CHIT FUNDS explained...

-Vaishali Sethi

A Chit fund is a kind of savings scheme practiced in India. They are savings plans conducted by a group of people who contribute to the fund and thereby benefit from it. So, simply put, chit funds are just like the ‘kitty parties’ that women organize at their homes. They collect some amount of money every month and the entire amount goes to one person each month. This continues till each person has got an opportunity to keep (and use) the amount atleast once.

The Chit Funds Act, 1982 governs the functioning of Chit funds in India. According to Section 2(b) of the Chit Fund Act, 1982, "Chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount".

People who contribute to the chit funds are called subscribers.  The person or company who organizes and manages the fund is called the Foreman. Foreman has to be a subscriber also. He/She/The company  just receives a small fees for the services that they have provided.

The chit funds system basically works in this way. A small group of people get together for mutual savings and loan requirements. All the members pool in their money. (Usually the maximum amount to be contributed is fixed). Then there can be a draw of lots every month regarding who shall be pocketing the money during the month. Later on this member is expected to keep taking part in the savings process, but he/she will not get the money again. Normally, the duration of the chit funds scheme is the number of months as the number of members.

For those with no credit background, those with an unstable collateral base, it is a simple and self-help way to organize funds during crises or as and when need arises and also, as a saving scheme during normal and stable times. So, chit funds are just another, but if implemented properly, then excellent microfinance instruments. It has the capability of pulling people out of years of debt and drudgery.

But hardly anything in this world comes without a disclaimer. For so many successful chit funds that go unsung and unpraised, there are some people who con others by talking them into fake chit funds and thus robbing them of their hard earned money. So, never miss the word of caution!