What are chit funds and how is it a better investment option than SIP?

SIP vs Chit Funds

All of us want to save money. We all realize the value of savings and how the smallest savings can help us achieve our life goals. An old concept of savings and borrowings that is frequently used by people especially in villages is Chit fund. Chit funds are a popular option for people who want to save money while also being able to borrow money when required.

How do Chit Funds work?

Chit fund is basically an investment option as well as a borrowing tool. In this type of savings, individuals come together and agree to pool-in a specific amount of money each month for a set period of time. The organizer then holds an auction wherein all the members participate and those who wish to take the pooled in money bid for it. Bidding means that the individual agrees to sacrifice some part of the money in order to claim the pot. The person who agrees to take home the lowest amount, wins the lot. A commission is paid to the organizer. The dividend or the amount foregone by the winner is then distributed among the rest of the members. The dividend is not received in cash but is deducted from the monthly installments that the member has to pay.
Invest in Chit Fund with The Money Club and make your saving, investing and borrowing money easier. 

What is SIP?

SIP (Systematic Investment Plan), is an investment option in mutual funds in which an individual chooses a mutual fund scheme and invests a particular amount at fixed intervals. There are two ways in which you can make this investment. First, you can make a one-time payment, known as lump sum investment. Or you can opt to invest through a Systematic Investment Plan or SIP in which you can invest in a regular and systematic manner. The money is used to invest in various financial instruments like mutual funds, equities, bonds, etc.

SIP Vs Chit Fund - Which one is better?

Both SIPs and chit funds have their members pool their money. In the case of SIP, the money is invested in stocks/bonds. On the other hand, Chit funds lend the collected money among its members and the interest is equally divided among them.

Here is a little comparison between SIPs and chit funds-

Aspect of Borrowing
SIP serves as a great investment option but it, however, does not make borrowing easier. When it comes to chit funds, you can bid and borrow the entire chit value amount at an extraordinarily cheap rate of interest in the first month itself. A registered chit fund platform, such as The Money Club, has the upper hand in this situation.
1. Performance of the Market
Whenever you invest in mutual funds through SIPs or even otherwise you are exposed to market risks and unpredictability of the market. On the other hand, the value of the chit fund you sign up for, does not change its value until the end of the chit period, whether it is 10 months or 20 months.
Value of Time 
Only after a significant period of time does the actual benefit of SIPs become apparent. As a result, if you want to maximize the interest you get from mutual funds through SIPs, you need to invest for a long term. But through a registered chit fund platform like The Money Club, you have the option to save for as long as you want and at the same time you can also fund from it!
Conclusion
Whether it’s a chit fund or a systematic investment plan (SIP), both encourage saving at regular and timely intervals, which is wonderful for inculcating the habit of saving. While chit funds are an excellent financial tool for both borrowing and saving at the same time, SIP is just a method of investing in mutual funds.
However there are a few advantages of investing in chit funds:

  1. People who need money can get it easily when they need it the most whether it is for any unforeseen or planned expenditure.
  2. The rate of interest of borrowing from chit funds is low.
  3. Borrowed money can be repaid in monthly installments over a period of time.
  4. People from lower income groups who do not have documentation for bank accounts can also join.

Bottom line is that both mutual funds and chit funds can yield profitable results if invested wisely. Depending on individual preferences, one can invest in a chit fund or a mutual fund, or both. What matters is what an individual wishes to get out of investing the money. It depends on the financial requirements, investment goals, and investment capability of the individual. Most importantly one needs to be extremely careful regarding each before making an investment.