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Chit fund is a form of rotating savings scheme which provides an easier access to credit for the un-organized sector, since the latter has no access to consumer loans since they are yet to be touched by formal banking. Through Chit Fund, an individual can save money and borrow money at the same time. . It provides a good return on investment and also acts as a dependable source of finance in times of emergencies.
Chit fund may be provided formally by microfinance organisations, financial institutions, or be created informally among friends, relatives, or neighbours. This process of microfinance has existed in India since ancient times and is still practiced domestically as well as in Pakistan, Bangladesh, Sri Lanka, China, Central Africa and other Asian countries.
Although Chit fund is an ancient Indian method of microfinance, it was observed in the late 18th century by William Logan, erstwhile Collector of the Malabar district of the Madras Presidency. It became a popular investment especially in Kerala during the early 19th Century.
Lore has it that in the 19th century, Raja Rama Varma, ruler of the Cochin State, extended a loan to a Syrian Christian trader. The ruler kept a portion of the money for administration expenses and later drew it on the principle of equity. Later, in order to deal with the growing number of loan seekers, he ordered a cast of lots and distributed the total amount among those who drew the lot on the principle of equity. Eventually, the practice spread to other parts of the country including neighbouring countries as well.
In the present day and age, Chit fund serves as a great source to save money, especially for salaried workers, self-employed people, businessmen, and low income groups. Besides earning dividend, all investors of the pool money have the opportunity to take a bulk amount loan. However, it’s worth noting that despite its simplicity, there are many who still don’t understand process in its entirety and this article explains exactly how Chit Fund works
A typical chit fund involves a group of people who regularly contribute a set amount to the chit value for a period of time that is equal to the number investors. The people who invest the money are known as subscribers and amount collected from the members is called pot or chit value. The person who manages the chit fund is called a foreman who pockets a 5% commission during every auction. Let’s simply that with an example.
Let’s assume that there 20 subscribers who have agreed to subscribe an amount of Rs 5000 for a period of 20 months. Thus every months a total of Rs 1 lakh is collected from all the members (5000 x 20 = 1,00,000).
Once the total amount is collected it will be placed on auction for the subscribers. During the auction, the individual who bids the lowest will win and get the quoted amount.
For example, three individuals A, B and C bid Rs 80,000, Rs 75,000 and Rs 65,000 respectively. In this case, Mr. C has put forth the lowest bid and hence will be awarded with the sum of Rs 65,000.
Meanwhile, the foreman who has managed the chit fund will charge his commission of 5% which amounts to Rs 5,000. (5% of 1lakh).
Now, the remaining amount post the deduction of Mr. C and the Foreman’s commission is Rs 30,000. This amount will be divided among the remaining subscribers as dividend and will amount to Rs 1579 per head (30k divided by 19).
It must be noted that this process is followed month after month for the period of 20 months and every subscriber can bid only once during the entire period of the Chit fund’s existence.
Thus if a subscriber were to place and win a bid on the very first month, he will not be able to place any other bid again during the 20 months period of the Chit fund. He however, has to pay his monthly installment of Rs 5000 and will receive his share of dividend every month when some other subscriber bids and wins the pot.
This is how Chit fund function and every member or subscriber of the chit value will sooner or later get an opportunity to win the pot while also enjoying the dividend during the other auctions.
There are around 15k chit fund groups in India and their variety can be classified into three types:
State-run chit funds such as Kerala State Financial Enterprises and Mysore Sales International Ltd, as well as PSU-run chit funds
Registered Chit funds which are run by large corporations, and
Unregistered Chit funds, which are run on the basis of friendship among members.
As an investor one will find numerous good chit fund companies in Indian but it is vital that one invest in the best chit fund company in India.
Established on June 17, 2009, four people got together in Mangalore and started a chit business with a small amount of capital. Driven by the enthusiasm and commitment of its team members since then, Navachethana Chits has experienced steady growth and made a name for itself in the field of chit funds and finance. One might even consider it to be the best chit fund company among others.
With 70 crores turnover and more than 6,500 subscribers, we have 40% recurring clients and have helped investors across Karnataka to invest in our high-yielding chit program. We have 7 branches across Karnataka state and are still expanding in major centers.
Along with chit funds, we also provide microfinance such as emergency quick gold loans, loan against LIC policy, and business loans to our existing chit fund clients within 1-2 days, ranging from 50,000 to 10 lakhs with very easy documentation.
Our first priority is to safeguard our client’s money, and therefore, we are extra careful in ensuring the security of our client’s investments. For more information, you can visit www.navachethana.com
