How much can you gain using Chit Funds?

Chit Fund has the option of being a personal loan, a recurring deposit and a kitty, based on consumers’ need. A chit fund is the only financial instrument that has the capacity of solving more than one financial agenda. For someone seeking a loan, it is a convenient credit which is difficult to avail from banks. For the small saver, it is an option that enforces monthly investment discipline and saving. And for the unbanked rural investor, it is a crucial step towards financial inclusion. A chit fund is a traditional savings and borrowing mechanism. As in the case of a kitty party, members pool in a specified amount every month and one of them gets the entire sum. This process is repeated every month till all members get the booty. The difference is that unlike in a kitty party, the winning member is not chosen by a draw of lots, but through an auction.

So, the ultimate question is how much can we gain using chit funds. Let’s take a hypothetical situation. If 20 members can contribute Rs. 1000 for 20 months then they can expect the following kind of returns.

(This table is made based on hypothetical value based on assumptions like the first bid winner Is settling for Rs. 16200 and eventually every month this is getting increased by Rs. 200. This may or may not hold true.)

Months Assumed Bid Value Distributable Surplus Contribution Needed Foreman’s Commission Net Received by the bid winner
1st month 16200 3800 810 1000 15200
2nd month 16400 3600 820 1000 15400
5th month 17000 3000 850 1000 16000
10th month 18000 20000 900 1000 17000
15th month 19000 1000 950 1000 18000
20th month 20000 0 1000 1000 19000

Bidders accept amounts less than the pooled money in order to get the kitty in a particular month. The lowest bidder gets the pooled sum and the amount he forgoes is distributed among all the members. For instance, if 20 members pool in Rs 1,000 every month, they will have a kitty of Rs 20,000. If the lowest bid in the first month is Rs 16,200, the surplus of Rs 3,800 will be divided equally among the members. This will bring down the first month’s net contribution of each member to Rs 810

So, now if we check out  the mathematical calculations, then

  • Cost of Loan in the first month is 22% which will go low as number of months progresses.
  • Returns in the twentieth month is 8.3%
  • In the mid months, the returns are equal to your cost of loan but it instills a habit of saving

The chit fund participants see this as a win-win situation. The bidder gets the money he desperately needs, and the other members get to pay a lower sum than the original amount agreed upon. For him, it means a quick loan that he will repay through monthly contributions till the end of the chit. For them, it means better returns on their investment in the chit. The Foreman of the chit fund also benefits. He gets to keep up to 5% of the gross amount every month as his commission.

There are also some tax benefits in chit funds. A member who wins an auction by accepting a lower payment can set off the loss from the chit against business income. This reduces the cost of capital for the borrower. This benefit can be availed by businessmen and traders. This helps in hedging risk and making a safer choice.

Shanthala Chits Pvt Ltd is a registered chit fund company since 1996 and is highly reputed for its trustworthiness. Our customer service surpasses every benchmark as we are not only reliable but also quick in our payments. We are a strict follower of Chit Fund Act of 1982 and have an excellent track record. Shanthala Chits wants to empower its customers and all other investors who want to park their funds in chit funds.

We offer products like High Networth Fund Pro which is great for investors and business Owners. This scheme has a duration of 25 months with a monthly installment of Rs. 100000. We also have a scheme where the monthly installment is Rs.40000 which can help small and mid-sized businesses. We also have an option like Young Talent Fund, Value Saver, and Smart Focused. These schemes last for 25 months and due diligence is done before a group is formed for any scheme. Our schemes are meant for Small Business Owners, Students, Homemakers & Salaried individuals. We cater to the whole market and cover needs for savings or borrowings. Chit funds can act as a savings and borrowings instrument and can help you in your short term goals.

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