They do pay. If you invest in the right one. And by right, we mean registered chit funds with healthy and long track records

By Shailesh Menon, Illustration by Dinesh S. Banduni

spends more time these days telling people the dif­ference between genuine chit funds and ponzi schemes. And he has per­sonal reasons to do so.Sivaramak- rishnan, secre­tary of All India Association of Chit Funds,

“Managing a chit fund is seen as a bad profession now; people look at you with a lot of suspicion. It can bring a bad name to your family… these are

times when no one would even want to have matri­monial ties with people engaged with chit fund business,” laments Sivara- makrishnan, who also manages the Balussery Benefit Chit Fund.

Ponzi investment schemes such as Saradha and the infamous Rose Valley Fund have rocked the foundation of the chit fund industry. These scams have caused an identity crisis for Indian chit fund companies —
some of which have been in existence for over seven decades. Although inves­tor base of chit funds is growing in India, there is an increasing skepticism among ‘new-gen’ patrons towards this indigenous savings product. “There has been a lot of confusion over chit funds in the last three years… Partially this is because of mis-reporting by the media, which feels all chit funds are ponzi schemes. This is simply not true,” explains S. Bapu,
executive advisor to Shri- ram Group, which runs the Shriram Chit Funds.

Proliferation of unregis­tered chit funds is another big problem faced by the industry. Finance compa­nies prefer to float unregis­tered chit schemes as it saves them from stringent regulatory mandates, cumbersome filings and tax obligations.

To make matters worse, the union government re­cently brought chit funds under the service tax re-

gime; this levy, charged in­directly on investors, will hurt the return profile of most chit funds.

Chit Basics

A chit fund is both a credit and savings product. Chit schemes bear a pre-deter- mined value and are of a fixed duration. Each scheme admits a particu­lar number of members (generally equal to the du­ration of the scheme), who contribute a certain sum every month to the ‘pot’.

The ‘pot’ is then auctioned every month. One with the lowest bid gets the pot. The borrower continues his contribution till the end of term.

Let’s take an example to decode the working of chit funds. Say, investor A joins a Rs 50,000-worth chit fund alongside 49 other members for a monthly subscription fee of Rs

  • for 50 months. In the first month, after all the 50 members contrib­ute Rs 1,000, the ‘pot’be­
    comes worth Rs 50,000.

Most chits do not allow bids in the first round of instalment, but to simplify the example, let’s assume As chit fund manager (also known as foreman) allows draw from the first pot. To get the pot (Rs 50,000), A has to bid alongside other contributing members of the fund who too might be interested in the pot. If A manages to out-bid others — at say Rs 49,000 — he gets to keep the money.

For the remaining months
(till tenure), A will have to continue paying his sub­scription fees of1,000.

Here’s how the math would look at the end of the term: A pays Rs 50,000, but gets only

  • (out of his success­ful first pot bid). The Rs
  • that he forgoes (at the bid) is divided among other members of the chit fund, which is their profit or dividend. A benefits from the timely receipt of funds; he also gets divi­dends if other members borrow from the ‘pot’ in subsequent months. Mem­bers who do not borrow from the ‘pot’ generally make 9-12 per cent returns on their investments.

The ‘pot’ value could be between Rs 1 lakh and Rs 5 crore; and the tenure of high-value chits could go up to a decade. The smart thing to do is to invest in chit funds that have a higher bidder turnout. Discounts could be steep in funds with more bid­ders, and this could incre­ase the dividend payout. (Excerpts paraphrased from a UPTstory published in June 2013).

“Chit fiinds are more flexible than banks. They require less documenta­tion and are more accom­modative of different types of collaterals (at the time of joining the fund). The biggest plus-point is that chit fimds allow members to access cash whenever.


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