Chit Fund Explained
A chit fund is a unique and traditional financial instrument that blends savings and credit schemes into one cohesive package. It operates on a simple yet effective principle, providing participants with a systematic way to save money while also having access to credit when needed. Here’s an in-depth look at how chit funds work and their benefits:
Understanding Chit Funds
Formation of a Chit Group
A chit fund begins with the formation of a group of individuals, known as subscribers, who contribute a fixed amount of money every month for a predetermined period.
Bidding Process
At regular intervals, typically monthly, an auction is held where members can bid for the chit amount. The lowest bidder, who agrees to take the least amount from the pool, wins the bid and gets the funds for that month. The remaining amount is distributed as a dividend among the other members.
Monthly Contributions
Each member of the group makes an equal contribution to a common pool, creating a fund that grows monthly.
Fixed Dividend Option
In some chit funds, a fixed dividend scheme is used where the monthly chit amount is predetermined, and no auction takes place. This ensures a steady return for all members.
Cycle Continuation
This process continues until every member of the chit group has received the chit amount once, completing the cycle.