What is Chit funds. And how to invest in it?
Chit fund is a versatile financial product because it works as both an investment and a borrowing tool: when you pay the monthly installment, you invest that money and when you win the auction, you borrow against the subsequent installments (future savings).
Is investing in chit funds good?
Chit funds are not necessarily a bad investment. It has a bad reputation because it has been misused in the past to scam naive investors. There are Government-run and registered chit funds that are safe to invest in. On the other hand, recurring deposit are a much safer investment.
What is chit fund and how it works?
A chit fund is a type of rotating savings and credit association system practiced in India, Bangladesh, Sri Lanka, Pakistan other Asian countries. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours.
What is the benefit of chit funds?
Chit Funds have the advantage both for serving a need and as an investment. Money can be readily drawn in an emergency or could be continued as an investment. Interest rate is determined by the subscribers themselves, based on mutual decisions and varies from auction to auction.
How is profit calculated in chit fund?
The chit Foreman takes 5% chit commission each month as their fee (i.e 5% of 10 Lakhs = 50,000). Now 4 Lakhs – 50,000 = 3.5 Lakhs, this 3.5 Lakhs is distributed equally among the 50 subscribers (i.e 3.5 Lakhs/ 50 = 7000). This 7000 is known as the Dividend.
What are the disadvantages of chit funds?
Disadvantages
- The biggest risk involving a chit fund is the misuse of the pooled funds by the foreman.
- Sometimes members stop paying the dues and have already taken the first bid.
- In certain chit funds, discount rate is rigged, and a desperate member ends up paying a higher discount.
How do I start a chit fund?
Steps to Register:
- Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN) …
- Apply for Name endorsement of Chit Fund Company. …
- Set up Reports as per Chit Fund Company goals. …
- Least Capital Requirement for Chit Fund Company. …
- Apply for Chit Fund Company enrollment.
What is the interest rate in chit funds?
You would be surprised to know that people have already earned more than 12-15% returns (annualised) on their savings in this innovative savings model.
Chit Fund Vs Fixed Deposit.
| Chit Fund | Fixed Deposit |
|---|---|
| Pays competitive interest rate than banks. Investors can get returns as high as 12-15% | Interest paid by banks range between 7.5-9.5% |
How many types of chits are there?
There are five different types of chit funds that you can invest in and be a part of. Registered Chit Funds: Registered chit funds are the ones that are registered with the Registrar of Firms Societies and Chits.
Is chit fund money taxable?
Tax on Income from Chit Funds
It should be noted that the dividend income earned per month in chit funds is neither tax-deductible nor taxable. On the other hand, the overall income is taxable as income from other sources. At the same time, the overall loss can be claimed as a business loss.
How are chits calculated?
Amount collected per month = 20*1000 = Rs. 20, 000 – this is known as the Chit Amount. Once the first month’s payment is received, bids are invited from all subscribers. Any subscriber, who is in need of money, can bid for the chit amount, at a lower amount than it.
Are chit funds regulated by RBI?
Chit funds in India are not regulated by the Reserve Bank of India (RBI), nor the Securities and Exchange Board of India (SEBI). The term ‘deposit’ as defined by the Reserve Bank of India Act, 1934 does not comprise the subscription to chits.