What is a Chitfund?

A chit fund is a rotating saving scheme that has been a section of India’s economic system for more than 100 years. It's additionally referred to as chit. Chitfund is a superb money instrument for both – saving & borrowing schemes. As a savings instrument, it provides a decent return on investment, and as a borrowing scheme, it is often a reliable source of funds in emergencies.

History of the Chit Fund Concept:

  • The history of chit funds is a new idea in  India. However, there are a variety of versions in its history and its inheritance.
  • A book written by Edith Jemima Simcox, entitled the ‘Malabar Kuri’ reinforces the particular proven fact that the system existed from ancient Dravidian times, being somewhat nearly just like the systems in China. In China, it developed into what is popularly wonderful recently as a result of the Chinese lottery.
  • Another version of the origin of invoice fund is let alone Portuguese missionaries, who visited Muziris (Kodungallur) for evangelization and established a seminary at Vypeencotta village in 1577. They reportedly impressed promotion of the invoice fund in Kodungallur.
  • There is jointly proof to advocate that in earlier days, farmers took half in ‘grain funds’ (Dhanya Chittu), where grains were used instead of cash.

Evolution of the chit Fund:

  • An indigenous financial establishment peculiar to South India, Chit Funds found their means that once banking and credit facilities were inadequate and others usually had to trust to an outsize carry on endemic sources. chit funds are meeting a locality of the important credit needs of the people, every in urban and rural areas.
  • The earliest systems of chits created the use of lots. Presently, the systems of auction and tendering are more prevalent.
  • In 1969, the govt. of Kerala originated the Kerala State cash Enterprises limited with the item of promoting chits. Mysore Sales International restricted, (MSIL) a Government of Karnataka enterprise established in the year 1966, is also purposeful.

Chit fund meaning

  •  Under the Chit funds act 1982 section b Chit fund may be a variety of rotating savings and agreements among totally different persons i.e. friends, relatives, neighbours, and organizations to subscribe an exact add of cash for such period of your time. Chit funds are typically Microfinance Organizations. Chit Funds are referred to as the Chitty, Kuri, and chit.
  • It is proud to say that there are over 10,000 registered chit fund companies in INDIA.
  • Under the chit fund agreement; a particular amount is deposited on regular basis by the fixed group persons, Foreman conducts an auction at regular intervals where group persons participate in bidding to win the amount, finally, one person will be the winner. Here initial winners get a low amount and late winners of the following intervals will get more gradually. Chit fund helps in collecting the tiny savings of the people that turn into an enormous amount.

How do chit Fund companies work today?

  • Let’s take into account the operation of chit funds example.
  • Say, twenty-five subscribers, change to subscribe amount  2,000/- for 25months i.e. for a whole chit price is 50,000/-. In his turn in an exceedingly manner that's arranged call at the agreement, the subscriber gets his chit amount.
  • A simple formula for the operation of chits:
  • Monthly Premium × period in Months = Gross amount
  • On top of the instance, 2000*25=50,000/- that's termed the chit price. The chit starts on a declared date, all the subscribers shut up for the auction/lot.
  • During the auction, subscribers in need, who have an interest, bid by allowing the proportion of subscriptions to be forgone.
  • The highest bidder i.e.who permits the foremost proportion to subscribers is given the invoice amount. Once deducting a commission/remuneration to be paid to the foreman of the company, the number departed by the subscriber is distributed as a dividend amongst all the subscribers at intervals of the draw.
  • Before the winning bidder attracts the amount, he proposes securities – stable properties, insurance Policies, Bank guarantees, etc., counting on the liability.
  • In a chit fund scheme, a group of individuals contributes sporadically towards the chit price for a period adequate to the number of investors (members or subscribers). The money collected is given to the foreman, who is either chosen through a lucky draw (lottery system) or an auction.
  • In the auction allotment system, the one who bids the lowest bid (agrees to claim the lowest amount) gets the cash. this kind of auction system is understood as a reverse auction. The amount forgone by the winning bidder is then distributed among different members equally once deducting the foreman’s commission and other charges. The money received by every member is named a dividend. Even once claiming the amount, the winning bidder needs to continue finance.

Mathematics Behind chit Fund Reverse Auction scheme

  • Let's consider how a chit fund works with the help of an example:
  • Let’s assume that a coupon fund scheme has fifty members, each paying a monthly instalment of ₹1000 to possess a first-month pot of ₹50,000. Once the auction is declared, the member who bids to require the least amount of the chit fund wins the bid.
  • Let’s assume the winning bidder agrees to just accept ₹45,000 of the whole chit fund worth for that month, the rest of the amount fifty thousand– is distributed equally amongst the opposite forty-nine members when subtracting the organizer’s fees.

What are you able to Use chit Funds For?

Chit funds address the subsequent needs:

  • Consumption
  • Emergency
  • Investment
  • Business
  • Saving

Also read: Types of chit funds

Features of chit Funds

Here are some options of chit funds you want to recognize before investing

  • They are credit and savings schemes rolled into one.
  • They act as microfinance institutions.
  • Furthermore, they have a planned price and period.
  • Likewise, they allow you to borrow at a rate of interest below moneylenders.
  • Not only that, but they are best for meeting the money needs of individuals belonging to lower-income households.
  • The deposits created by all the subscribers become a payment.

Types of chit Funds

There are 5 different types of chit funds as follows

Chit fund schemes are regulated by financial institutions, informal market players like traders, cash lenders, or non-public financiers. Schemes are floated by teams of friends, relatives, or neighbors. Chit funds are of five types that we can simply invest in

  • State-run Chit Funds/Organised Chit Funds:

The Chit funds are operated by state governments. Since these funds are state-operated, the probabilities of losses are marginal and businesses’ processes are clear. T-chits in Telangana and KSFE in Kerala are some examples of state-run chit funds.

  • Registered chit Funds:

The Chit funds that run privately, are registered with the Registrar of chits and controlled by the state governments beneath the directives of the RBI guided by the Chit Fund Act of 1982. These are said to be safe, only when they're regulated beneath a legal framework and thence the chance is covered totally.

(shriram chits, kapil chits, margadarsi chit fund, gokulam chitsbalussery chits, etc,..)

  • Unregistered chit Funds:

The chit funds are operated by friends groups, relatives, peer teams, or colleagues. Investment in unregistered funds is taken into account as risky as they are doing not coming back beneath the range of any law. Despite the private risk related to collaborating in an unregistered chit fund, these are very common across India They're sometimes formed by close groups of associates and principally all subscribers are familiar to everyone.

  • Online Digital Chit Funds :

Online Chit funds are digitalized, chit funds have evolved and are organized online. Online auctions are conducted in these chit funds. The subscribers will create their monthly contributions online and conjointly receive their prizes through online modes. In this type, every subscriber must produce an internet account through which he/she will manage and flow into chit funds. ( moneyclubber, mypaisaa, balussery, ksfe chitty, Shriram chits, etc,..)

  • Special Purpose Chit Funds

Special Purpose chit funds: These are organized to save lots for a specific purpose. As an example, a cluster of neighborhood ladies might group along to prepare a saving scheme for Diwali sweets. This Diwali sweets fund would have a finish date, which is sometimes one week before Diwali. The fund collected is employed to buy and prepare sweets in bulk. The sweets are prepared and then distributed among all the members throughout Diwali. Special purpose chit funds can help to reduce the price and effort.
( ksfe chitty, t chits, sreekarayil, etc,..)

Advantages of finance in Chit Funds

When it involves financing your hard-earned cash, it's imperative to weigh the professionals and cons. If you select check funds, it ought to be as a result of they fit your necessities, and you perceive however it works.

  • Chit fund may be a versatile money product as a result of it works as both an investment and a borrowing tool,after you pay the monthly installment, you invest that money, and after you win the auction, you borrow against the next installments (future savings).
  • Chit funds allow you to borrow a payment amount while not providing any formal collateral, as against banks or different financial institutions.
  • The rate of interest is almost less than what a bank would provide.
  • From the tax purpose of view, whereas the income is subject to tax, The dividends earned per month are neither ratable nor tax-deductible. Any losses may be claimed as business losses.
  • Joining in Chit funds is simple, particularly if your social status is high and cash obtained may be utilized in any method you want: for travel, medical or business expenses, marriage, education, or any other monetary emergency.
  • At the social group level, they promote a culture of saving as every member is predicted to contribute a hard and fixed amount often towards the fund.
  • To some extent, chit funds level the enjoying field by providing access to cash for financially excluded communities. This can be an advantage in a country like India wherever the majority of the population works in the informal sector and getting a proper loan is troublesome for an average person.
  • Risks concerned in finance in Chit Funds additionally suffer from a nasty name as a result of they need been put upon within the past to scam naïve investors or run Ponzi schemes. Popularly there are 2 huge instances at the national level wherever folks are defrauded within the name of chit funds.

Top nine benefits of chit funds

  1. Saving and investment tool: chit funds provide you with the advantage of saving further as borrowing.
  2. Quick access to money: It’s simple to join a chit fund theme, and you have got the chance to borrow the payment (the pot) by simply paying the primary installment.
  3. No or less paperwork: It’s a good product to satisfy the money desires of individuals while not providing documents such as IT returns, PAN cards,s, etc.
  4. No collateral: not like banks and different money establishments that provoke tangible security, the chit fund is given on personal sureties.
  5. No queries asked: You don’t ought to reveal the aim of using the borrowed cash (the pot)
  6. Emergency cash: You will easily access the cash to satisfy a surprising expense or a money emergency.
  7. High dividend: The subscribers get a dividend that is relatively over the interest increased on the cash saved in varied deposit schemes.
  8. Low interest: The subscribers mutually verify the rate, and it varies from auction to auction. to boot, the rate of borrowing from the check fund is relatively less than different kinds of borrowing.
  9. Flexibility in its usage: you'll be able to draw upon your chit fund for any purpose you would like – marriages, shopping, travel, medical expenses, spiritual ceremonies, festivals, children’s education, etc.

Things to contemplate Before finance in chit Funds

  • Make sure that your chit fund may be a registered company. Examine the certificate of incorporation from the registrar of the companies.
  • Find out who the promoters of the chit fund firms are.
  • Make sure that all of them are financially sound.
  • Check the license number and certificate issued by the registrar of chit funds of the state within which the chit fund company operates. ( Example for licensed companies Shriram chits, Kapil chits, margadarsi chit fund, gokulam chits)
  • Find out what proportion commission the foreman takes. Select the chit fund company with the very cheap commission. ( Example for low foreman commission companies balussery chits, gokulam chits)
  • Find out from the workplace of the registrar of chit funds whether there are any complaints or unfinished proceedings against the chit fund company.
  • Ensure that you are financially ready to contribute throughout the chit-fund cycle.

Also read: Best chit fund companies in India

Bottom Line

  • Especially in rural areas, most of the people have benefited from the favorable gains and simple accessibility of chit funds. When taking into consideration the risk appetency and monetary goals, We get benefits in investing in any of the highest chit fund schemes in India.

FAQS

What is the Difference between Recurring Deposit and Chit Fund?

  • Saving cash is a vital facet of life. Finance cash could be a need of many people. In India, many folks don't seem to be however concerned about the organized monetary sector.
  • Many folks of the lower tax bracket value more highly invest in chit funds as a result of they are not educated or have a bank account.
  • Chit funds don't seem to be essentially a nasty investment. it's a nasty name as a result it's been misused in the past. It is safe to invest in Government-run and registered chit funds.
  • On the opposite hand, Recurring deposits are a far safer investment. The returns are fixed and secured at the top of the tenure. 

What are the top five chit Funds in India in 2022

  • The following are a number of the foremost undefeated and widespread chit fund homes in India,among them top five are as follows:
  1. Margadarsi chit Fund
  2. Shriram Chits
  3. KSFE
  4. Mysore Sales International
  5. Purasawalkam Santhatha Sanga Nidhi Limited

Do chit funds charge GST?

  • GST relates to the services that are offered by the foreman of a chit fund. The GST Council In 2017 introduced Input tax credit (ITC),.

 Is Chit fund legal?

  • In India, chit fund firms come back beneath the Chit funds act, of 1982 and thus are legal, registered, and safe. They're completely different from unregulated deposits and Ponzi schemes. Unregistered chit funds aren't lawfully guaranteed to pay the amount deposited to its members. Hence, they cause the most risk of fraud.

 Who regulates chit funds?

The Chit funds act, 1982 regulates the chit fund firms in INDIA. Under this law, the chit fund business registration is often done solely by its state governments. The govt appoints the chit Registrar underneath section sixty-one of the Chit funds act, 1982.