Chit funds, also referred to as Chitty or Kuri, is one of the popular types of savings schemes in India with a long-standing history since ancient times. Nowadays, potential investors may have questions regarding the safety of having to invest in a chit fund. Chit funds have evolved with time to become a secure transaction for a financial save option, emerging as a preferable saving scheme accessible to all.
To invest in Chit funds and to ensure a secure transaction, it is advisable to approach a renowned and registered Chit fund provider like Aranmula Chits
About Chit Fund
A Chit Fund, Kuri or Chitty is a form of rotating savings and credit system and is a financial product which is recognized in India.
Chit funds are a financial save service wherein a number of individuals subscribe to deposit an amount of money periodically and await their turn to receive a lump sum fund. Picking the person to take home the prize fund is done via auction or a lucky draw.
How Chit Funds Work?
Let’s better illustrate the functioning of a chit fund with an example
A Chit fund has 12 members willing to deposit an amount of Rs 5000 on a monthly basis. This creates a chit amount of Rs 60,000 per month, which is collected by the chit company.
Who receives the fund could be determined in one of two ways:
- Using a lucky draw mechanism where lots are picked and the person whose name is drawn receives the amount. Over a period of 12 months, each one of the members will receive the amount once.
- Using an auction mechanism where the members of the Chit fund can express their interest to take home the chit amount to meet a specific need. For example, Babu requests for 70% of the Rs 60,000 chit amount (Rs 42,000) to meet urgent medical expenses. From what’s left, a fixed amount will be charged as commission from the chit company’s end and the remaining amount will be equally redistributed amongst the 11 other members. The process goes on every month until every member receives the prize fund once.
Benefits of Chit Funds
The beauty of the functioning of a financial save service like the Chit fund are its unique benefits in comparison to conventional banks and moneylenders.
- Flexibility to save as well as borrow
- Collateral-free borrowing with minimal paperwork
- Quick access to money
- Can opt to win the prize fund from the first round without completing all payment instalments
- Great for emergency cash without having to reveal why the pot was requested
- Possibility of receiving a dividend higher than other deposit options
- Low-interest rates for borrowing
This innovative saving scheme allows a person to assume the role of both the saver and a borrower, based on their need, and takes place over a pre-determined timeline with an amount fixed in advance.