Misuse and default are the dual problems faced by chit funds in India

Misuse and default are the dual problems faced by chit funds in India

Earning from chit funds is always a matter of apprehension. There are very few savings avenues where returns are as uncertain as chit funds. Under normal circumstances the returns from chit funds are higher as compared to banks and other registered bodies. This is the principal reason behind popularity of chit funds in India.

Unlike other time bound funds where earnings are somewhat regular and discernible, the rates in case of chit funds are never fixed. Usually rates are higher than bank interest rates, or rates prevailing for term deposits in registered companies. This is because, for immediate borrowings a member might bid a low rate. This consequently pushes the rate of returns upwards. But, this is not always the case. Biddings take place every month or at regular intervals. It is not necessary that at every bid rates are low. If rates are high then return rates automatically come down and could be same as that offered by commercial banks or other financial institutes or private registered companies.

With earnings uncertain, the decision of saving in chit funds needs to be examined critically. At the same time, it needs to be noted that whether savings in chit fund is at all justifiable.

Should you or should you not

This is a typical question that comes to any person’s mind before investing in chit funds. The problem does not exist with registered companies or state government units. In these instances, both the bodies offer interest regularly. The so called risks of funds forfeiture and irregularity are mostly seen in unregistered chit funds. As the pot money lies with the foreman, the existence of a chit fund depends greatly on his integrity and trustworthiness. Though a foreman is required to meet monetary demand of subscribers when a chit fund fails, this is not put to practice.

Another thing that you must ensure within a chit fund group, is continuity of subscriptions every month, or any other periodical interval as decided by members. Every member must pay a fixed sum every month which forms the booty. In case of failures in contributions, the entire process of lottery gets impaired.

Profitability of chit funds

Profitability of a chit funds lies entirely with promoters’ intentions and foreman’s integrity. Saving in registered bodies is profitable and reduces the risks associated with chit funds. In fact, the easy availability of services has turned subscribers apprehensive. Chit funds become profitable only when it is under the control of honest and reliable promoters, and foreman. Savings in chit funds should always be made based on promoters’ involved and the foreman engaged.

This profitability is best understood among group members of a chit fund ideally located in an Indian village or small town. Here members are closely acquainted and typically belong to same profession. For a known group it is easier to interact with one another and with total confidence. Further, if by chance a member needs the entire booty amount then it might be claimed accordingly.

Earnings from chit funds are thus dependent on factors already explained.