Chit funds are a popular means of investment for lower and middle income families in our country. In fact, it is viewed as not just as an investment product but also as a way to get cash during emergencies. There are thousands of chit fund companies operating in India. But, are they reliable? How good is investment in chit funds compared to recurring deposits, fixed deposits, mutual funds, etc? Here are 10 interesting facts about chit funds which you always wanted to learn:
(Also see: What is a chit fund and how does it work?)
1) Chit fund companies need to register themselves under chit fund act, 1982 (or similar state acts). As per this act, a chit fund company is one that manages, conducts or supervises a chit scheme. Everyone who wants to invest in a chit has to pool in certain amount of money and can participate in auctions held regularly.
2) Every company which is carrying on the chit fund business must have the words ‘Chit’, ‘Chitty’ or ‘Kuri’ in its name.
3) There are basically 3 types of chit funds in India – Govt run, Private and Un-registered. Kerala state financial enterprises (KSFE) is an example of govt. run chit fund. Margadarsi, Shriram chits, Kapil chits are examples of private run chits. Unregistered chits are all those run by friends, neigbours or anyone not registered under the chit fund acts. In our country, about 5400 chit fund companies are registered under the chit fund acts.
4) Chit fund companies can only operate as per the process said above. They cannot indulge in trading or other such activities such as real estate investments, deposit mobilization, etc.
5) Chit fund is different from a ponzi scheme, MLM (multi level marketing) or any dubious schemes. Hence, a fraud such as Saradha should not be treated as a chit fund scam.
6) For managing the chit, companies can take maximum of about 5% of the bid or auction value as commission. The rest of the amount is called dividend and is distributed equally among the members.
7) Dividends received from chit fund companies are completely tax free in the hands of investors. However, they need to declare this amount while filing their tax returns.
8) Maximum bid value of a chit varies with the provider. It is usually in the range of 35-45%. So, if a chit value is Rs. 1,00,000, an investor cannot bid for an amount more than Rs. 35,000 – 45,000 when he participates in the auction.
9) Returns from registered chit funds are in the range of 7-10% p.a. if held till maturity. Higher the commission taken by the company, lesser is the return from chit funds. If they are treated as loans, they could be cost efficient when compared to personal loans or credit cards.
10) Chit funds offer liquidity. Once the bid is finished, you are likely to receive the amount in 5-10 working days. A loan usually takes at least 15-20 days to get sanctioned and then disbursed.
(Also see: Different investment plans in India)
These are some points about how chit funds operate and how they can be used to our benefit. However, do remember that chit funds come higher in the risk-return spectrum. There are multiple financial products in the market and you should try to diversify your investments as per your goals.