Is it safe to invest in Chit Funds? Digital Vs Offline Chit Fund

Digital Vs Offline Chit Fund

Chit funds are a recurring savings scheme that has been a part of India’s financial system for over a century. It is a method of borrowing as well as saving, which provides easy credit to the people and gives high return on their investment. Today, through this article we will explain how a chit fund works, is it safe to invest in chit funds, its benefits, etc.

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Types of Chit Funds

Chit fund schemes are organized by financial institutions, traders, money lenders or private financiers. They can also be organized by groups of friends, relatives or neighbours. You can invest in one of three different kinds of chit funds:

1.State-run Chit Funds: These chit funds are operated by state governments. Hence, the chances of losses are minimal and the process of business is also transparent. Kerala State Financial Enterprises (KSFE), Mysore Sales International Limited (MSIL) are examples of state-run chit funds. 2.Registered Chit Funds: These are privately-run chit funds, registered with the Registrar of Chits and regulated by the state governments under the directives of the Reserve Bank of India guided by the Chit Fund Act of 1982. These are regarded as safe since they are governed by a legal framework, which entirely eliminates any risk. 3.Unregistered Chit Funds: Groups of friends, relatives, peers, or coworkers run these kinds of chit funds. Investments in unregistered funds are seen as dangerous because no laws apply to them. Unregistered chit funds, despite the personal risk involved with investing in them, are immensely popular throughout India since they are typically created by close groups of friends, and the majority of their subscribers are familiar with one another. However, participation in these funds should be avoided as the risk increases with the amount of money involved.

How Chit Funds Work?

Let us understand how chit funds work with the help of an example:
  1. Suppose Sunil joined a chit fund of Rs 20,000. He will contribute Rs 1000 every month for 20 months. There will be a total of 20 members in this scheme, as the number of members is always equal to the number of months.
  2. The auction will take place at the end of the month. Any member of the group can bid for a pot of 20,000. 5-7% commission will be deducted from the value of the pot.
  3. The lowest bidder will get the pot.
  4. Suppose Sunil bids at a discount of Rs 1000, while Ravi and Sunita bid at a discount of Rs 700 and Rs 500 respectively.
  5. The lowest bidder i.e. Sunil will get the pot. He will get a pot of Rs 19,000 (20,000-1000). Now this discount of Rs 1000 will be distributed among all the members as dividend.
  6. Sunil will have to continue his contribution of Rs 1000 in the coming months.
  7. You usually earn 7 to 10% on the investment.

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The person who deposited only Rs 1,000 in the first month got a loan of Rs 19,000 easily.

Due to the fund, people get loans at very low interest rates as well as an investment on their savings.

Is It Safe To Invest In Chit Funds?

Chit funds have a bad reputation as they have been misused in the past to cheat innocent investors. It is safe to invest in government run and registered chit funds. Unregistered chit funds are not legally bound to pay the deposited amount to their members. Therefore, they carry the maximum risk of fraud.
  • It is safe to invest in government operated and registered chit funds, as the chit fund business in India is regulated under the Chit Funds Act, 1982.
  • The Chit Fund Act has made it mandatory for the chit fund companies to register themselves with the state governments.
  • During registration, the owner has to pay a security deposit, which is 100% of the chit value, to the chit registrar.
  • The security deposit can be withdrawn only when the chit fund group is closed, and each member is paid what remains to be paid to them. Thus, this regulation protects the money invested by the clients.
  • If there is any fraud, the registrar of the chit fund and the concerned state government can take regulatory action against the owner of the chit fund company.
Make sure that the chit fund is registered and only then invest by checking the Chit fund Registration Certificate and the Registration Number issued by the Chit Fund Registrar. It is safe and rewarding to invest in 100% digital, legal, registered and regulated chit fund platforms like The Money Club.

Benefits of Investing in Chit Fund vs Mutual Fund

Benefits of Investing in Chit Funds

When it comes to investing your hard earned money, you must be aware of the advantages. Let us discuss some of the advantages of investing in chit funds.

  • Chit funds work as both an investment and a money borrowing tool. When you pay the monthly installment, you invest that money and when you win the auction, you pay the subsequent installments (future installments).
  • Unlike banks or other financial institutions, chit funds allow you to borrow a lump sum amount without providing any collateral/security.
  • You are not required to disclose the purpose of using the money borrowed.
  • The rate of interest is also very less as compared to the bank.
  • Joining a chit fund is easy as it does not require submission of documents like IT return, PAN card etc.
  • The members get a dividend which is comparatively higher than the interest on the money saved in various deposit schemes like fixed deposit, recurring deposit
  • You can easily get money to deal with any financial emergency.

Digital Chit Fund Vs Offline Chit Fund

Most of the traditional chit fund companies operate offline with little or no online presence. So, if you have to enroll in any chit fund scheme, you have to either visit the branch or wait for the agent to come to your home to register for the same. Also, these traditional chit fund companies serve a particular city, region or state. This means, traditional chit fund companies are geographically constrained. If you are not in the city, state or region where the traditional chit fund company operates, you cannot become a member. Money Club Online Chit Fund Platform is a secure mobile platform. It provides an opportunity to join a group of like-minded people from all over India to start saving or investing money.

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If you need money urgently, you can also borrow money which is a multiple of what you have invested. All members are verified before they start their journey on The Money Club platform.

  1. Due to ease of operation, high liquidity, low risk, good returns and minimal paperwork, online chit fund schemes are increasing in popularity.
  2. Registered online chit funds have a high degree of transparency, are technology driven, fast and efficient. Thus, the chances of fraud are reduced.
  3. It is also more convenient as consumers can join, auction and transfer money online and do not need to physically meet to auction and distribute the proceeds.
  4. The Money Club is one such registered digital chit fund platform where you can start saving or investing money. Do you know the difference between saving and investment?

How Is The Money Club Different From Traditional Chit Fund Companies

  • Money Club is India’s best AI-powered online chit fund platform with 100% online processing, ensuring a secure and smooth peer-to-peer lending experience.
  • Registration, verification, bidding, transactions and almost everything on the platform can be done online without the hassle of paperwork, thus saving your time and effort.
  • Unlike traditional chit funds, The Money Club has a variable commission structure that starts at 4% of the chit amount and goes down to 5% depending on the performance of the client.

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Investing in a registered chit fund is a good financial decision for investors as their maturity period is usually short and the contribution amount is small so that they can be deposited easily. Paying regular installments will help you discipline your finances and can be a reliable source of funds in case of an emergency.

Hope you have understood how Chit Funds work, however, while investing make sure that the chit fund company is registered. Before investing you should check who the promoters of the company are and whether they are trustworthy or not. Only then must you invest.