A chit fund is an arrangement where a set number of people come together to contribute a fixed amount at intervals. This forms a pool or a kitty. During the process of collection, any member can draw a sum through ways like a lucky draw, an auction or a member can even fix a payout date based on a known expenditure.
Chit funds are popular among the artisans and shopkeepers running small businesses. It's also favoured among other individuals as well, who would like to receive a big amount for an expensive event like a marriage.
How does a chit fund work?
The number of members in the group equals the number of times a contribution is made to ensure everyone gets a fair turn. Let’s take an example, if a group of say 10 people pay Rs.2,000 each a month, the total monthly pool becomes Rs.20,000. Now, in case of an auction, if three members need money at the same time, one is chosen through a process of bidding and the lowest bidder gets the deal. So if three people put in their bids (the bid amount is usually slightly lower than the total pool amount) and the lowest bid is Rs.15,000, then the bidder will get Rs.15000 immediately; the remaining amount gets divided among the remaining members at the end of the tenor.
Chit funds are regulated?
Chit Funds are mostly regulated and some are also run by government entities. In Kerala, Chit Funds are regulated by the Kerala Chitties Act 1975, similarly, in Andhra Pradesh, Maharashtra, New Delhi etc.
There are many organised companies incorporated to do this as a business and these are governed by state or central laws. There is a central Chit Funds Act of 1982, apart from a number of state chit fund Acts. The rules are stringent to protect the member and operations are monitored closely.
Is it safe to invest in a chit fund?
Even though there are laws to regulate chit funds , the ‘kitties’ and ‘committees’ exist where there is no regulations. These come under the unorganised chit fund sectors. In the past their have been cases of people investing and losing money, because few organisers have duped investors. However, many have also benefited from chit funds. There are many reputed chit fund companies who bring some safety into the game.
The importance lies in the fact that people can make small investments can gain from this, their bids can allow them to win a lump sum that can help them in their children’s marriage or in buying a small plot. There is assurance to get an amount and not fall prey to lenders. There are loop holes in this system as well, however it has worked in favour for many families.