Chit Fund

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What is a Chit Fund?

Chit Fund is a saving scheme practiced in India. It originated 1000s of years ago. It was started as informal association of traders and households with in communities. It enables poor people to convert small savings into lump sums.

According to the definition given by Chit Funds Act 1982, Chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount.

Explanation:- A transaction is not a chit within the meaning of this clause, if in such transaction,-

(i) some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or

(ii) all the subscribers get the chit amount by turns with a liability to pay future subscriptions.

Acts Governing the Chit Funds in India are:

Union Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir)
Kerala: Kerala Chitties Act 1975
Tamil Nadu: Tamil Nadu Chit Funds Act, 1961
Karnataka: The Chit Funds (Karnataka) Rules, 1983
Andhra Pradesh: The Andhra Pradesh Chit Funds Act, 1971
New Delhi: The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007
Maharashtra: Maharashtra Chit Fund Act 1975

Why people invest in Chit Funds?

Easy to join as there is no formalities needed
High Promised Return
Option of small deposit
High Liquidity
Door to door collection by agents

What are different kinds of Chit Funds in India? Is Chit fund safe investment option?

There are 3 kinds of Chit funds in India
  1. Chit funds run by State governments like Kerala State Financial Enterprises and Mysore Sales International Ltd and PSU run Chit funds
  2. There are registered Chit funds like Shriram chits etc which are run by big business houses and are registered
  3. Unregistered Chit funds, which are run on the basis of friendship and close proximity of the members.
Chitfunds run by PSUs are the safest. The second safest is the one run by registered ones. The least secured is the unregistered ones.

What should be done when some one you know approaches with high return Chit fund? What are the checklist one should have while investing in Chitfunds?
  1. Check if the Chitfund is registered or not. If registered, get the registration number?
  2. Check if the certificate of Registration is genuine or not?
  3. Find out if the new chit started by the chitfund is approved or not?
  4. If you join the chit, you should ask yourself if one is able to continue to the full term ie period of the chit is very important
  5. Find out who are the promoters of the Chitfund?
  6. Find out if there is any compliant against the company/chitfund. If you have access to internet, just do a Google search on the company

Facts and Figures of Chit Fund Business in India

  • India has around 15,000 chit fund Groups/Companies
  • In Kerala the State is running its own Chit Fund company named Kerala State Financial Enterprise which has operations through out the state.
  • Out of the 15,000 chit fund companies/groups, only less than one percent run it as professional business unit. Rest all work in unorganized setup.
  • Chit Fund money is used by the investor in India is mainly used for marriage, property purchase, Vechicles, Assets purchase, Consumer Non durable goods etc.

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