How do Chit Funds Work?

Many articles and blogs / posts have been written across the .com but we would like to state it in our way here too.

We at ChitMonks believe that Chit Fund is one very traditional but a unique financial instrument which acts like a group borrowing / savings platform, which allows you to borrow money while you started to save every month in the same group. This opportunity of raising money from the group works out to be very cheap compared to going for a borrowing upfront from other instruments out there in the market. No other financial instrument has this kind of advantage. This is the only instrument which combines both savings and borrowing capabilities which is not heavy on your pocket.

If the subscribers can choose a good company and invest safely and stick to the rules of Chit Fund companies strictly, this can be a very wonderful financial tool. ChitMonks is one place where you will be able to get that service. We will discuss the pros and cons of Chit Funds and the care we need to take as investors in a different blog, but let us understand how this traditional but unique financial instrument works.

In this blog, we will be talking about the procedure, as to how a registered Chit Fund should be working.

A picture is worth a 1000 words. Let us see the below image.

How Does a Chit Fund Work

We keep getting two generic questions

  1. What will happen, if no one participates in the auction?
  2. What will happen, if two people bid for the same amount?

Here is how we should look at it.

  1. If no one participates, the person (it could be you) who invests that 5 minutes in a month and go to auction can get lucky to bid for the lowest possible amount (generally 5% of chit value) and take the big prize money which is due for him in the end.
  2. If two subscribers get to bid for the same money, then there will be a lucky dip between them and the prize money will be given to the one who wins in the lucky dip.

Most of the times, this is how the Chit fund auctions are operated. This is a clear “Open Auction” system where every customer has a say in it.

There could be some Chit fund companies who does a “Closed auction” system, where the bid letters are submitted once you pay your subscription and all of them are opened during the auction in front of the customers. The one who quotes the maximum permissible amount, will be awarded the prize money.

In few cases, it can be a combination of both systems. Few customers who will just submit the bid letters and don’t participate in the open auction. This case, customer participating in the auction can pay little more than the open offer and take the prize money.

So, at ChitMonks, we generally encourage our customers to go and participate in the auction directly. Because in cases where money is involved, the best judge is Subscriber alone.

We will talk more on how you can manage your chits more smartly in our next blog.

Until then.

Take care.

Some more useful links we found in online this space are

https://www.quora.com/Personal-Savings-How-do-chit-funds-work

What are Chit Funds? How do Chit Funds Work?

How Chit Funds Works