Today almost every middle class family is aware of chits. Most of them invest in chits thinking that they are a good investment option. In this article, let’s see whether they are really so.

1. Are Chits Really Beneficial?
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2.  Today almost every middle class family is aware of chits. Most
of them invest in chits thinking that they are a good
investment option. In this article, let’s see whether they are
really so.
 A Chit Fund is a scheme wherein a group of people
contribute towards the chit value and every member
participating in the scheme agrees to pay a certain sum for a
certain period. Each subscriber, as determined by a lot or by
an auction, is promised to get a chit – a certain amount and
the others share the dividends.

3. How Chit FundWorks?
Let’s say 30 people contribute Rs.2,000 per month for 30 months (equal to
number of people in the group).That will make a total of Rs.60,000 every
month. Now an auction is held to take this money.The person who bids for
lowest amount wins the auction amount. Suppose of total 3 people who bid
for 50,000/-, 52,000/- and 48,000/- the one who bids the lowest wins. In
this case it is the person who has bid for Rs.48,000.
For every chit fund scheme, “organizer charges” are around 5% (typically)
of the total amount is to be paid. In this case 5% of Rs.60,000, which is
Rs.3,000 is taken by organizer. So, out of total 48,000/-, Rs.3000 will be
deducted and the winner will get only Rs.45,000 and Rs.12,000 is the
profit, which will be shared by the members (all 30 people).Thus, you see
that the main winner is entitled to take a loss because of his need of getting
the money and others benefited by it. Each person actually paid only
Rs.1600, not Rs.2000. (In this case they got 400 back as dividend).

4. Advantages of Chits:
 The rate of borrowing is much cheaper than other non-
banking loans like money lender.You can borrow up-to 70%
of the chit value, just by paying the first term (installment).
 Suitable for unorganized economy group and needy people
who are unsure of their cash flows and for their unexpected
expenditure.
 You can get finance without documents like PAN card, IT
returns, bank statements, etc.

5. Disadvantages of Chits:
 No security in unregistered chit fund companies.There are more
chances of getting duped by these fraud companies.
 Organizer gets benefited more from your savings.
 No guarantee for fixed returns, as these returns are based on auctions.
 In chits, interest earnings are lower than bank FDs.
 You will save less money as the discount reduces the amount of principal
invested will most likely the dividend saved be spend on other useless
expenses.Thus reduces the amount of savings accrued.
 There is very little protection.
 High degree of risk is associated with chits, so relying on chit funds for
saving could be more dangerous.
 Chits cannot make money; it is just a mechanism for liquidity and
emergency funds.

6. The advantages of investing in chits are often over emphasized
when compared to their disadvantages.Therefore, an
investment which is prone to high risk like chit fund should be
considered as an inferior option.
Chit funds mainly run for saving the financial need of its group
members. It is a good option for people who either don’t
report their income or who work in the unorganized sector.

7. Earlier, people used to participate in chits as they don’t have
other forms of finance. Mostly, because they did not have access
to the banking channel or have no paper work to support their
loan request. But these days, people working in organized
market or paying taxes have more forms of finance available
from various banks and financial institutions.Taking personal
loans or using credit cards is more beneficial than investing in
chits.
Above all, they neither provide safety of capital, better yield or
interest nor more accumulation of savings.

8. For more information on personal finance,
Please visit:
http://moneychutney.com