Chit funds are traditional financial instruments that combine the dual benefits of savings and borrowing under a single plan. It has been around for centuries. It originated in the rural areas, where communities used to pool money, which they could use in times of need. This way, they used to help each other save and borrow funds, and the process was quite simple. Today, chit funds are popular across the nation, including urban areas, and have become a popular and recognised financial instrument.
What are Chit Funds?
The chit fund is a popular financial tool that plays a significant part in India’s traditional investment choices. In this financial setup, a group of people comes together and pools a certain amount of money. Based on prior understanding or agreement, every member receives the pooled money by taking turns, depending on a bidding system.
A chit-fund association is managed and organised by a manager, also known as a foreman. The organiser or foreman is responsible for fund collection, auctioning, record-keeping, and prize money distribution. The manager or organiser takes a fee that’s equal to the percentage of the chit value.
How Do Chit Funds Work?
In the chits fund arrangement, the participants contribute a predetermined amount of money at regular intervals (usually monthly). The pooled money is then distributed amongst the participants based on auction results. The contributions continue until every member has received the pot money in every cycle.
The bidding process commences after the funds are collected from every member within a stipulated time frame. The winning bidder pays the operator a predetermined percentage of the pot money as a commission fee. After subtracting the commission and other charges, the remaining amount is distributed amongst other participants as dividends.
Types of Chit Funds
Here are the three different kinds of chit funds you must know before investing.
- Organised Chit Funds: Under this scheme, the investors must conduct weekly or monthly meetings. In this system, the names of every participant are written and folded into small pieces of paper, which are then placed in a box. The organiser or group leader draws a paper slip randomly during each meeting. The person whose name is on the slip enjoys the complete pooled fund. However, that person is no longer eligible to attend the subsequent meetings, though they are still required to keep contributing to the pool.
- Special Purpose Chit Funds: In this type, the chit funds are unutilised for specific reasons. For instance, you may come together with a group that needs to pool money to fulfil a common goal (such as saving up for Diwali, Christmas, etc.). The end date of the fund collection and distribution might last from a week to a few months, depending on when you want to fulfil your financial goals.
- Registered Chit Funds: To improve the chit funds’ success, it is safe to choose a registered chit fund company under the Chit Fund Act of 1982, which is further regulated by the Reserve Bank of India. Also, a chits fund often demands that the members get the scheme registered with the Registrar of Societies.
Margadarsi Chit Fund is an organised, registered chit fund in India that has been helping investors realise their dreams for the last six decades. At Margadarsi, we offer several special purpose funds, including wedding plans, education plans and home plans, to name a few.
Features of Chit Funds
The salient features and key elements of chit-fund schemes are mentioned below.
- Every member deposits a lump sum amount, which is collected in one place.
- A chit fund is a great tool for offering financial assistance to individuals facing a financial crisis.
- Chit funds generally come with a fixed tenure and value.
- A chit fund has lower interest rates compared to moneylenders or other financial institutions.
- Chit funds are a combination of savings and credit schemes.
Top 5 Benefits of Chit Funds
Before making investment decisions, be aware of the advantages of chit funds. It will also help you compare its benefits with other investment options.
- You get quick access to funds during cash crunches while simultaneously using chits funds as a savings tool.
- You can get financial assistance from experienced chit-fund organisers who will guide you regarding debt payments, withdrawals, bidding, and more.
- There is no need for collateral, nor do you need to pledge any assets.
- It helps develop a positive financial discipline, thus leading to good savings.
- Participants are subject to substantial returns on their contributions, and the auction money is determined based on the bid amount and the total number of investors in a particular cycle.
Why Choose Margadarsi Chit Fund?
Margadarsi Chit Fund is a smart choice for investors looking for a safe and efficient savings and borrowing tool. We have a reputation for maintaining transparency and credibility in all our procedures. Investors who opt for our chit-fund schemes can earn significant dividends, thus improving the overall return on their investment.
To summarise, chit funds are a great option if you are looking for an investment platform offering twofold benefits of savings and borrowing. Opt for a platform that provides prompt financial assistance and ensures success in the short and long term.
