Chit Funds Explained: A Simple Guide for Beginners
What if you were given an option to combine savings, borrowings, and investments in one financial tool? It’s very hard to resist, isn’t it? That’s exactly what chit funds offer. Welcome to the world of chits, where common people come together to build wealth and secure their future by joining chit funds. Curious to know more? Let’s dive into the details and understand it better.
What Is a Chit Fund and How Does It Work?
In a chit fund, members (or subscribers) come together to put money into a shared pool, called the chit value or pot. The number of months each person contributes is the same as the number of people in the group.
Example:
Chit value: ₹1,00,000
Number of members: 25
Number of months: 25
Monthly contribution per member: ₹4,000
Each month, one member takes the full pot through an auction.
How Does the Auction Work?
In regular auctions, the person who offers the most money wins. But in a chit fund, the person who agrees to take less money wins. This is called a discount. The more money someone gives up, the better their chances of winning.
Example:
If the chit value is ₹1,00,000 and someone agrees to take ₹70,000 (a ₹30,000 discount), they win the auction if no one else offers to take ₹70,000.
What Happens to the ₹30,000 Discount?
From the ₹30,000 discount, a small part goes to the foreman as their fee (commission). The rest is shared equally among all members of the chit fund as a dividend..
What Is a Dividend?
A dividend is the money each person gets from the discount. After the foreman takes their fee, the leftover discount money is shared equally among all the members. Every member gets the same amount of dividend..
What Is the Foreman’s Commission?
The foreman is the person or company that manages the chit fund. They handle the money and arrange the auctions. They charge a small fee for their work, usually 5% of the chit value.
Example:
Chit value: ₹1,00,000
Subscriber offers ₹30,000 discount
Foreman takes ₹5,000 as commission
This leaves ₹25,000, which is shared equally among 25 members, and each member gets ₹1,000.
Summary:
A chit fund is a way for people to save, borrow, and invest as a group.
Each person contributes money every month to a common pool.
Every month, one person gets the full amount through an auction. The winner is the person who agrees to take the lowest amount (offers the biggest discount).
The foreman takes a small fee from the total amount.
The remaining discount is shared equally among all members as a dividend.