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A chit fund is a rotating saving scheme that has been a part of India’s financial system for more than a century now. It is also known as chit, chitty or kuree. Chit fund is an excellent financial instrument for both – saving and borrowing. As a savings instrument, it gives a good return on investment, and as a borrowing scheme, it can be a reliable source of funds in emergencies and otherwise.
Table of Contents
- How Do Chit Funds Work?
- The Math Behind Chit Fund Reverse Auction Scheme
- What Can You Use Chit Funds For?
- Features of Chit Funds
- Types of Chit Funds
- Benefits of Chit funds
- List of 12 Best Chit Fund Companies & Platforms in India
- Things to Consider Before Investing in Chit Funds
- Chit Funds Vs Other Investment Tools
- Chit Fund Schemes of The Money Club
- Join Money Club Now
How Do Chit Funds Work?
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The Math Behind Chit Fund Reverse Auction Scheme
Lets check out how chit fund works with the help of an example:
Quick highlights of the above example:
(Chit fund acts as a borrowing scheme here)
(Chit fund acts as a saving instrument here)
(Chit fund allows the organizer to be compensated for putting in efforts to organize the event)
The process repeats with each member getting the opportunity to take the auction amount each month while all the other subscribers, including the previous month’s winning bidder, continue to contribute their monthly instalments.
What Can You Use Chit Funds For?
Chit funds address the following needs:
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Features of Chit Funds
Here are 6 features of chit funds you must know before investing
- They are a credit and savings schemes rolled into one.
- They act as a microfinance institution.
- They have predetermined value and duration.
- They allow you to borrow at an interest rate lower than moneylenders.
- They are best for meeting the financial requirements of people belonging to lower-income households.
- The deposits made by all the subscribers are turned into a lump sum.
Types of Chit Funds
- Registered Chit Funds
- Unregistered Chit Funds
- Online Digital Chit Funds
- Organized Chit Funds
- Special Purpose Chit Funds
Top 9 Benefits of Chit Funds
The Benefits of Chit funds are
- Saving and investment tool: Chit funds offer you the advantage of saving as well as borrowing.
- Quick access to money: It’s easy to join a chit fund scheme, and you have the opportunity to borrow the lump sum (the pot) by just paying the first instalment.
- No or less paperwork: It’s a great product to meet the financial needs of people without providing documents such as IT returns, PAN card etc.
- No collateral: Unlike banks and other financial institutions which ask for tangible security, the chit fund is given on personal sureties.
- No questions asked: You don’t need to reveal the purpose of using the borrowed money (the pot) .
- Emergency cash:You can easily access the money to meet an unexpected expense or a financial emergency.
- High dividend:The subscribers get a dividend which is comparatively higher than the interest accrued on the money saved in various deposit schemes.
- Low interest:The subscribers mutually determine the interest rate, and it varies from auction to auction. Additionally, the interest rate of borrowing from the chit fund is comparatively lower than other forms of borrowing.
- Flexibility in its usage: You can draw upon your chit fund for any purpose you wish – marriages, shopping, travel, medical expenses, religious ceremonies, festivals, children’s education, etc.
List of 12 Best Chit Fund Companies & Platforms in India
12 Best Chit Fund Companies & Platforms in India are
The Money Club
The Money Club is a fast-growing digital chit fund platform that ensures zero risk, zero paperwork and lowest commission as compared to the traditional chit fund platforms.It is a transparent, safe and secure platform that allows like-minded people from all over India to save, invest or borrow efficiently through their smartphones.
Government of Kerala Backed Chitty
The government of Kerala supports the Kerala State Financial Enterprises (KSFE). To a great extent, it is limited to the people of Kerala. It’s a risk-free financial product that blends the advantages of both borrowing and investment.
Shriram Chits is the biggest chit fund company in India. It is safe and protected and serves various states like Maharashtra, Andhra Pradesh, Tamil Nadu and Karnataka. It has about 6,000 chit representatives.
Mysore Sales International
Mysore sales international limited began chit funds business in 2005, and it belongs to the Government of Karnataka foundation. Popularly known as MSIL, this company gives access to quick money in emergencies.
Purasawalkam Santhatha Sanga Nidhi Limited
Purasawakam Santhatha Sanga Nidhi Limited, established in 1879, is a public limited company and it is classified as a Non-government Company. It is registered at Registrar of Companies, Chennai. The company’s authorized share capital is ₹20,000,000, and its paid-up capital is nearly ₹7,350,000.
Margadarsi Chit Funds
Margadarshi Chit Fund Private Limited was founded by Ramoji Rao of Eenadu groups in 1962. It has three branches in three different states – Tamil Nadu, Andhra Pradesh and Karnataka.
Guru Nanak Chit Fund
Guru Nanak Chit Fund Pvt Ltd, established on 29 June 1964 is a private limited company, classified as a State Government company. This company is registered under the Registrar of Companies at Kanpur. The company’s authorized share capital is ₹20,000.
Gielle Investments Ltd
Gielle Investments Ltd is a public organization, delegated as a non-government company. It is registered with the Registrar of Companies, Kolkata. It has an authorized share capital of ₹10 Lakh and its paid-up capital is ₹6 Lakh.
Kapil Chit funds
Kapil Chits is a private limited company, established on 29 August 2008. This is a non-government company, registered at Registrar of Companies, Hyderabad. It has an authorized capital of ₹50 Lakh.
Amruthadhara Chits and Finance Private Limited
Amruthadhara Chits and Finance Private Limited, established on 31 December 1900, is a non-government organization. This unlisted private organization is named ‘organization restricted by shares’. This company’s approved capital is ₹2.5 Lakh, and its paid-up capital is at 18.4% (₹40,000).
Louis Chit Funds Private Limited.
Louis Chit Funds Private Limited is a private unlisted, non-government organization, named under ‘organization restricted by shares’. Its authorized share capital is ₹50,000, and its paid-up capital is ₹48 Lakh (96%).
Sree Gokulam Chit & Finance Co. Pvt. Ltd. (SGCF) is the flagship company of the Gokulam Group of Companies. This Chit and Finance business started at Mylapore, Chennai on 23rd July 1968 and has branches in Tamil Nadu, Kerala, New Delhi, Andhra Pradesh, Maharasthra, Karnataka, Telangana, Puducherry (Pondicherry), and Haryana..
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Top 6 Things to Consider Before Investing in Chit Funds
Chit fund can be a risky investment. Hence you should take the following precautions before investing money in it:
- Make sure that your chit fund is a registered company. Check the certificate of incorporation from the registrar of the companies.
- Find out who the promoters of the chit fund company are. Ensure that they all are financially sound.
- Check the registration number and certificate issued by the registrar of chit funds of the state in which the chit fund company operates.
- Find out how much commission the foreman takes. Choose the chit fund company with the lowest commission.
- Find out from the office of the registrar of chit funds whether there are any complaints or pending court cases against the chit fund company.
- Ensure that you are financially prepared to contribute throughout the chit fund cycle.
Chit Funds vs Other Investment Tools
Here’s a short comparison of the common financial products or investment tools. It will help us understand where chit funds stand when compared to them.
Chit Fund vs Bank Deposits and small savings schemes:
The annual returns on bank deposits and small savings schemes are quite low, at 3%-6%. Also, the total amount due upon maturity and the interest earned are both fully taxable. So that makes the annual returns even lower. NBFCs offer better returns, but their reliability must be carefully examined. Another major issue with fixed deposits is the tenure lock-in for the funds. You cannot use the money in the event of an emergency. Senior citizen savings scheme and Sukanya Samriddhi Yojana are government backed small savings schemes which provide better returns.
Chit Fund vs Mutual Funds and Equity shares:
Shares and mutual funds appear to be a very attractive option because of the high returns. If stocks are carefully chosen, investors are known to make above-average profits. However, the equity markets are very volatile. You cannot be sure that you will keep making money year on year. You need to have good knowledge of the market in order to make profits.
Chit funds are obviously not as popular as the above two options. But if you examine it carefully, you will realize that chit funds are a very powerful and simple financial instrument. Firstly, it is both a saving and a borrowing tool. You can park your surplus funds month-on-month for a fixed tenure of 2-3 years. Secondly, you can withdraw the entire chit amount anytime during that tenure when you need that money. You can earn 10%–12% p.a. returns.
Chit Fund Schemes of The Money Club
The chit fund scheme of The Money Club platform journey starts with a Pilot Club wherein 5 money clubbers contribute a maximum of Rs 200 each daily.
- During the pilot club, money clubbers go through the level 1 verification, which involves basic KYC, pilot club performance, and profile check.
- After the pilot club, the level 1 verified money clubbers are invited to join a 6K3D club.
- The next club invitation sent to the money clubbers is for the 8K3D club.
- The next club invitation that a money clubber receives in his journey on the platform is for the 10K15D club.
- After joining the 10K15D club, money clubbers keep receiving club invitations of different club amounts and frequencies based on their track record.
Ans. In India, chit fund companies come under the Chit Fund Act, 1982 and hence are legal, registered, and safe. They are different from unregulated deposits and Ponzi schemes. Unregistered chit funds are not legally bound to pay the amount deposited to its members. Hence, they pose a maximum risk of fraud.
Ans. Chit funds have a bad reputation because scamsters have misused them in the past. However, registered and government-run chit funds are one of the best investment instruments as they pay good dividends. Many people, especially from small towns, have benefitted from such schemes.