Investments in Chits/Chitty
A chit fund is a kind of savings practiced in India. A Collection of members called a chit group contribute the money and they bid in auction and the awarded money which equals to chit amount minus the commission deducted by Chit Fund Company. However I felt this is not that best investment among the options available.
How does it works?
Let us take an example of a chit scheme of 25 chit members contributing Rs. 1000 each per month for a 25 month period.
Total amount would be Rs. 25,000. In the chit auction meeting, chit bidders can bid to a maximum of Rs.25,000. The successful bidder is one who gives the highest bid amount, not exceeding the maximum limit specified above of Rs.25,000, within the specified auction time. Suppose the bidder bids for Rs 20,000, he would get this amount and the rest of the amount i.e. Rs. 5,000 is distributed among all 25 members. This discount of Rs. 200 (Rs.5000/25) is returned back to each member. So the month’s contribution for each member would be Rs.1,000 minus Rs. 200 = Rs.800.
This process is followed for all months up the end of the scheme, giving each member a chance of receiving the money. If in a particular month there are more than one person willing to take the chit amount, a lots is taken to select the person who would get the sum.
5 Facts to know before you invest in Chits/Chitty
1) Compulsory savings: Since the chit subscriber needs to pay the amount month on month for chit fund, this would be a good habit of compulsory regular savings
2) Emergency fund: This can treated as one of the emergency fund where a chit subscriber can bid and get the money as and when he requires within a month.
3) Is this a loan? If you observe in case the chit subscriber is bidding the chit amount in earlier months of chit period, amount received in lump sum Vs the amount paid month on month, the chit subscriber would be paying more than what he is getting. Hence this needs to be treated like a personal loan or any other loan taken from any financial institution as the amount paid is more than the amount received.
4) Is this an investment option? In case of an investment, the amount invested would get returns. In chit, if the chit subscriber takes the amount in earlier period of chit amount, the amount received is lower than what is paid month on month, hence in such cases, chit should not be treated as one of the investment option.
5) Trusting chit fund companies: There are many chit fund companies which are not registered under chit fund companies. One should exercise caution investing in such unregistered chit fund companies, else they run away with the subscribers money.
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