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What is Chit Fund and how does it work?

Hemant Singh

Meaning of Chit Fund:

Chit fund is defined as per the Section 2(b) of the Chit Fund Act, 1982. According to this act; A chit fund is a type of rotating savings and agreement among different persons i.e. friends, relatives, neighbours and family members to subscribe a certain sum of money for a specified period of time. Chit funds are often microfinance organizations. Chit Funds are also known as the Chitty, Kuree, chit.

It is worth to mention that there are over 10,000 registered chit funds in India.

Under the chit fund agreement; a certain amount is deposited on regular basis by the different persons; and after the gap of a specified period of time the amount is returned to the subscribers with interest. Chit fund helps in collecting the small savings of the individuals which turns into a big amount.

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How safe is Chit Fund?

Once the chit group commences, the foreman has to register the chit company with the registrar of chits. The owner of the chit has to pay 100% of the chit value as security with the registrar of chits.

The deposited amount can only be withdrawn after the said chit group closes and every subscriber is paid what is due to him or her. This regulation protects the interests of the subscriber to a certain extent.

If the chit is not registered with the registrar of chits then neither it is legal nor bound to pay the deposited amount of the subscribers.

The Chit Funds in India are regulated by the Chit Fund Act, 1982. Under this law, registration of the chit fund business can be done only by the respective state governments.

The Chit Registrar is appointed by the Government under section 61 of Chit Fund Act 1982. The Registrar of chit fund and the concerned State Government are authorised to take regulatory action in the cases related to chit fund fraud.

Why Chit Funds are Successful?

The secret of the success of the chit fund is that the business of these companies runs through agents who know the surrounding people, relatives, so these people are lured easily by the agents.

Chit companies are more active in rural and town areas. The agents of these chit companies promise to give 3 to 4 times returns to the subscribers in few months. These companies endorse their schemes or ponzi scheme through celebrities that is why innocent peoples believe the agents blindly.

Chit companies pay 25 to 40 percent commission to the agents that is why these agents do not hesitate in investing the money of their relatives also.

Chit fund companies convert this work into Multi Level Marketing (MLM). In these chit fund companies, the current agents are given more commission on adding other people in the scheme, which expands their network day by day.

Where do Chit Fund Companies Invest Money?

Chit Fund companies primarily invest in the stock market, real estate, hotels, entertainment and tourism, micro finance, newspapers, electronic media and contract with the actors and celebrities.

Why Money lost in Chit Fund?

Since every chit company; works like a pyramid to form a network of agents. Hence, the numbers of agents and subscribers increase day by day. In this process the money received from the new subscribers or investors is distributed among matured policy holders but problem arises when the liabilities of the chit funds companies becomes more than their receipts.

To avoid this situation these chit companies elop with the entire money without returning the matured amounts to the subscribers.

The Saradha Chit fund scam and the Rose Valley scams are similar scams in which millions of rupees of thousands of the people have been duped.

How do save yourselves from Scam?

Whenever you want to invest money in a chit fund company, first of all check the website of the chit registrar of the respective state. If the name of the chit company (in which you are planning to invest) is mentioned in the list of approved chit fund companies then you can invest your hard earned money in that company otherwise don’t.

One more thing you need to take care that whenever anyone approach you to invest in a scheme in which you need to add some members to get more commission then it the time to get cautious instantly.

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