About Chit Fund

What is a Chit Fund and how does it work?

A Chit Fund is an indigenous financial institution involving regular periodical subscriptions by a group of persons. It functions through a contract between the chit fund company and the subscribers. The subscribers agree to pay a certain sum by periodic installments for a definite period. Each subscriber shall in his/her turn, as determined by lot or by auction or in such other agreed manner be entitled to the chit amount. There will be as many periodical installments as there are members in the group. There is mutuality of interest among subscribers and hence the chit fund constitutes a convenient instrument combining savings and borrowing.

To constitute various chit fund, different groups consisting of members from 15 to 50 are being formed. These members agree to pay monthly subscriptions ranging from Rs.500 to Rs.1,00,000 and the chit amounts range between Rs.10000 to Rs.50,00,000. The amount collected from all the subscribers in a group every month is given to a needy person in that group. The person opting to draw the chit amount forgoes a certain amount from the chit amount. The discount foregone represents the cost of borrowing for the person opting to draw the chit amount.

The Chit Fund Company takes a fixed amount not exceeding 7% of the chit amount towards its remuneration / fee for conducting the chits. This 7% amount is taken from the discount foregone by the prized subscriber and the balance discount amount is divided equally among all the subscribers in the group. This share of discount is passed on to the members by way of deduction from the subscription payable for the next month.

Chit fund is thus a Systematic Savings Plan with an option to get the chit amount at the time of need. Chit fund is an unique financial arrangement that has in it all the salient features of a Loan Company, MFI, Mutual Fund and Co-operative bank.

It may be noted that

The entire subscription amount collected in every installment from the subscribers in a group goes to one needy person in the group.

The Chit Fund company gets a fixed amount not exceeding 7% of the chit amount towards its remuneration / fee, out of which all the expenses of the company are met.

The subscriber who is opting to draw the money in a particular installment decides the amount of discount to be foregone by him. In other words, the borrower decides the cost of money to be borrowed by him. Though the Act permits a maximum discount of 40%, most of the companies restrict the maximum discount to 30% so that the cost of borrowing to the subscriber is kept at reasonable levels.

The benefit accruing to the members in the form of discount forgone by the prized subscribers is distributed among all the members every month.

As the entire subscription amount collected in every installment is given away to a needy member in the group, no money is left with the chit fund company except the remuneration / fee to which the Chit fund company is entitled.