How does a chit fund work?
A chit fund is a savings cum borrowings scheme wherein a few people (known as members or subscribers) come together and invest a fixed amount every month for a fixed period.
In a chit fund, the number of months for which the investment is made is the same as the number of subscribers in the scheme. Every subscriber gets a turn to take the total amount collected in a month; this means, in every month, one subscriber will get the collected amount.
The subscriber that gets the money will be decided based on a bidding system. Once a subscriber gets his turn, he is not allowed to participate in the bidding again. Generally, those who are in need of money during a particular month participate in the bidding, and the subscriber with the lowest bid is allowed to take the amount.
The chit fund scheme is managed by one of the members, who is known as the Foreman. He is responsible for collecting the subscription amount from the subscribers, recording details of members and conducting the auctions. For these duties, he is paid a fee, which is generally 5% of the amount collected. The Foreman’s fee is reduced from the amount paid to the subscriber who wins the bid. Any extra amount from the monthly collections is distributed equally among all the subscribers.
Registered funds are regulated and governed by law, but unregistered chit funds are not bound by any regulations. When fraudulent chit funds closed shop, several investors lost their hard earned money. It is therefore not advisable to invest in such unregistered chit funds.
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