What are Chit Funds?

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Overview:

Around 70 persons belonging to the Andhra Pradesh special police have lost nearly Rs 12 crore in a chit fund scheme recently.

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