Investment tools like mutual funds and chit funds enable us to gradually make little investments that add up to a greater corpus over time. While both entail the quarterly pooling of investor funds, they differ in terms of their features and traits.
Individuals should be informed of the advantages and risks associated with each option before choosing one of them to create their investment portfolio. Here, we shall examine these two types of funds in an effort to understand their distinctions.
What are chit funds?
India’s financial system includes a cyclical savings scheme known as a “chit fund.” Kuree, Chit, and Chitty are some of the other names for this savings scheme. It offers a reasonable return on investment. They also offer a way to borrow funds to meet planned as well as unplanned expenses.
Some of the better-known chit funds in India are:
- Margadarsi Chit Fund
- Shriram Chits
- Government of Kerala-linked Chitty
- Mysore Sales International
- Purasawalkam Santhatha Sanga Nidhi Limited
- Guru Nanak Chit Fund
However, make sure to do your own research, as there have been many frauds associated with chit funds.
How chit funds work
In a chit fund, a number of people make periodic payments for a fixed duration. The money collected in this way is given to any one of the persons, picked randomly or through a reverse auction.
With the reverse auction method, whoever agrees to take away the lowest amount (with the lowest bid) receives the funds. After deducting the fees and commissions, the amount that the winning bidder forfeits is divided among the remaining bidders. The dividend is the sum that each bidder receives. Even after accepting the winning proposal, the bidder will keep making investments.
What are mutual funds?
In a mutual fund, a number of members pool their cash in order to earn returns gradually on their initial deposits. This collection is managed by a professional investor who acts as a fund or portfolio manager. It is the manager’s obligation to invest the corpus in a variety of securities, such as bonds, shares, gold, and other assets.
The participants later split any profits (or losses) on the investment in accordance with their contributions.
Chit funds vs. mutual funds
Chit funds and mutual funds are quite different from each other. The table below should help you understand how specifically.
| Factors | Chit Funds | Mutual funds |
| Purpose | Fundamentally a tool for borrowing and saving. | Tool for saving and investing. |
| Growth opportunity | Not many chances to expand your money. | Better potential for growth. |
| Procedure | Simple process because no paperwork is needed. | A considerable amount of documentation is required. |
| Government regulations | Regulated under Section 61 of the Chit Funds Act of 1982. | SEBI regulates and maintains mutual funds. |
| Market risks and volatility | No market exposure; there is no market risk. | Mutual funds are invested in a volatile market. Your money’s worth decreases with the market value so mutual funds are incredibly vulnerable to market risk. |
| Fees | Managed by the event organizer for a commission of 5% or more. | Managed by the asset firm for a yearly charge that may be as high as 3% or 2%. |
| Principal guarantee | Secured principal. | The risk of losing investment money exists. |
| Taxable income | Non-taxable, but require disclosure. | Earnings and dividends are taxed. |
Investment benefits of chit funds vs. mutual funds
Chit funds and mutual funds come with their own advantages. Some of the main ones are as follows.
Chit fund investment benefits:
- Simple access to funds. Borrowing is possible when there are unplanned or unscheduled expenses.
- Minimal interest rate.
- A good dividend yield; greater than those offered by bank fixed deposits.
Mutual fund investment benefits:
- Provides incredible potential for financial growth.
- Suitable for both modest and large investments; allow for either several little contributions through a Systematic Investment Plan (SIP) or a single large investment.
- Absolute openness according to SEBI standards; publicly reports financial performance.
Conclusion
If you have to pick between chit funds and mutual funds, it all comes down to your tastes, financial ability, and financial goals. Both options can yield positive returns on investment when used sensibly, with reputable businesses involved. However, chit fund frauds are common. So do your research thoroughly and pick a registered firm if you take that route.
FAQs
Is it good to invest in chit funds?
Investing in chit funds involves pooling money with a group of people. Participants then take turns accessing the total sum. Chit funds are not always regulated and may have a high default risk. Consider your options closely and thoroughly research a fund before making any investments.
Is chit fund better than mutual funds?
Chit funds and mutual funds have different features and risk levels. Which works better for you depends on your individual financial goals and risk tolerance. You would do well to consult a financial advisor before making a decision.
Which chit fund is better?
We at CoinSwitch, do not offer investment advice, but we can tell you how to make the best choice for yourself. While choosing a good chit fund, look at the company’s reputation, track record, interest rate, and terms and conditions. The government-run and registered chit funds are usually considered safer.
How much interest does a chit fund offer?
The interest rate is set at the beginning, during the agreement, and is determined through an auction. The rate can vary but is often between 12 and 20%.
Is chit fund better than SIP?
Chit funds and SIPs (Systematic Investment Plans) serve different purposes. SIPs are a safer and regulated investment option, while chit funds can be riskier due to potential scams and exploitation.
Is chit fund a good investment?
Chit funds are risky and lack guaranteed returns. They may not be a suitable investment compared to more regulated options like mutual funds or recurring deposits.
What is chit fund and mutual fund?
Chit funds and mutual funds are investment vehicles. Chit funds pool money from participants for periodic payouts, while mutual funds invest in stocks and bonds to generate returns for investors.
Which is India’s No 1 chit fund company?
Shriram Chits is India’s No. 1 chit fund company. It is a trusted household savings and investments service provider and a pioneer in microfinance in India.
