What are Chit Funds?

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About Chit Funds

Chit funds are a financial instrument that is used in both borrowing and saving aspects.
Chit fund is also termed Kuri and Chitty.
Chit funds are a kind of financial arrangement wherein a few individuals gather and pool a fixed sum of money at regular intervals.
This is done with an understanding or agreement that a single member of the group will receive the total sum of money collected during each interval.
This process continues until every member has received their share of the pooled money.
This type of financial instrument is generally conducted by a chit-fund company that is responsible for the smooth carrying out of this process.

How Do Chit Funds Work?

Under a chit fund scheme, a number of individuals make contributions towards the chit value at regular intervals for a period equal to the total number of subscribers or members (investors).
A person, chosen through an auction or a lucky draw, receives the money collected.
Through an auction allotment system, an individual who agrees to receive the lowest amount (with the lowest bid) gets the money. It is known as a reverse auction system.
The sum forgone by a winner is distributed equally among the other bidders post subtracting a foreman’s charges and commission.
An amount that each bidder receives is termed a dividend.
A winning bidder will continue to invest even after agreeing to claim the sum.

Q1) What are Mutual Funds?

A mutual fund is an investment option where money from many people is pooled together to buy a variety of stocks, bonds, or other securities. This mix of investments is managed by a professional money manager, providing individuals with a portfolio that is structured to match the investment objectives stated in the fund’s prospectus.

Source: Cops lose Rs 12 crore in chit fund scheme, probe on