Precautions needed while investing in chit funds in India

Precautions needed while investing in chit funds in India

Investing in chit funds in India appears a lucrative proposition considering its flexibility of operations and rate of return. In many instances they appear irresistibly tempting. In fact there have been several instances of chit funds winding up after duping its members. This is especially noticeable for unregistered companies and chit funds that operate in a micro level. Investing in chit funds is always a risky option and every possible safeguard should be taken.

Check for registration

It is always safer to save in a chit fund that is registered as per Indian Chit Funds Act of 1982. In India, registration certificate is provided by the Registrar of Chit Funds of the concerned state. Associations in the unorganized or unregistered sector do not own such a certificate. State government chit funds and those controlled by PSUs (public sector undertakings) are registered and are safe places to invest. For private registered chit funds this certificate should be prominently displayed. Or else it must be produced whenever demanded by investors.

Check promoters’ details

This is particularly relevant for chit funds in the private sector. Promoters must be financially sound or else your entire saving could become risky. Promoters are required to keep a collateral security for entire amount invested in chit funds. This security amount might be liquidated in case the company fails to pay its subscribers. Investing in a chit fund backed by financially sound promoters is reasonably safe.

Ability to contribute

An essential condition for the existence of a chit fund is members’ ability to contribute regularly for its full term. A necessary condition of a chit fund is contribution of a fixed sum at regular intervals, normally monthly. The success of a chit fund depends on members’ ability to make this contribution without fail. As chit funds are time bound these contributions must remain continuous till term period ends.

Verification for court cases

Before investing in a chit fund it is advisable to check for pending court cases against the company from office of registrar. Pending court cases or complaints should be an indication about the integrity of a chit fund company. A company without any complaints or court orders pending against it could be treated as a safe place for investing.

Foreman’s commission

Foreman’s commission is a vital parameter for chit funds. Always compare this commission among different chit fund companies and invest in the one which has the lowest. This commission payable to foreman at every auction is deducted from the total booty.

Subscribers’ rights

Together with the checks on a chit fund company, it is essential to check the rights of subscribers or members. Every subscriber has the right to get proper receipt of contributions made. He or she also holds the right to receive a copy of chit agreement duly signed by company authorities. Every member holds the right to attend auctions and participate in biddings. In case of dispute members enjoy the right to seek arbitration or any other legal processes of judgement as mentioned in chit agreement. Subscribers also enjoy the right to inspect records of a chit company as and when required.