Chit Fund Company Meaning
A chit fund is a prominent type of savings scheme operated in India. A chit fund company ensures to manage, conduct, or supervise chit funds as defined in the Chit Fund Act 1932. As per section 2 (b) of the chit fund act 1932, the meaning of chit fund states that it is a transaction (whether called a chit, chit fund, kuree, chity, or by any other name) under which a specified number of persons enters into the agreement. Every person is obliged to subscribe a certain sum of money (or a certain quantity of grain) over a definite period through periodical instalment and that each subscriber is entitled to price amount, as determined by a lot, or auction, or tender or in any other manner as specified in the chit agreement.
Such chit fund schemes may be managed by organised financial institutions or may be unorganised schemes between friends and relatives. Read on to know more about What is Chit Fund & How does it work?
What is Chit Fund, and How Does It Work?
A chit fund is a mutually beneficial saving scheme practised in India. It operated in a different way, and this may lead to many fraudulent strategies practised by private firms. A basic requirement of conducting a chit fund is a group of needy people known as subscribers. In the chit fund process, a group of people contributes towards the chit value, and one member of the group receives a prize amount, and the dividends are distributed to all other members. For example, if we are considering a chit value of Rs. 1,00,000 with 50 members in the group, and each member has to contribute Rs.2000 whereby (502000) Rs.1,00,000 is collected.
The auction is conducted in which members participate, and the person who discounts the maximum is announced as a prized subscriber. If there is more than one person eligible for the maximum discount, then the successful bidder will be determined by the lottery. A token with the numbers written on it distributed to the members is put into the box, and one token is drawn by any member presenting the auction. Hence, the member whose number is mentioned in the token will be announced as a successful bidder.
Nearly 45% is the maximum bid that is permitted, which implies a person writes off Rs.45,000, and the balance amount 55,000 is paid to the subscriber who one the prize. Out of a 45% discount, 5% of the amount goes to the chit fund company, which conducts chit fund, and the balance of the discounted amount is distributed among all the members of the group. This means 40% is allocated among all the subscribers or members from which members have to contribute Rs 1200 (2000-800) in the succeeding month, and Rs.800 /- is declared as a dividend for that month.
If there are no maximum bidders, then the members need to bid in the open auction that is conducted in five minutes for each group, and the person who bids the highest is announced as a successful bidder. For example, if the successful bidder was announced at 40% in the tenth month, then all the members of a group will get a dividend of Rs. 700, i.e. (35000/7) and each member is entitled to pay Rs.1300/- towards instalment.
Therefore, members have to pay the instalment amount less than the dividend; the dividend earned will be considered the interest on the instalment payments made by the member. Successful bidders are asked to give assurance depending upon the future liability of the chit. Only non-prized subscribers whose payments are on time can participate in the auctions.
Each month a successful bidder is eligible to receive the prize amount on the submission of required security. The chip fund company distributes the prize amount within 72 hours, provided that assurances are fine and documents are verified and approved. The prized subscribers are entitled to pay the amount till the termination of chit.
The members or subscribers who are not willing to borrow funds contributed to the chit. After forty months, if no bidders are left for auction, Lot announces one of the remaining members as the successful bidder, and the prize amount is generally paid to them. They get the option either to submit assurance or prefer future liability upon which balance amount is paid from the prize amount. The dividends collected for the 50 months are the returns on investment from which monthly deposits are made to their account.
Define Chit Fund
The definition of chit fund states that “ Chit Fund is a process of raising a lump sum from the subscriptions of its members (subscribers) to be given away to one of its members by following a systematic procedure or allocation method repeatedly over time”.
What are the Features of Chit Fund?
There is a predetermined value and duration.
Chi funds combine both credit and saving in a single scheme.
Chit Fund fulfils the financial needs of moderate-earning households.
Chit funds function like microfinance institutions.
The chit fund interest amount is lower than other moneylenders.
Types of Chit Fund
State-Run Chit Fund- This category of chit funds is operated by the government. In this type of chit fund, the losses are minimal, and business processes are transparent. Kerala State Financial Enterprises and Mysore Sale International Limited are examples of State-Run Chit Fund.
Registered Chit Funds -The Registered chit funds are a type of fund that is registered with the Registrar of Firms Societies And Chits. These chit funds are regulated by the state government under the direction of the Reserve Bank of India, assisted by the Chit Fund Act 1982. Registered chit funds are the safest investment as they are regulated under a legal framework, and risk is completely covered.
Unregistered Chit Funds: Unregistered chit funds are a type of chit funds that is arranged by a group of friends, relatives, colleagues, or peer groups. This type of chit fund is risky as they are not legal. Formation and management of these types of chit funds are completely based on the trust of the person. Surprisingly, the number of unregistered chit funds is high in comparison to registered chit funds, as in this type of chit fund, there are no rules to follow.
Why Opt Chit Fund?
Chit fund is a flexible product because it works both as an investment and borrowing tool.
It is easy to join a chit fund scheme as you have an opportunity to borrow a lump sum amount without any formal collateral.
You don't need to disclose the purpose of borrowing a lump sum amount.
You can easily access the money to meet any financial emergencies.
The subscriber receives a dividend that is generally higher than the interest accrued on the money saved in various deposit schemes. The dividend income earned through chit funds is neither taxable nor tax-deductible.
The subscriber determines the interest rate mutually, and it varies from auction to auction. Generally, the interest rate of borrowing funds is comparatively lower than other forms of borrowing.
Chit fund is suitable for unorganized sectors and poverty-stricken people who are not sure of their cash flow and unexpected expenditure.
What To Consider While Investing Chit Fund Company?
Ensure to invest your amount in a registered chit fund company. Make sure to check the certificate of registration and the registration number of the chit fund company issued by the Registrar of Chits.
Find out the promoters of the chit fund company and also ascertain whether promoters are financially stable.
Find out how much commission the foreman takes. Choose the chit fund company with the lowest commission.
Find out from the office of the registrar of chit funds whether there are any complaints or pending court cases against the chit fund company.
Ensure that you are financially prepared to contribute throughout the chit fund cycle.
Is Chit Fund Investment Safe?
The following point proved that investing in chit funds is safe.
The owner of the chit fund ensures to submit 100% of the chit amount to the registrar.
The deposit amount can be withdrawn only once the chit fund ends.
The Chit Fund Act 1982 governs chit fund companies.
The Government of India appoints the Chit registrar under the register section 61 of the Chit Fund Act 1982.
The chit fund company should be registered.
Every chit is drawn by giving prior notice to the government.
FAQs on Chit Fund
1. When Do Returns From Chit Funds Receive?
Ans: Returns from chit funds are received only after the chit cycle gets over and cannot be estimated beforehand.
2. Do Chit Fund Companies Invest the Money Collected by Subscribers?
Ans: The chit fund company does not invest any amount collected by subscribers anywhere as all the amount that is collected is paid to prize subscribers, and no money is left to the company except the commission they are entitled towards their remuneration.
3. Who is a Prized and Non-Prized Subscriber?
Ans: A subscriber who has taken his chit or to whom the price amount is paid is known as a prized subscriber, whereas the subscriber who has not taken his chit or to whom the price amount has not been paid is known as a non-prized subscriber.
4. What Does Lot Mean in Chit Funds?
Ans: There may be the case where more than one non-prize subscriber of the auction group desires to take the chi amount on a given month; token numbers are assigned to all subscribers. Tokens are drawn from the lot, and the holder of the token number who is drawn out is considered a prized subscriber. This process of selecting one prized subscriber by drawing a lottery is termed a lot.
5. What is the Responsibility of a Chit Fund Company?
Ans: Chit fund companies are responsible:
To gather members in order to form a minimum size group for the chit.
Ensure to collect the amount periodically accepted by all the members in the group.
Fulfilling the payment responsibilities of prize money for the subscriber that is chosen each month.
Ensure to collect the appropriate amount from the prized subscribers every month.
6. What is the Typical Duration for the Chit Funds?
The normal duration for which the chit funds are formed is for a period of 25 months, 40 months, or 50 months.
