Chit Fund has the option of being a personal loan, a recurring deposit and a kitty, based on consumers\u2019 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.<\/p>\n
So, the ultimate question is how much can we gain using chit funds. Let\u2019s take a hypothetical situation. If 20 members can contribute Rs. 1000 for 20 months then they can expect the following kind of returns.<\/p>\n
(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.)<\/p>\n
| Months<\/td>\n | Assumed Bid Value<\/td>\n | Distributable Surplus<\/td>\n | Contribution Needed<\/td>\n | Foreman\u2019s Commission<\/td>\n | Net Received by the bid winner<\/td>\n<\/tr>\n | ||||||||||||||||||||||||||||||
1st<\/sup> month<\/td>\n| 16200<\/td>\n | 3800<\/td>\n | 810<\/td>\n | 1000<\/td>\n | 15200<\/td>\n<\/tr>\n | 2nd<\/sup> month<\/td>\n | 16400<\/td>\n | 3600<\/td>\n | 820<\/td>\n | 1000<\/td>\n | 15400<\/td>\n<\/tr>\n | 5th<\/sup> month<\/td>\n | 17000<\/td>\n | 3000<\/td>\n | 850<\/td>\n | 1000<\/td>\n | 16000<\/td>\n<\/tr>\n | 10th<\/sup> month<\/td>\n | 18000<\/td>\n | 20000<\/td>\n | 900<\/td>\n | 1000<\/td>\n | 17000<\/td>\n<\/tr>\n | 15th<\/sup> month<\/td>\n | 19000<\/td>\n | 1000<\/td>\n | 950<\/td>\n | 1000<\/td>\n | 18000<\/td>\n<\/tr>\n | 20th<\/sup> month<\/td>\n | 20000<\/td>\n | 0<\/td>\n | 1000<\/td>\n | 1000<\/td>\n | 19000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n | 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<\/p>\n So, now if we check out\u00a0 the mathematical calculations, then<\/strong><\/p>\n 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.<\/p>\n 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.<\/p>\n |