Chit funds are a century-old method that’s still used today to work as a monetary instrument for saving and borrowing finances.
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What are chit funds?
In a chit fund system, a group of people gathers and agrees to contribute a set amount periodically to a time duration that equals the number of members. An open auction is then held for the investors to bid for a chit fund value.
The amount of money is then auctioned off to a member either who bid the lowest or selected through a lucky draw. The rest of the funds are then distributed equally among the remaining members reducing the sponsonsor’s commission, these are called dividends.
The winner treats the chit funds as a borrowing scheme whereas the remaining investors as a return on the amount they have invested.
This process is repeated until each member has a go and takes the auction amount home, while the other subscribers pay their monthly installment. At the end of the chit fund cycle everyone pays the same amount but what they get depends on what they took.
What are chit funds used for?
Chit funds address many needs and are therefore still commonly used in India, they are useful for 2 servings; needs such as consumption and emergencies, and investments such as for businesses and savings. Chit funds work as a type of non-banking finance system.
Why chit funds are popular
There are many different types of chit funds ranging from; state-run chit funds, registered chit funds, unregistered chit funds, online digital chit funds, organized chit funds. Etc.
India has many registered chit fund companies, the main one being run by the Kerala government. According to a report, the turnover for some chit companies was around eighty-two billion rupees in 1986.
Currently, there is an estimated turnover of nearly over thirty-five thousand rupees crores per annum is being made now all over India. Chit funds are most commonly considered as good investments even from financial advisors, that is if promoters follow the rules that have been laid down for them.
Chit funds are popular because it does not require heavy paperwork and lengthy procedures and are very easy to access because usually chit funds are held with family members and close friends.
How do chit amount calculation work
For example; if there was a chit fund of fifty members each subscriber paying one thousand rupees monthly to have the first month of fifty thousand rupees.
When the auction is made, the member who made the lowest bid for the chit fund wins. The chit amount calculation is made as such; let’s assume the winner agrees to take forty-five thousand rupees in the first month, the remaining forty-nine members earn good returns on the amount they invested.
The organizer also gets a commission. The chit amount calculation is made so it’s a win-win for everyone.
This process continues until each member gets an opportunity to take the chit amount calculation they made. Any member who needs money can bid for a lower amount.
This is how the chit amount calculation work.
Chit funds are an excellent financial instrument for both saving and borrowing. As a saving instrument, it gives a good return on investments.
Now you know how chit amount calculations works as a borrowing instrument, so it can be a reliable source of funds in emergencies or otherwise. While interest rates are determined by the subscribers themselves, based on mutual decisions, and vary from auction to auction. Chit funds may be simple to comprehend and utilize, as well as an excellent way to generate money.
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