Are Chit Fund Investments relevant for the Millennial Generation?

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In the earlier blog, we highlighted some of the solutions that chit funds provide to people interested in engaging in an easy mode of savings as well as borrowings.

But the question that many often ask is how safe it is to park your money in a privately-owned chit fund?
 
True, this is a question that is worth asking given that a potential customer would put his or her hard-earned money at the hands of someone whom they hardly know. Despite chit funds being active in India for decades now, some incidents of fraud have made a section of potential customers of the financial instrument weary and even skeptical.
 
Therefore, it is important that those who are interested in making investments in chit funds or even those who are not – including young salaried people and professionals, should get some assurance about the stability and viability of chit funds in Indian and some security about the safety and security for their hard-earned money.
 
The first and the most important suggestion that financial experts give to such individuals is to ensure that they make an informed choice about the chit fund company that they would want to invest in.

Before investing in any chit fund, a potential investor should make sure that the company runs chits according to the established regulations – some made by the central government and others by the state governments. Mostly, the Chit Fund Act 1982 of the government of India should ideally be governing the Chit funds. The regulations are implemented by the Registrar of Chits and any chit fund such as Shanthala chits which are closely monitored by this regulatory body can assure safety and security of the money parked with them. Under the regulations, every chit company needs to deposit the aggregate value of each chit scheme with the Registrar of Chits which ensures that in case of any default by the chit company, the investors can be assured to get back their money, according to says Sridhar Alampalli, promoter of Shanthala Chits.
 
But yet the question might linger as to why anyone would choose to invest in chit funds instead of the established banking system.
 
We have elaborated the scope for obtaining easy loans from chit funds in the earlier blog. But that is not all. There are other reasons that one can support one’s decision for investing in chits – those that are hardly provided by the established banking system.
 
For one, the habit of making small monthly but regular investments creates a sense of financial discipline. The habit of keeping away investment decision for tomorrow is common in a lot of people. Further, there are many who are only able to save money if they are forced to – for example via auto debit for a money back life insurance policy. And this trend can be more prevalent among the young salaried people and professionals (MILLENNIAL GENERATION – BORN 1981-1996) who like to live in the ‘Today’ and believe ‘Tomorrow’ is far off. Therefore, making small but regular investments in chit funds creates the much-needed habit of saving for tomorrow’s needs and instills a form of financial discipline.
 
Most chit funds have a unique way of fixing the rates of interest on borrowings where the participants themselves decide on the rate and not an external agency. This means that the rates tend to be much lower than what would be charged for a personal loan. Further, the intermediation cost is the lowest when compared to other financial instruments. These are elements of chit funds that one can hardly find with any traditional banks.
 
Therefore, chit funds offer more than one financial solution. And while the older – and arguably the wiser, can be assumed to already possess knowledge about various aspects of personal finance, investing in chit funds can be a very good learning experience for the younger generation in a practical way.
 
Therefore, it can be concluded that while a careful selection of a chit fund can ensure the safety of your money, investing in such firms can also help you develop certain habits that are not offered by any traditional banks.

Swarup Sridhar