HOW IT WORKS ?
- A chit scheme has a pre-determined value and duration.
- Each scheme admits a particular number of members, which is generally equal to the duration of the scheme.
- Each member contributes to a certain pre-determined monthly amount, which is auctioned out every month.
- The highest bidder, also known as the prized subscriber, wins the amount for that particular month.
- The bid amount is also called the ‘discount’.
- The highest bidder wins the sum of money equal to the chit’s value less the ‘discount’.
- The balance amount is then distributed as dividends equally among all the members in the chit group.
- In the subsequent month, a subscriber will have to pay an instalment less the previous month’s dividend.
SCHEME EXAMPLE
✓ The initial contribution in this case will be ₹2,000/- per month per member. Therefore, the collection in the first month will be ₹2000 X 50 (the number of members) which amounts to ₹1,00,000/-. This amount is auctioned out during a particular month .
✓ The member who agrees to bid for the highest, for instance 40% gets to take home 60% i.e ₹60,000/-. After the company collects its commission of 5%, the remaining 35%, which is ₹35,000/- is distributed among all 50 members.
✓ As a subscriber of this chit group, each member gets a dividend of ₹700/-. So the subsequent instalment for each member would be only ₹1300/- instead of ₹2000/-. As long as the bid goes for maximum of 40%, a subscriber will continue to get ₹700/- as dividend.
✓ Subsequently, if there are no bidders for maximum, the group comes to an open auction where the dividend reduces and the instalments increase gradually. This process gets repeated for all the months till the end of the chit period.
Here’s an example for a clearer
understanding. let’s take a chit scheme with
the following characteristics:
- ✓ Chit value: ₹ 1,00,000/
- ✓ Chit period: 50 Months
- ✓ Monthly subscription:₹ 2000/-
- ✓ Members: 50
- ✓ Maximum bid limit:40% = 40,000/-
- ✓ Company’s commission: 5% = 5000/-
- ✓ Remaining 35%, which is ₹ 35,000/–
- ✓ Get dividend(₹35000 ÷ 50) 700/-
- ✓ Take home:60% = 60,000/-
BENEFITS OF CHIT FUNDS
Financial planning is mandatory for everyone. It is sensible to earmark a small amount from your business/income every month as a reserve to face any possibility.
1. Chit funds offer a unique blend of saving and borrowing in one system.
2. They provide easy access to lump-sum funds with minimal documentation and no complex procedures.
3. This system is especially helpful for emergencies or planned big expenses.
4. It encourages regular saving habits and financial discipline.
5. Most importantly, it thrives on mutual trust within a close community.
6. Compared to bank documentation our Chit Fund documentation will be simple.