HOW CHIT FUND WORKS?
How Chit works?
A chit fund is a type of rotation in savings and credit association system. Chit funds play an important role in the financial development of people, by providing easier access to credit.
A chit fund comprises a group of members, called subscribers. An organizer, a company, brings the group together and administers the activities of the group.
The fund starts at an announced date and continues for the number of months equal to the number of subscribers. Each month, the subscribers put in their monthly installments into the pot. Then, an open auction is conducted to determine the lowest sum a subscriber is willing to take that month.
For example, if the monthly installment is ₹12,500 and there are 40 members, the pot in particular month will contain ₹5,00,000. If the auction determines a winner who is willing to accept ₹4,00,000 for that month where auction starts from 5%, the surplus ₹100,000 is distributed to 40 members, after deducting foremen commission of 5%. The subscriber who won the auction will be able to access ₹400,000/- and the 75,000/- will be distributed among 40 members to reduce the monthly installment.
The process repeats, distributing the auction amount to one member each month. All of the other subscribers, including the ones who took their share in the previous month, continue paying the monthly installments.
Special Purpose Funds
Some chit funds are conducted as a savings scheme for a specific purpose. An example is the Deepavali sweets fund, which has a specific end date about a week before Deepavali. Nowadays, such special purpose chits are conducted by jewelry shops, kitchenware shops, etc. to promote their products.