Why Chit Funds?
- 5 Times better than FD’s
- Best and most trusted investment plan to meet your short term needs.
- In simple terms, it could be said as interest free advance* which needs to be paid back as monthly installments, depending on monthly auctions.
- Effective financial planning helps you to mitigate from huge interests levied on personal loans, short term loans etc if borrowed.
- When the capital outflow is large, chits offer flexibility of breaking this large requirement into fragments. Membership of a small chit may be taken after convenient time gaps so that installment outflows are easily managed.
- Ease of excessive paper work as compare to loans.
- Chit Funds are designed to meet the customer requirements can be dynamic per client needs.
- Ease from money lock in period for any specified period.
- To ensure safety of investments the company has insured the investor’s money
History:
A collection of members called a chit group makes their contribution in the form of money to collect a chit amount and they bid in an auction to be awarded with the prized money which is equal to the chit amount minus the discount and the foreman’s commission.
with the Deputy Registrar of Chits and a registered number is obtained. The Foreman promotes and conducts the Chits as per the regulations of the Chit Fund Act and Rules.
How it works: Example
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by many private firms. The basic necessity of conducting a ‘Chitty’ is a group of needy people called subscribers. The foreman – the company or person conducting the chitty – brings these people together and conducts the chitty. The foreman is also the person responsible for collecting the money from subscribers, presiding over the auctions and keeping records of subscribers. He is compensated a fixed amount (generally 5% of gross chitty amount) monthly for his efforts; other than that the foreman does not have any specific privileges, he is just a subscriber of the chitty.
The general pattern of the chitty can be readily noticed by a simple formula:
Monthly Premium × Duration in Months = Gross Amount
E.g.: 1000 * 50 = 50,000/- Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.
The chitty starts on an announced date, every subscriber come together for the auction/lot. As per Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is 35,000 in the above example. When there are more than one person willing to take this minimum sum, lot are conducted and the ‘Lucky subscriber’ get the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding lowest sum get bid amount.
In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 – 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber gets a chance of receiving some money.