How do chit Funds work?

Chit Fund Meaning

Chit fund is a flexible monetary product as a result it works as both an investment and a borrowing tool after you pay the monthly installment.

Chit Fund Definition

A chit fund defines as a financial instrument that's a mix of savings and borrowings. It's been a locality of India’s financial set-up for over a century. At its most basic level, in a very chit fund, a group of individuals or subscribers comply with contributing a fixed amount each month for a fixed time of a corpus. This amount is auctioned to an all-time low bidder and also the left-over funds are distributed equally amongst the remaining members as dividends when deducting the organizer’s commission.

What are the Key Roles of a Chit fund?

The key roles of a chit fund are as follows

The Winning Bidder:

Receives the award (lump total amount) supported his bid and in this case is a borrowing instrument.

The Members:

Receive monthly dividends that cut back the amount they have to pay within the following month’s instalment, so acting as a savings instrument.

The Foreman

Receives a commission (5%) for overseeing and organizing the chit fund.

Process for the Foreman to form a chit group

Before setting up a Chit fund, the Foreman obtains a previous Sanction from the Registrar of chits by creating a security deposit such as the Gross Chit amount and therefore the required forms/documents, together with the total value statement as stipulated by the Chit Fund Act, 1982.

  • The terms and conditions of the chit must be obeyed by The Registrar of Chits.
  • The Foreman will solely begin sourcing the chit Fund when getting the sanction from The Registrar.,
  • All the members of the chit Fund got to register with the Registrar too.

How do chit Funds work?

  • If five folks move to begin a chit-fund theme. Everyone pays Rs. 2,000 once a month for five months (Number of individuals during a theme = variety of months). Under this cluster, AN organizer takes care of auctions and conferences. He would impose an organizer fee.
  • In the first month, these five people meet and pay Rs. 2,000 each. Now, the entire cash obtainable is Rs. 10,000. 3 of the folk bid for Rs. 10,000. 1st individual bids for Rs. 8,000, the second individual bids for Rs. 7,000, and also the third individual bids for Rs. 9,000.
  • Since the second individual bids rock bottom, he receives Rs. 7,000. The organizer can levy a 5% fee, which can stand at Rs. 500. So, the second individual can draw Rs. 6,500. Next, the outstanding profit of Rs. 3,000 should be uniformly distributed among the five folks. Everybody can get Rs. 600. different people can bid monthly, and this procedure can continue for five months.
  • Placed, the chit fund starts on a particular out date and carries on with the number of months equal to the number of subscribers. Members offer their monthly installments to the box, and a backward auction runs every month permitting members to bid for the prize.
  • The member willing to require the least sum with a very cheap bid is asserting the winner and receives the award for that month. The balance amount is distributed as a dividend amongst all members when deducting the Foreman’s Commission (5%). The method is continual monthly, so permitting every member to win the prize money.
  • A Chit fund provides you with the distinctive advantage of permitting you to borrow from your future savings.

Example of chit fund process:

  • Suppose a chit fund scheme with seventy-five members will run fifty months, with every paying a monthly instalment of ₹10,000/- to form, a 7,50,000/- box. Once the auction is declared, the member who bids the best discount wins the Bid. (40% is the most discount anyone will bid as per Law).
  • Number of members within the chit fund scheme – seventy-five
  • Duration – fifty months
  • Monthly instalment owed by every member – Rs. 10000/-
  • Total pot price – Rs. 7500000/- (75 members x 10000)

In the above example, allow us to think the winning Bid offered a 35% discount.

  1. Discount offered by the winning Bid – 35%
  2. Amount of discount – Rs. 2,62,500/- (35% of 7,50,000)
  3. The amount received by the winner – Rs.4,87,500/- (750000 - 262500)
  4. The balance amount is distributed equally amongst the members after deducting the Foreman’s commission.
  5. Foreman’s commission – 5-7% = Rs.37,500/-(on 7,50,000)
  6. Total Dividend – Rs.2,62,500- Rs. 37,500 = Rs. 2,25,000/-
  7. Dividend attributable to every member’s account – 2,25,000/75(no of members) = Rs. 3000/-

Chit process

  • Installment = Monthly Subscription =₹10,000
  • Period = number of months = 50
  • Gross chit amount = Total of Instalments by all members = ₹7 lakh 50 thousand (₹10,000x75)
  • Bid offer amount = amount willing to be bygone by the subscriber to win the prize money award of 2,62,500 (if we tend to think about Bid = 35%).
  • Min Bid amount = 5% (Foreman Commission),
  • Max Bid amount = 30% (for thirty & forty months chit Fund) and 35% (for fifty months chit Fund)
  • Net amount (Prize Money) = chit amount minus Bid-Offer amount (₹7,5,00,00 - ₹2,62,500 = ₹4,87,500)
  • Foreman Commission (FC) = 5% of the Gross chit amount (₹37,500)
  • Total Dividend = Bid provide amount minus Foreman Commission( Rs.2,62,500- Rs. 37,500 = Rs. 2,25,000/-.)
  • Dividend per client (Share of Discount) = Total Dividend/No of Subscribers (₹2,25,000/75 = ₹3,000
  • Next Month Instalment = Gross Installment minus Dividend (₹10,000-₹3,000 = ₹7,000)

If somebody waits to win the prize money at the end of the time

  • Total amount invested with = ₹4,19,500
  • Total amount Received = ₹4,72,000 (₹5 lakhs – (4,19,500 + 12% of4,19,500 as GST)
  • Profit = ₹52,500
  • The above calculation is just an example of the particular come is set by the auction discount decided by the chit Fund members.

Benefits of chit Funds

  • Helps Fulfill financial Goals

You can fulfill your personal and money goals through these funds. The amount is used to finance the expenses associated with children’s education, marriage, nonsecular ceremonies, medical expenses, etc.

  • Considerable Dividend and Lower Interest

Dividend income from chit funds is comparatively more than the interest income from other savings schemes. Members during a chit fund scheme decide the speed of interest, which differs from auction to auction. The interest on the borrowed amount is below the other kinds of borrowing.

  • Prompt Disbursal of cash

Chit funds supply cash instantly to finance you throughout a crisis or to satisfy your imperative expenses. You don’t have to be compelled to disclose why you're borrowing the total.

  • Collateral-Free

You can avail of bill fund schemes supported by personal sureties, in contrast to money institutions that need you to pledge assets as security. Within the case of a chit fund scheme, you'll simply borrow cash when paying your 1st installment.

  • Minimal work

It offers money help to folks while not involving tedious work. you'll choose these schemes while not submitting your PAN and IT returns



Investing in a Registered chit fund may be a sensible financial decision for investors as their maturity period is sometimes short, and therefore the subscription amount is less than form them simply reasonable. The investment may be designed to satisfy individual monetary wants.

Frequently Asked Questions

What are the choices to join in the Auction?

The member will participate in the auction in the following ways.
1. Direct Participation
The member will either participate online or in-person to attend the auction in the chit workplace on the date and time per the bill Fund agreement.
2. Bid provide Letter
The subscriber has to fill all told the main points within the letter before signing and sending it to the Chit’s workplace.
3. Bid Authorization Letter
The client will send a proxy to participate in the auction on their behalf. The proxy should carry the authorization letter & valid ID proof to participate in the auction.