What is Chit Funds? How Does It Work? (2024)

Chit funds are a common way for people to work together financially in many societies, particularly in India. Chit funds are a centuries-old idea that has developed into a structured financial product. This piece will discuss What is Chit Fund How Does It Work? and its place in the financial system?

What are Chit Funds?

Chit funds are a type of financial instrument that can be used for both saving and borrowing. Chit funds are a type of financial arrangement in which a few people pool a set amount of money regularly. This is carried out with the understanding or agreement that the entire amount of money collected during each interval will be given to one group member. Until each member has received their portion of the money that has been pooled, this process will continue. This kind of financial instrument is typically managed by a chit-fund company, which is in charge of making sure everything goes smoothly.

How Do Chit Funds Work:

Understanding the meaning of the chit fund is the first step towards understanding how it operates. In a chit-fund plan, you and an equal number of participants must pool a certain amount of money for a predetermined amount of time. Following the collection of funds through an auction or lottery, a recipient is selected and awarded the funds. 

With chit funds, the operator receives a predetermined percentage of the money pooled as a commission charge from the winning bidder each interval. This is done through a reverse auction mechanism. Dividends are given to the other members from the remaining amount, which is after the commission and other costs are subtracted. 

The winning bidder must continue making contributions to the fund even after claiming their share. Monthly contributions from all members extend the length of the chit fund cycle, which is determined by the total number of investors. Each interval concludes with an open auction where participants can place bids on the money that has been pooled. The winning bidder receives the pooled funds and is declared the lowest bidder.

Why Chit Funds are Successful?

The reason these companies are successful is because their agents know the locals and their relatives, which makes it easy for them to entice people. This is the secret to their success.

Chit businesses are more prevalent in towns and rural areas. In a few months, the agents of these chit companies guarantee that the subscribers will receive returns three or four times over. Because these companies use celebrities to promote their Ponzi schemes or schemes, innocent people fall for the agents’ unquestioning charms.

Because chit companies give their agents commissions ranging from 25 to 40 percent, these agents are willing to invest their relatives’ money as well. This work is converted into Multi Level Marketing (MLM) by chit-fund companies. The current agents in these chit-fund companies receive additional commissions for bringing new members into the program, which grows their network daily.

Where do Chit Fund Companies Invest Money?

The stock market, real estate, hotels, entertainment and travel, microfinance, newspapers, electronic media, and deals with actors and celebrities are the main areas of investment for chit-fund companies.

What are the Different Types of Chit Funds?

Special Purpose Chit Funds: These kinds of chit funds have a specific use, as their name implies. For instance, you can pool your money with a few others to save for Christmas or any other occasion. A week before the celebration can be the fund’s expiration date.

Organized Chit Funds: Members of this kind of chit-fund scheme must meet once a month or once a week. Additionally, a box contains tiny pieces of paper bearing the names of subscribers. At each meeting, the group leader then draws a slip at random from that box, and the person whose name appears on the slip wins the entire pooled amount. After that, the winner’s name is removed, and they are ineligible to be selected at any more meetings. Nonetheless, the winner needs to keep showing up to meetings and hand over their share of the cash.

Online Chit Funds: In the current digital era, even the chit fund system is now available online. An online chit fund scheme uses digital means for the auction and online payment methods for contributions.

Registered Chit Funds: Chit funds are governed by the Reserve Bank of India under the Chit Fund Act of 1982, which is applicable throughout the country. They can be registered with the Registrar of Societies, Chits, and Firms.

Unregistered Chit Funds: The unregistered chit fund scheme is started by friends, family, or coworkers. One way to do this is to save money.

How do save yourselves from Scams?

Before making any financial investments in a chit-fund company, always visit the website of the state’s chief registrar. You can put your hard-earned money into the chit company if its name appears on the list of companies that have been approved to receive chit funds; if not, you should not.

Another thing you should be careful of is that if someone approaches you to invest in a scheme where you need to add members to receive more commission, that’s when you should immediately become cautious.

What are the Benefits of Chit Funds?

Multiple Usages: These funds can be used for several things, including weddings, vacations, shopping, religious ceremonies, festivals, children’s education, and medical costs.

Low-interest rate: The rate of interest is mutually determined by bidders and varies from auction to auction. In addition, chit funds maintain lower interest rates for borrowers than other lenders. 

High Dividend: The dividend paid to investors is significantly higher than the interest received on savings held in various deposit schemes. 

Urgent Cash: When faced with an unexpected expense or financial emergency, you can get quick access to cash. Following the payment of your first installment, you will also have the opportunity to borrow the pot (lump sum amount).   

No Queries: The applicant is not required to give a reason for taking out a loan (the pot).    

Collateral-free: You don’t need to pledge any assets as collateral to borrow money. It will rely solely on personal sureties; banks and NBFCs need physical security.  

Less Or No Paperwork: It satisfies people’s financial needs without requesting personal information like a PAN card or IT returns.

Things to Consider Before Investing in a Chit Fund

  • Make sure the chit fund is a legitimate business. To confirm the companies’ certificate of incorporation, go to the registrar of the business.
  • Remember to verify the certificates provided by the state registrar of the state where the chit fund company is located, as well as the registration number. 
  • Remember to get information about the individuals overseeing the chit fund. It’s more crucial than you might think to look into their financial situation.
  • The commission paid to the foreman can be used to compare different chit funds. It would be sage to think about selecting a chit fund with the lowest commission.


A chit fund is a time-tested, conventional, and flexible financial structure. It is a good choice for groups of people who have similar financial objectives because it incorporates aspects of mutual benefit, credit, and savings. For those who are thinking about participating, it is essential to comprehend What is Chit Fund How Does It Works because it involves balancing risk and reward inside a reliable community framework.

Read more

Leave a Comment