A Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined

in Section 2 of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982, "Chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit [1] agreement, be entitled to the prize amount". Such chit fund schemes may be conducted by organised financial institutions or may be unorganised schemes conducted between friends or relatives. There are also variations of chits where the savings are done for a specific purpose. Chit funds also played an important role in the financial development of people of south Indian state of Kerala, by providing easier access to credit. In Kerala, chitty (chit fund) is a common phenomenon practiced by all sections of the society. A company named Kerala State Financial Enterprise exists under the Kerala State Government, whose main business activity is the chitty. Chit Funds are also misused by its promoters and there are many instances of the founders running what is basically a Ponzi scheme and absconding with their money.

the chit companies we approached were in the business for the past 10 to 60 years. In most cases, the owner or manager was already involved in a similar line of business (like income tax consultant, chartered accountant, and jeweler or kirana shop owner) and expanded or diversi ed into the chit business. All the chit companies interviewed were running registered funds. The number of schemes open at a particular time ranged from 10 to as many as 80. The chit values ranged from Rs.10000 to Rs.1000000 and the duration from 20 to 50 months. The majority of members of the chit funds were small traders and businesses. Households (mainly housewives) and salaried employees also participated extensively in these schemes. The funds generally allow multiple-membership in each scheme, which means that a member can contribute double or more number of times the amount and participate in that many auctions during the tenure of the scheme. For instance, in a 20 month scheme where the contribution is Rs.1000 per month per member, a member who pays a contribution of Rs.3000 per month can participate in 3 out of the 20 auctions. However,

the members can bid again only after 50% of the duration is completed (for instance, in case of a 20 month scheme, the member who has won the pot in the rst 10 months can bid again only after the completion of 10 months). Usually only members with high credit worthiness will be allowed such a privilege. The chit companies do not require much documentation, which is their advantage over banks and other nancial institutions. Some of the companies, however, ask for income proof and address proof from new members. Most of the companies require the members to have a bank account, as 100% of the transactions are done through check payments. No business or address veri cation is undertaken by the chit funds unless it is deemed absolutely necessary. Most chit companies admit only members who are either connected to other existing chit members or known to the chit manager personally. Some chit funds employ agents to acquire new members. However, in case the members are not personally known to the managers, rigorous veri cations are made to ensure the credibility of the member. In some cases, the new members are not allowed to participate in the auction for the rst few months of the scheme and will only contribute to the pot during that period. Generally, the members who want to bid in the auction are asked to produce a guarantor or surety who is trusted by the chit manager. In some cases, collaterals are also demanded from members prior to their participation in the auction. However, if the members are well known, only a promissory note is collected from them for admission to membership.

How Do Chits Work?

A chit scheme generally has a predetermined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the pot . The pot is then

auctioned out every month. The highest bidder (also known as the prized subscriber) wins the pot for that month. The bid amount is also called the discount and the prized subscriber wins the sum of money equal to the chit value less the discount. The discount money is then distributed among the rest of the members (or the non-prized subscribers) as dividend and in the subsequent month, the required contribution is brought down by the amount of dividend. To illustrate the above, let us take the example of a chit scheme with the following characteristics. Chit Value = Rs.500000, Duration = 50 months and Members = 50. The contribution in this case would be initially Rs.10000 per month per member. In the rst month, the collection would, therefore, be Rs.10000 multiplied by the number of members i.e. Rs.500000. This amount is called the pot which is auctioned out at the end of the month. Now let us assume that the highest bid in the rst month auction is Rs.100000. This is called the discount . The highest bidder now gets the amount equal to the chit value, Rs.500000, less the discount, Rs.100000, i.e. Rs.400000. The discount amount of Rs.100000 is then divided among the other 49 members equally (the dividend for the 49 members work out to roughly Rs.2040 each). For the subsequent month, therefore, the contribution of these members reduces by the amount of dividend (i.e. the contribution in the second month for the 49 members would be Rs.10000 less Rs.2040 which is equal to Rs.7960). This process gets repeated for all months till the end of the scheme. There are many variations to the above mentioned process depending on the scheme, preference of the members, capability of the company and so on. Generally, the chit manager or the company is also a member in each scheme. This is because the chit manager has to deposit an amount equal to the chit value of the scheme with the Registrar of Chits for the particular jurisdiction.
The Beginning of Chit Funds

Chit funds evolved years ago, when the present system of banking did not exist. Few families in a village would get together to form a chit or a group, to save money and to avail of loans amongst the group formed. A sensible person is chosen to manage the group. This informal system of saving prevailed only on trust. Gradually, as groups became larger and the money involved became huge, many companies started chit fund schemes with attractive offers. To thus provide for the regulation of chit funds and for matters connected therewith, the government introduced the Chit Funds Act in 1982.

Benefits of Investing A chit fund investment has its share of benefits too. y y y y y It inculcates the habit of compulsory regular saving. It earns dividends every month. So the net effective rate of return proves to be pretty attractive. For any unexpected financial requirement, bidding for the lump sum amount, could prove to be a better option than going through the hassles of a loan. Chit fund investments are not affected by any market fluctuations. Finance option through chit funds are easier to re-pay through the remaining monthly instalments.

Drawbacks Chit-funds do not offer any pre-determined or fixed returns. Higher returns are earned when there are more number of members in the group or if the duration of the scheme is longer. One would earn more, when more members need emergency funds. Thus returns cannot be calculated and decided when one joins the scheme. Safety of Chit Funds With the plethora of chit fund companies around, the safety of a chit fund lies in choosing the right one. In a registered chit fund company, under legal binding, the activities are regulated and institutionalized by the Chit Fund Act. And hence could be considered safe. However, other unregistered companies operating informally do exist. One needs to exercise caution while choosing where he desires to invest. Chit funds definitely are an attractive option for regular saving. It inculcates a disciplined approach to financial planning. It has the added advantage of bringing a combination of savings as well as hassle free borrowing. This dual purpose investment tool could be a friend in need at times of unexpected financial emergencies

Organised chit funds

In North India common type of chit fund is where small slips with each members name are written and gathered in a box. When all members gather for a monthly or weekly meeting then concern incharge in front of all members will pick up one slip from the box and who so ever's name comes that person will be entitled to get the collection of that day. Afterwards that persons name slip is torn and thereafter he comes for meetings regularly and gives his kitty's share but his name won't be there in the slips of box as he has already collected his share.

Special purpose funds

Some chit funds may be conducted as a savings scheme for specific purpose. An example is the Deepavali sweets fund, which has a specific end date - about a week before Deepavali. Neighbourhood ladies will get together to pool their savings each week. This fund will be used to prepare sweets in bulk just before the Deepavali festival, and the sweets will be distributed to all members. Preparation of Deepavali sweets may be a time consuming and costly activity for individuals. Such a chit will reduce the cost, and relieve the members from excess work from an already tense festival season. Nowadays, such special purpose chits are conducted by jewellery shops, kitchenware shops, etc. to promote their products.

What Is Chit Fund?

A totally Indian concept, the chit fund system has now won universal
acclaim. In the villages of Kerala, many centuries ago, a small group of farmers operated a unique scheme. Each farmer gave a fixed quantity of grains periodically to a selected TRUSTEE. The Trustee, after keeping aside a portion for himself, gave the rest to a member of the group to help him to meet his social commitments and other needs. The farmer who received the lot continued to give the fixed quantity till every member of the group received his lot. The additional benefits when receiving the lot earlier led to competition. Some members were even willing to forgo a certain portion (like a discount) of the lot, in order to get an earlier chance. So, an auction was held and the lowest bidder got the lot. This was the basis of what we know today as the "Chit Fund Scheme" The Chit Company forms different group each consisting of a certain number of subscribers. They agree to contribute a specific amount as instalment for a certain number of months. As soon as the group is complete and the Government Certificate of Commencement is secured, an auction is held. On the date of the auction, the subscribers in the particular group assemble, either in person

or through proxy. They bid for the amount and the person offering the highest discount receives the chit amount. Out of the discount foregone, the Company's commission (5% of the chit amount) is deducted and the balance is divided equally among the subscribers in the group. The subscribers then deduct the dividend and pay only the balance in their next instalments. Before the successful bidder draws the amount, he proposes securities immovable properties, Life Insurance Policies, Debentures of good companies, Unit Trust of India Certificates, Bank Guarantee etc. Personal sureties of persons employed in government offices, government undertakings and reputed public limited companies are also accepted. The prize amount is given as soon as the securities/sureties are accepted.

How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment. Money can be readily drawn in an emergency or could be continued as an investment.
y Interest rate is determined by the subscribers themselves, based on mutual decisions and varies from auction to auction. The money that you borrow is against your own future contributions. The amount is given on personal sureties too; unlike in banks and other financial institutions which demand a tangible security. Chit funds can be relied upon to satisfy personal needs. Unlike other financial institutions, you can draw upon your chit fund for any purpose - marriages, religious functions, medical expenses, just anything... Cost of intermediation is the lowest.