Chit Fund vs Mutual Funds

Chit Fund vs Mutual Funds

Chit Fund vs Mutual Funds


Saving money is the most basic and most responsible thing to do, the importance of which is rarely disputed.

Saving money has so many benefits that it is easily one of the best financial habits to adopt. Thankfully, there are a number of tools in the market that helps you save money – Chit Fund vs Mutual Funds are a few popular ones.

Both mutual funds and chit funds work on the concept of letting people come together to pool their money over a certain period of time. However, the difference lies in the way that money is used.

In the case of mutual funds, the money is invested in stocks/bonds. And chit funds use the money to lend it and the income generated is divided equally among all subscribers.

Let’s dig a little deeper into chit funds vs mutual funds.

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Chit Funds Vs Mutual Funds

The difference between chit funds and mutual funds is that Chit funds have their investors pool in money and then lend it to the needy person. The income generated is equally divided among the subscribers. On the other hand, mutual funds pool money from different investors and use it to invest in different securities. Chit funds are a saving, borrowing, and investment tool, whereas mutual funds are essentially a saving and investment tool.

This table clearly outlines the difference between these two financial products

Chit Fund Mutual Funds
What Is it? Chit fund is a sort of community funding where a group of people come together to contribute a predefined amount for a certain period. Each person gets a chance to claim the pool amount either by lot mechanism or auction. This professionally-managed investment scheme brings together a group of people and invests their money in stocks, bonds and other securities.
Purpose Essentially a saving and borrowing tool Essentially a saving and investment tool
Growth Opportunity Doesn’t provide many opportunities for your money to grow Offers huge growth opportunities for your money
Procedure Easy procedure as no paperwork or documentation required Need to provide an extensive amount of documentation
Government Regulations Regulated by the Registrar of Chits appointed by respective state governments under Section 61 of Chit Funds Act 1982 Regulated and maintained by SEBI
Market Risks and Volatility Not exposed to the market, hence free of any market risk. Mutual funds are invested in the market, which is highly unpredictable. When the market goes down the value of your funds, go down too. So highly susceptible to market risk
Fees Managed by the organizer at a commission of up to 5% or more Managed by the asset company at an annual fee which can be at 2% or 3%
Product Understanding Simple and straightforward to understand Need more expertise to understand
Ability to borrow Can borrow at a low-interest rate Not an option
Principal guarantee Principal is guaranteed There is a risk of losing the principal amount
Taxable Income Generally non-taxable but must be declared Dividends and earnings are taxable

Benefits of Investing in Chit Fund vs Mutual Fund

  • Easy access to money People looking to borrow can access funds when they need it the most to meet any unforeseen or planned expenditure.
  • Low-interest rate Money can be borrowed at a low-interest rate.
  • Good dividend income People looking to save can earn attractive interest in the form of dividends, much higher than bank fixed deposits.
  • Safe investment Regulated by the Chit Fund Act.1982.
  • Easy repayment option Borrowed money can be repaid in periodical instalments over a time period.
  • Simple procedure No complex formalities nor extensive paperwork involved.

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Benefits of Investing in Mutual Funds

  • Convenient for small and big investments Allows small amount of investments multiple times through SIP or one big lump sum once
  • Growth opportunity Offers huge growth opportunities for your money
  • Complete transparency Publicly discloses their financial performance under SEBI’s regulations

In Conclusion

When it comes to choosing between chit funds vs mutual funds, it boils down to your preferences, financial capacity and financial goals. So, choose wisely.

If invested wisely and through legitimate companies, both mutual funds and chit funds can yield profitable results. There are many incidences of chit fund scams; so do your due diligence and choose a registered chit fund company that is ethical and safe. The Money Club is a legitimate chit fund platform and is a great option to save, borrow or invest.

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