your guide to a better life at Technopark
Sunday December 4th 2016
Technopark Living

What are “Chit Funds” and How do they Work?

Chit Funds

Chit Fund is a term much seen, but not too many, especially in the IT sector, are aware of how it works. Chit Funds work on the basic premise of providing better than bank deposit rates (for investors) and providing loans at better than personal loan rates (for borrowers). However, it is important to stick to chit funds managed by government (like KSFE in Kerala), instead of the various fly-by-night operators who have a penchant for vanishing with investors’ money.

A chit fund ensures one invests a specific installment every month for a specific period (usually 30 to 100 months), at the same time ensuring liquidity when needed. The number of months and the number of subscribers are always the same.

Let us see how it works, and how to make profit from chit funds by taking the case of a KSFE chitty of Rs.10,000 per month for 30 months, hence with 30 subscribers.

  • Every month, the chit prize money of Rs. 3,00,000 ( Rs. 10000 * 30 ) is auctioned to the lowest bidder. He keeps the money he has bid.
  • Suppose he bids for Rs. 2,40,000. The Rs. 60,000 reduction from Rs 3 lakhs is similar to the “loan interest” in normal bank loans
  • KSFE commission (5% of prize = Rs. 15,000) applies on all auctions. The remaining amount of Rs 45,000 (Rs. 60,000 – Rs. 15,000) would be shared among all 30 subscribers – that is, each getting Rs. 1500.
  • This Rs. 1500 would be paid against the next installment, so one would have to pay only Rs. 8500 the next month instead of Rs. 10,000.
  • Every subscriber has to bid at least once – if there aren’t any one to bid, the prize amount goes to someone who hasn’t bid, with only the commission being deducted. The subscriber may even deposit it back in KSFE FDs, which give better than bank rates.

Subscribers need not go to the branch for auctions – he/she can appoint the branch manager or any other person as his proxy.

With stock market investments returning dismal returns, and bank deposit rates hardly keeping pace with inflation, many are in search of a reasonable safe investment avenue. Real estate may be nice(?), but for those with around Rs.10,000 to Rs. 20,000 to spare a month, it may be quite out of reach. Chit Funds may be ideal for such people.

(With inputs from Mrs. Latha, Manager, KSFE Medical College (Evening) Branch. For further details, readers may contact her at 9447224642/9496007367)

2 Comments for “What are “Chit Funds” and How do they Work?”


Leave a Comment