National Savings Certificate and Chit Funds Which is the Better Investment Option?

national savings certificates Vs Chit funds

Old-timers will recall the days when they used to make a beeline to the post offices to invest in national savings certificates, also known as NSCs. NSCs were the primary tax-saving instruments in those days in the absence of concessions on home loans and other tax-saving avenues. So, it was a preferred investment in those days. Similarly, chit funds used to be very popular because of their liquidity and flexibility. So, let’ the two avenues and see which of the two is a better investment option.

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Savings vs. Investment

Did we use the term investment? Is it correct, or should we use savings? The confusion is bound to be there because the line between savings and investment is thin. Both chit funds and NSCs qualify as quasi investments that can double up as savings.

Chit funds vs. NSCs

Before comparing the two, let us understand the concepts better.

What is NSC?

NSC is the short form for National Savings Certificate, an instrument issued by post offices all over India.
  1. NSC is a fixed-income investment option with a lock-in period of five years.
  2. All post offices in India issue NSCs.
  3. The rate of interest available on NSCs today is 6.8%.
  4. Tax benefits are available up to Rs 1.50 lakhs under Sec 80C of the IT Act.

What is a Chit Fund?

Chit funds constitute a money pool contributed by members of a homogenous group. Each member contributes a fixed, predetermined sum of money at regular intervals. Each member can place a bid to receive the amount collected. The member who is ready to forgo the maximum amount wins the bid to receive the amount from the pool. The difference between the bid and the pooled amount is distributed among the other members as their interest or earnings. The same procedure continues every month until each member gets their share of the pooled money. One example of a chit fund is the Money Club online chit fund platform.

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Which of the two avenues is a better investment?

Generally, NSCs and chit funds are two different types of savings instruments. However, there is no common thread other than that both these avenues generate returns. Here are some points of distinction between the two.
  • NSC is a fixed-income investment. On the other hand, the chit fund is a flexible investment. As a result, the returns are uncertain but more than what the NSCs offer. So, from the viewpoint of returns, the chit fund is far better than the NSC.
  • The NSC offers guaranteed returns because they have the government’s support. On the other hand, chit funds can be risky, even if they are registered chit funds. Unregistered chit funds are extremely risky.
  • The NSCs have a lock-in period of five years. However, there are no such lock-in periods in chit funds.
  • Chit funds are a combination of deposits and loans because you can bid for the pooled money.
  • Chit funds are personal property shared between the members of the fund. On the other hand, NSCs are government property used for national development. So, from the viewpoint of contributing to national development, NSCs are the best option.
  • Investors can pledge their NSCs and take loans from banks, whereas this facility is not available in chit funds. However, in chit funds, one can get the pooled amount either through a lottery system or through an auction.
  • Tax savings are available on NSCs, whereas there are no such tax implications on chit funds.

By comparing NSCs and chit funds, you can draw the following conclusions.

  • The NSCs are safe investments that provide guaranteed returns. On the other hand, chit funds can deliver better returns but are high-risk investments. While registered chit funds can be secure, the unregistered chit funds can suddenly close shop overnight. So, the chances of losing your money in chit funds are high, whereas there is no question of any loss of investment in NSCs.
  • Chit funds can deliver better returns on investment and are comparatively better on the liquidity front.

NSC 5 years kee lock-in avadhi ke saath ek fixed-income investment hai. NSC par aaj upalabdh interest rate 6.8% hai. IT act kee dhaara 80C ke tahat 1.50 laakh rupaye tak ka tax benefit upalabdh hai.

Chit fund yojana mein, logon ka ek samooh samay-samay par members kee sankhya ke baraabar avadhi ke lie chit value mein yogdaan deta hai. ekatr kee gaee raashi us vyakti ko dee jaatee hai, jise ya to lucky draw (lottery system) ya bolee ke maadhyam se chuna jaata hai. jo vyakti sabse kam bolee lagaata hai usko paisa mil jate hai. vijeta boleedaata dvaara chhodee gaee raashi ko foreman ke commission kee katautee ke baad anya sadasyon ke beech samaan roop se distribute kiya jaata hai jisse divend kehte hai.

NSC ek fixed income investment hai. doosree aur, chit fund ek flexible investment hai. Chit fund kay returns anishchit hai lekin Nsc kee tulna mein adhik hai. NSC mein paanch saal kee lock-in avadhi hotee hai. haalaanki, chit fund mein aisa nahin hota hai. chit fund deposit aur loan ka ek sanyojan hai kyonki aap jama dhan ke lie bolee laga sakte hain.

Final Words

Both the instruments have their own advantages.  NSCs are safe investments with low returns whereas chit funds are high risk investments which can reap better return on your investments than NSCs. If we apply the liquidity criteria, the chit funds are better than NSCs. So, it depends on your needs and your risk appetite to choose between the two options for investing money.