A simple guide to benefits and advantages of chit-fund

Chit funds are a century-old financial instrument. The existence of the chit fund can be dated back to the 1890s. It is a long-lived tradition that involves a type of rotating saving and credit system among the members of the chit. Mostly practised in Asian countries like China, India, Pakistan, Bangladesh, and Sri Lanka, the benefits of chit funds are numerous. It is one of the best investment schemes used for decades.

What is the Chit Fund?

A chit fund is a financial institution where people use it both for saving and borrowing aspect. The process involves a group of individuals coming together and pooling in a fixed dividend by each member.?

How does the chit fund work?

Every month one member of the group borrows the pooled money. In this process, the chit plan lasts for the same number of months as the members in the group, so that every member gets a chance to borrow from the pooled money. In the case of the chit fund, there happens to be reverse bidding for the money that is taken by the borrower. The rest of the dividend after being borrowed is returned to all the members including the bid winner. The simplicity of the process of it is one of the advantages of chit funds.

What are the features of the Chit Fund?

1. Chit funds are legally registered financial bodies.
2. Deposits from all the members of the chit fund make up the lump amount.?
3. They serve as a financial institution for both the low and high-income households of the country.
4. They are both credit and saving schemes in one.
5. They offer lesser rates of interest than money lenders.

What are the advantages of the Chit Fund?

1. More than one usage: Unlike some savings that are for specific reasons, a chit fund is a saving that is used for multiple uses. It is a multi-purpose used fund for education, medical expenses, travel, marriage, shopping, etc?
2. ?Easy access to funds: While you must wait for specific months and years for some saving instruments, chit funds have easy access to money. You can borrow the fund in the month that you need it the most. This can be helpful for debt payment and household issues which cannot be available easily otherwise.
3. ?No collateral required: If you wish to invest in Chit funds, there is no requirement of pledging to any assets as collateral. The chit-fund institution only looks at the personal sureties of the person before adding them as a subscriber, unlike a few banks that require substantial security.
4. Less to no paperwork: To become a part of the chit-fund community, there is barely paperwork required. Chit-fund institutions ask for KYC documents and a few other documents compared to other financial institutions.
5. Financial discipline: Chit funds help with financial discipline as they help in saving money and avoid unnecessary spending. It gives people a means to reach their short-term and long-term goals.??
6. Returns from dividend: Members of the chit fund get potential returns every month from the dividend as the borrower is the person who bids the least amount of money among the group. The rest of the dividend money is divided and given back to the members of the chit.
7. Taxation rules: As per the government of India, income tax act, the chit fund is registered under "other income sources ". Therefore, the chit fund is a tax-free fund.
8. Credit and savings: Chit fund is a means by which people can both save their money and avail credit. It is a financial institution where both happen simultaneously.
9. Low-income households can also invest in chit funds: Some chit plans are specifically built for people who have low incomes. Chit fund makes sure that there are saving plans for these people and that they can meet their other needs by saving and crediting.
10. Short-term and long-term capital for business owners: One of the advantages of the chit fund is for the business owners. Building a business requires more funds than expected. To reach these goals chit funds are one of the best financial institutions. Short-term goals can be met by chit fund because of the easy access to money and sometimes it might also help in saving a business that is crashing.?
11. No queries: The chit fund company whatsoever, never queries about the reason for the borrowing of money. The customers are not asked to disclose the reason for borrowing.?
12. Building Trust: In this modern world of long-lost trust, financial institutions barely give funds to customers without tangible security. Whereas, chit fund works partially to mostly on the bases of trust.?

CONCLUSION

Chit funds have been a strong financial institution since time immemorial. In today's fast and money-oriented world, the advantage of Chit funds to easily access and save money is bliss. Chit-fund saving can be fruitful as there are chit-funds that start at low subscription amounts and the maturity time for the same is less and flexible. The advantages of chit funds are numerous and overpowering. However, a few things must be taken into account while investing in a chit fund. The Chit fund must be registered legally by the government of India. No court cases or pending court cases must be in the history of the chit-fund company. A thorough investigation and research about the chit-fund company in detail will safeguard your investment. If these necessities are met chit fund investments can be fruitful and helpful.