Complete Guide About Chit Funds in India

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Complete Guide About Chit Funds in India

Chit funds in India are regulated under the Chit Funds Act of 1982. This Act is administered by the Ministry of Finance but the State Governments are responsible for its implementation in their respective states. 

This article will serve as a complete guide about Chit Funds in India, including chit funds’ definition, different types of chit funds and the benefits which chit funds have.

What are Chit Funds?

Chit funds means financial instruments that are used in both borrowing and saving aspects. Simply put, chit funds are basically a financial arrangement in which a few individuals gather and pool a fixed amount of money at regular intervals. It is done with an understanding or agreement that a single member belonging to the group will receive the total amount of money collected at each interval. This process carries on until every member has received their pooled money’s share.

Other names of chit funds are kitty, chit and kuri. Typically, chit funds are conducted by chit-fund companies that are responsible for ensuring that this process is carried out smoothly. Chit funds are included in the definition of Non-Banking Financial Companies. However, they are exempt from obtaining NBFC registration by RBI.

How Do Chit Funds in India Work?

Knowing the meaning of the chit fund is the first step towards knowing how it works. In a chit-fund scheme, along with an equal number of participants, you must pool a certain amount of money for a predetermined amount of time. Following the collection of funds through an auction or lottery, a recipient is selected and awarded the funds.

With chit funds, the operator receives a predetermined percentage of the money pooled as a commission charge from the winning bidder each interval. This is done through a reverse auction mechanism. Dividends are given to the other members from the residual amount, which is after the commission and other costs are subtracted.

The winning bidder must continue making contributions to the fund even after obtaining their share. Monthly payments from all members extend the length of the chit fund cycle, which is determined by the total number of investors. At each interval’s end, an open auction takes place where participants can place bids on the money that has been pooled. The winning bidder is declared the lowest bidder and is entitled to the pooled funds. 

What are the Different Types of Chit Funds available in India?

In total, there are 5 different types of chit funds in India. They are special purpose chit funds, organized chit funds, online chit funds, registered chit funds and unregistered chit funds. Let’s discuss all these different types of chit funds in brief.

Special Purpose Chit Funds

As you can already imagine from its name, special purpose chit funds are used for a particular purpose. Suppose you, along with others, want to pool in money to save for Diwali or any other occasion and the fund’s end date is a week before the festival. Such a chit fund is known as special purpose chit funds.

These chit funds are designed to end not long before the special purpose or occasion’s date and reduce the financial burden that one would feel during the festive season.

Organized Chit Funds 

In an organized chit funds scheme, the members need to have meetings on a weekly or monthly basis. Furthermore, small pieces of papers containing names of subscribers are placed in a box. Thereafter, the group leader randomly draws a slip from that box during every meeting and the full pooled fund is received by the person with the name on the slip. Once the winner’s name is withdrawn, they are no longer to be chosen at subsequent meetings. However, the winner is required to continue attending the meetings and give their part of the money.

Online Chit Funds 

In a world driven by technology, even the system of chit funds has gone digital. As you can imagine, the auction for online chit funds is held digitally and the payment/contribution by each participant is made through online payment modes.

Registered Chit Funds 

Chit funds can be registered with the Registrar of Societies, Chits and Firms. They are regulated by the RBI according to the provisions of the Chit Fund Act 1982. 

Unregistered Chit Funds 

Chit funds do not always necessarily need to be registered. In case of an unregistered chit fund, colleagues, friends or family members initiate it. It can be done as a means of saving funds.

What Benefits do Chit Funds have?

Before you decide to invest your money in a chit fund, you must know the benefits which chit funds have. We have listed the main benefits of chit funds funds for you below:

• Availability of Funds: Accessing funds that might not be available otherwise can be made possible by a chit fund scheme. They can aid households in payment for debts and other financial needs among other things. 
• Doesn’t Require Collateral or Security: If you want to participate in a chit fund program, you do not require any collateral. No assets or other collaterals are required to be pledged for this particular scheme.
• Allows Savings and Credit: Chit funds are basically a cross between savings and credit programs. Members can save their money and also have credit available with them when required.
• Offers Potential Returns: The members can receive returns on the amount they’ve donated by investing in chit funds. The amount of return is determined on the bid amount and the total number of members which make up the chit fund.
• Inculcates Financial Discipline: Chit funds are a great way of introducing financial discipline in your life as it helps to promote financial stability. It encourages individuals to save a fixed sum of money on a regular basis.

Conclusion

Chit funds are a popular financial arrangement practiced in India, Bangladesh, Pakistan, Sri Lanka among other Asian countries. Chit funds not only serve the purpose of savings but are also a source of borrowing capital in times of financial emergency. 

Many people choose to initiate chit funds between their friends, family members or colleagues. However, various financial institutions organize chit fund schemes. For setting up a chit fund company, company registration is the first mandatory step. Although chit funds companies are NBFCs, they are not required to obtain NBFC registration. For more information, you can check the official website of RBI.

Disclaimer: This blog is for educational purposes only. Before investing money in any scheme, one must verify the scheme’s genuineness and consider all the pros and cons. Additionally, seeking professional advice is also recommended.

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