What is the difference between a chit fund and a mutual fund?

India has had a long history with various savings schemes. Among all the schemes one of the most popular and widely used savings schemes are Chit Funds. Chit Funds concept came into existence in the 1800’s. Then, ruler of Cochin state of Kerala, Raja Ravi Varma gave a loan to a Syrian Christian trader, by keeping a certain portion of the loan to himself and later he claimed that money for the principle of equity. According to Section 2(b) of the chit Fund Act, 1982, chit fund company is one which manages, supervises and keeps a check on chit funds. It is a scheme that allows the user to borrow as well save some money.

What is the meaning of Chit Fund?

Chit basically means transaction. It has various other names such as chit fund, chitty, kuri etc. The mechanism of chit funds is that a person enters into an agreement along with a specified number of people such that all of them shall subscribe to a certain amount of money or some kind of gain. When the person’s turn comes, either by claiming it himself or by lot mechanism or by some kind of auction he draws the amount of money he needs. By means of periodical installments over a time period, he must repay the money gained.

Over the years we see that chit fund schemes are being conducted by registered financial institutions or some unorganized schemes which are run by relatives or friends. Kerala is the state which benefited much from such chit funds. The main aspect of chit funds is to provide easier access to credit.

How Chit Funds Work?

The investor pays an amount at specific intervals, usually a month, up to a fixed period. The money goes into a common fund. The amount collected is given to one person, usually selected in a lucky draw.

There is also the auction system for allotment in which the person who gets the money is selected on the basis of the lowest bid (he agrees to claim the least amount among the bidders). The difference between that and the full amount due is distributed among the other members. However, even after this, the winner has to continue investing.

Chit fund is a good savings instrument and it can be a reliable source of funds in an emergency.

One can also claim the amount without a draw through reverse auctioning. In this, the person who submits the highest bid (interest for picking the collected amount) is given the total collected money and his bid amount is distributed among the remaining people in his chit fund. This system is used in The Money Club mobile app which is a platform where people can form their own chit fund within their own trusted network (friends, family or office colleagues). The trusted network ensures a minimum credit risk here.

How Mutual Funds Work?

Whereas, mutual funds, on the other hand, pools money from different sources and invest in stocks. You are allocated units of mutual funds from the AMC of your choice. Then you get some returns for the money invested. All your transactions are regulated by SEBI.

Popular Chit Funds in India

Chit funds limit only to India. Normally we do not find chit funds in any other part of the world. Some of the most famous and successful chit fund houses are:

• Mysore Sales International — Government of Karnataka
• Kerala State Financial Enterprise (KSFE) — Government of Kerala
• Shriram Chits — Shriram Group
• Margadarsi Chits — Ramoji Rao Group

Mutual Fund vs Chit Fund

• MUTUAL FUNDS — It is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.
• CHIT FUNDS — Investors money is pooled and is lend to needy people along with investing at some interest rates and the income earned is shared with everyone.
• MUTUAL FUNDS — It is regulated and maintained by SEBI.
• CHIT FUNDS — Regulator of chit funds is the Registrar of Chits appointed by respective state governments under Section 61 of Chit Funds Act 1982.
• MUTUAL FUNDS — It is an saving cum investment option.
• CHIT FUNDS — It is a saving cum borrowing option cum investment.
• MUTUAL FUNDS — It is subject to market risks and volatility of the market.
• CHIT FUNDS — Not subject to any market risks. Interests are always fixed.
• MUTUAL FUNDS — Risk is very high.
• CHIT FUNDS — Risk is comparatively lower if it’s a registered chit fund or an unregistered chit fund among trusted people like friends or relatives.

Should you invest in Chit Funds?

India plays host to a huge number of chit funds. Many people have benefited from such funds. It would be wise to always pick a government registered chit fund house or some reputed private company or do it with your trusted people on The Money Club mobile app as it is a legitimate platform for peer to peer lending, registered under the RBI P2P lending regulations. It is a good option to save, borrow or invest.

Revolution in Chit Funds — The Money Club

The Money Club mobile app is a platform that mitigates the major cons of a chit fund like it removes the foreman from the chit fund and the huge profits which are consumed by the foreman in traditional chit funds are equally split among all the members. So here, the members earn more than the other chit funds. Secondly, since The Money Club allows only a trusted group of people to form a chit fund, the chances of default are a lot minimized. Finally the best thing is that the money is not pooled up here and stored with the company. Instead the money of the members remain in their pockets and whenever a members wins the bid, all the other members transfer him the funds directly from their bank account to his bank account. The Money Club keeps a track of all the transactions done in the group. It very transparent, secure and a safe platform. Convert your unregistered illegal chit fund into a legal one, do it on the Money Club app.

Benefits — Through this app, you can

1. Save money regularly
2. Borrow money whenever you need it the most
3. Earn 3–4 times higher returns than bank fixed deposits.
4. Buy things on EMIs. You don’t need to wait for saving money in order to but something.

How to form your own Money Club?

1. Search for ‘The Money Club’ on Google Play and download the app (app icon has blue background with white ‘M’ in the center).
2. Discuss with your friends about Money Club.
3. You will be required to form a Whatsapp Group with all your group members and a representative of the Money club. This group serves as a common ground to answer all the queries that any members might have
4. The Money Club representative will form the pilot club on the Money Club App and send out invitations to all the respective club members.
5. Details of the Pilot Club will be the following:

• Contribution per member: Rs 200 per day
• Frequency: daily
• Pooled Amount: Rs 2000 (max)
• Minimum Bid : 1 % of pooled amount i.e. Rs20
• The members will bid in the form of an interest rate for the pooled amount.
• Money club Commission: 10% of the winner’s bid (where bid amount is the interest paid by the winner to pick the pool amount).
• Bidding duration :15 minutes

6. As per the RBI Guidelines, it is mandatory for all users to complete their KYC on the Money Club Platform. We will verify address and PAN number of every member while the pilot is progressing

7. Once the Pilot Club is completed successfully, form the club button gets activated on the Money club App . Users can click the button and form their own club.

Watch the video given below to know the concept behind The Money Club: