academic background in Communication and Journalism, Hashim has published numerous articles aimed at educating readers on essential financial principles. His work covers areas such as financial markets, investment strategies, economic trends, and more. His writing style ensures complex topics are accessible and interesting, making financial literacy attainable for a broad audience.
