Paper money was invented as a financial instrument in exchange for goods and services around the 7th century in China. Since then various instruments of expenditure, lending, and investment of money have come into being. Bank deposits, equity shares, mutual funds, debt instruments, pension funds, chit funds and so on.
An average citizen approaches the money markets for 2 main purposes – (1) To invest and grow his surplus money (2) To borrow money for his expenses. But for a depositor or borrower with limited knowledge of the financial world, the various options of financial instruments available to him to can be confusing, misleading. Due to a lack of informed decision making, people land up making losses, getting into deep debt or losing money to frauds.
A quick comparative glance at all the popular financial instruments or investment tools that would help us, small investors and borrowers, to get a fair idea of the pros and cons of choosing a particular option. It will also help us evaluate where chit funds stand when compared to the other instruments.
Chit Fund vs Bank Deposits and small savings schemes:
By far the most secure and reliable investment method. In this budget, the government has extended the credit insurance guarantee for deposits to Rs 5Lakhs, making it even safer.
But with the recent low-interest regime, the annual returns are at 8% or below. Principal upon maturity and the interest earned are both fully taxable. So that makes the annual returns even lesser. NBFCs offer much better returns, but their reliability must be carefully examined. Another major problem with fixed deposits is the tenure lock-in for the funds. When you really need the money, the liquidity is not there.
Senior citizen savings scheme and Sukanya Samriddhi yojana are worth parking funds in. They are government small savings schemes with reasonably high returns.
Chit Fund vs Mutual Funds and Equity shares:
With the markets booming like how it is now, shares and mutual funds appear to be a very attractive option. In fact, a large number of deposit holders are seen to be shifting to equity investment in search of high returns. When stocks/fund houses are carefully chosen, investors are known to make above-average profits. Good performing stocks also earn handsome dividends.
The flip side of the equity markets is its volatility. You cannot take it for granted that you will keep making money year on year. Stock indices have cyclic fluctuating patterns, companies are affected by business prospects and government regulations. So only a knowledgeable investor should rely on this instrument. In addition to the market vagaries, another aspect to consider now is the long term capital gains and dividend being taxed at the investor end. This is apart from the commissions that mutual fund houses charge for their services. So the final returns are not as handsome as they appear on paper. A market-savvy investor can hope to make 8-15% returns going by the industry average. For the uninformed investor, it’s a risk.
Certainly not as popular as the above two options. But on close inspection you realize that chit funds are a very powerful and simple financial instrument. The first point in its favor is that it is both an investment and a credit instrument. Park your surplus funds month on month for a fixed tenure of 2-3 years. Withdraw the chit amount in its entirety when you have the need for that money, anytime during that tenure. No loans, no repayment liabilities.
All Registered Chit funds are known to earn about 8 – 9% returns year on year, as per industry statistics. Chits also score high on hassle-free joining formalities and ease of operation. They are your neighbourhood financiers with whom you will have a personal connection, especially in remote, rural areas where banking penetration is poor.
A major black mark against chit funds is the frauds and scams that get regularly reported, denting their reliability. When gullible investors opt for fund houses that are not government registered, they are taking on a mighty risk. The simple way to overcome this risk is to choose only government registered chit funds. With registered chit fund houses, your money is as secure as in a bank.
With the newly enacted Chit Fund Amendment Act by the Government of India, a major positive image make-over is expected in the chit fund industry. The fraudulent, Ponzi operators would be weeded out. The established reliable ones will get much-deserved credibility and government recognition. This will go a long way in reassuring customers. It is predicted that chit funds are likely to hold about 15-20% of the savings in India in the next 10 years.
Shanthala Chits is in the business over 2 decades now. We have always been a strong advocate of investor rights and interests. The small investor and borrower – whether a householder or a businessman – is at the center of our focus. We have always believed in keeping our investors informed and our customer service is also tuned to take care of our investor’s welfare and needs.
We are a Government approved chit fund company with a 24-year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, the Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.