Many common people who are in need money in short processing period joins chits funds. They might want to source fund to construct house or for daughter’s marriage or for business purpose, or to buy vehicles and consumer goods.
Here are some of the thoughtful comparisons to find which is better and which suits you the best. And empower you with the knowledge of Chit which serves in all situations over other financial options.
Chit Vs Loan
Most of the time, people do not go to bank and seek a loan because it has a cumbersome process. Every banks will ask for many documents, which they will not be able to give unless they have a salaried job. There are two types of loan available basically. One is short term and another one is long term. Let’s take a scenario of long term bank loan and a successful chit.
A home loan for Rs.1.35 lakhs for a term of 90 months at an interest rate of 10% will have EMI of Rs.2138. The total repayment will be Rs.1.92 lacs.
Suppose a person joined a chit with sala of Rs.2 lacs for a term of 25 months. He won the bid in the second month at a reduction of 25%. He got about Rs.1.50 lakhs. His total repayment is around Rs. 1.7 lakhs and tax benefit of Rs.20,000 which means that the interest rate is zero. This is unbelievable. This will happen when every bid is won at maximum reduction of 25%.
The maximum total payment to a chit is expected to be 90% of the sala, so for the above mentioned chit, the total payment will be Rs.1.6 lacs which is equal to a home loan at 4.62% interest p.a. This you will not get anywhere in any bank.
Therefore this clearly states for longer period chit will be a low cost borrowing option compared to bank loans.
Chit Vs Fixed Deposit
Saving money is an important aspect of life. Investing money is a desire of many. In India, many people are not yet involved in the organised financial sector. Many people of the lower income bracket opt to invest in chit funds because they do not qualify or have documentation for a bank account. Chit funds are the investment to opt-in. The returns are fixed and guaranteed at the end of the tenure also get good amount month-on-month.
In FD, when the deposit money matures, the lump sum is paid out to the investor. There are options to reinvest the money in an FD or start a fresh recurring deposit. In FD maximum of 8% interest for a tenure of 1 year will be given.
Where as Chit is a savings-cum-loan scheme where the customer pays the fixed amount every month and the investor can earn 12-16%.
Chit Vs Recurring Deposit
Let us consider two persons investing their money for an investment amount of Rs.1,50,000 for a period of 25 months and the installment amount of Rs.6,000 per month. One person invests his money in chit funds and the other invests in a Recurring deposit in a bank.
The person who joined chit fund will pay some amount between Rs.4,500 to Rs.5,800 every month (here, installment depends on the auction), where as the person who is investing in has to pay exactly 6,000 every month without fail.
In Recurring deposit, the person will pay regularly a certain fixed amount and while the person investing in chits will pay less comparatively and can use the balance amount for some other purpose.
The chit fund participants see this as a winwin situation. The bidder gets the money he desperately needs, and the other members get to pay a lower sum than the original amount agreed upon. For him, it means a quick loan that he will repay through monthly contributions till the end of the chit.
Chit Vs Mutual Funds
Mutual funds, pools money from different sources and invest in stocks. You are allocated units of mutual funds from the AMC of your choice. Then you get some returns for the money invested. It is managed by a unknown fund manager with annual expenses of 2.5% per annum.
In Chit, Investors money is pooled and is lend to needy people along with investing at some interest rates and the income earned is shared with everyone. Every chit funds is regulated by government body.
Mutual funds are subjected to market risks, on the other hand Chits are not subject to any market risks. Interests are always fixed.
Chit Vs Shares
What is Shares? If a share is explained in the simplest form, it should be explained as an instrument which allows you to buy ownership of a company. Shares are the small portion of a big company’s value. The value of the share is determined by the fundamental dynamics of demand and supply. As the company grows, the shareholder can earn more and more profit or vice versa.
Everyone interested in investing, but where to invest is the big question. In Chit fund, company takes care of the investors. The only thing you need to know is, how much to be invested. Hence Chit becomes an ideal investment instrument for the investors who are new to investing. Direct investment in shares needs a good ground study and strong knowledge on the market fluctuations of share market.
One can invest and earn a profit by investing in shares only if he/she invests much time and dedication to it. The investment in Chit fund happens in the passive way hence the primary investor needs not to worry much about the investment decisions.
While investing in a Chit fund, you can invest a systematic way for every month. Such systematic plans help you to be disciplined in finance. The investment which you do every month is handled by the Company. In another hand, while investing in shares you need personal attention and prompt trade decision to continue the investment every month.