How Chit Fund Works
A chit fund is a unique financial instrument that combines elements of savings, credit, and investment.
Here’s a simplified explanation of how a chit fund typically works:
Formation of a Group: A chit fund starts with a group of individuals who come together voluntarily. This group can be friends, family members, colleagues, or members of a community who trust each other.
Chit Fund Operator: A chit fund is managed by a Chit Fund Operator or Foreman. This person or entity is responsible for organizing and conducting the chit fund.
Chit Agreement: All members sign an agreement that outlines the terms and conditions of the chit fund. This includes the duration of the chit, the total amount, the number of installments, and the frequency of meetings.
Monthly Contributions: Each member agrees to contribute a fixed amount of money (called the chit amount) every month. This total chit amount is usually decided at the beginning of the chit.
Auction Process
At every meeting, a process called an auction takes place. During the auction, members have the option to bid for the total chit amount. The highest bidder gets the amount, minus a predetermined commission for the chit fund operator.
Winner’s Obligation
The winning member receives the chit amount for that month. However, they are still obligated to pay their monthly contributions for the remaining duration of the chit.
Prize Money
The difference between the chit amount and the bid amount (minus the commission) is called the prize money. This prize money is distributed among the members who did not win the bid.
Rotation Continues
This process continues until each member has had a turn to receive the chit amount. Once everyone has received the chit amount, the chit comes to an end.
Completion of the Chit
At the end of the chit, all members will have received the chit amount once. The chit fund concludes, and members usually have the option to start a new chit if they wish to continue.
Benefits of Chit Funds
Access to Funds
Members can access a lump sum amount when they need it, which can be used for various purposes like starting a business, buying property, or meeting unforeseen expenses.
Savings and Investment
It encourages regular savings and provides an opportunity for investment.
No Interest Charged
Unlike traditional loans, chit funds do not charge interest. The commission paid to the operator is usually the only cost.
Community Building
Chit funds foster trust and financial cooperation within a group of individuals.
