Things you must know about chit funds

Things you must know about chit funds

Chit funds are one of the most popular avenues to park your money in India. In the midst of all this, financial advisors do believe that chit funds are one of the good investments. From homemakers to successful businessmen, you will find a variety of people shelving their funds in a proper chit fund organization.

How it works: As an investor, you will have to pay a specific amount of money at regular intervals, for a certain period of time. Under this form of investment, the investor enters into an agreement with a specified number of people who will equally contribute the same amount of money every month.  And each person shall in his turn, by lucky draw or auction, win a certain sum of money.

Types of chit funds: There are three kinds of chit fund entities: a private chit fund organization, like Sriram Chits, which is registered to operate under the Chit Fund Act 1982; a government-run chit fund, example Kerala State Financial Enterprises and an unorganized chit fund which is a form of saving scheme among family, friends, and neighbours.

Purpose: Chit funds are one of the smartest ways of investing. It helps you convert small savings into a lump sum within a short period of time. The liquidity nature of Chit fund is a liquid investment in which you can pull out cash in case of any emergency at any time. Otherwise, it is considered as a form of recurring deposit. Middle-income groups are mostly interested in this form of investment.

Risk factor: Since chit funds are considered as one of the most preferred for the savings-cum-borrowing instrument, it is quite risky if you don’t choose your chit fund organization correctly. Hence, if you plan to invest in chit funds, make sure you are doing it the right way.

The best way to find out if you are investing with a legal organization is to thoroughly check your agreement to find out if it has been filed with the registrar of chits.

Tax-free: Returns from registered chit funds can range between 7-10% per annum when held until its maturity. From unorganized entities, you can expect about 10% returns per annum. Dividends received from chit fund companies are completely tax-free and need not be declared while filing for tax returns.

Research: There are a number of chit funds that have disappeared after taking people’s money. Before you excitedly invest your money in chit funds, do a detailed research on the companies you’d like to park your money in. It’s always safe to go with reputed organizations.  Also, every company that is operating a chit fund business must have the word chit, Kuri or chitty as a part of its name.

Rules: Chit fund companies cannot engage in trading or any other activities like real estate investments, etc. These companies have to operate only as chit fund companies. For managing a chit, a company or promoter can charge up to 5% of the bid or auction value as commission. The rest of the amount will be equally divided among the members of the chit.

Happy investing

Source:Yahoofinance.com