Chit funds Vs Regular Savings

In the present article I just decided to probe the so called benefits of chit fund organized and patronized by the Govt employees ,their wife and other family members. These unorganized chit funds are not registered with Authorities and are operated at neighborhood, canteen, bus stop etc by a single individuals.

Many persons especially in the lower grades of Govt service use these chit fund as savings option due to lack of knowledge and opportunities.

People use chit fund mainly for two purposes

Savings
Loan without security.

we will just see whether putting one's hard earned money in these schemes is really a good saving option or whether it fetches superior returns in comparison to traditional saving instrument option like GPF.

We will take an example of Rs 1.00 lakh as a chit fund amount with monthly subscription of Rs. 2500 for 40 month.

1. Let us see first the return offered by the GPF in such a scenario.

period	contributon	cum.contribution	interest	total
1	2500	0	17	2517
2	2500	5017	33	5050
3	2500	7550	50	7601
4	2500	10101	67	10168
5	2500	12668	84	12753
6	2500	15253	102	15354
7	2500	17854	119	17973
8	2500	20473	136	20610
9	2500	23110	154	23264
10	2500	25764	172	25936
11	2500	28436	190	28625
12	2500	31125	208	31333
13	2500	33833	226	34058
14	2500	36558	244	36802
15	2500	39302	262	39564
16	2500	42064	280	42344
17	2500	44844	299	45143
18	2500	47643	318	47961
19	2500	50461	336	50797
20	2500	53297	355	53653
21	2500	56153	374	56527
22	2500	59027	394	59421
23	2500	61921	413	62333
24	2500	64833	432	65266
25	2500	67766	452	68217
26	2500	70717	471	71189
27	2500	73689	491	74180
28	2500	76680	511	77191
29	2500	79691	531	80223
30	2500	82723	551	83274
31	2500	85774	572	86346
32	2500	88846	592	89438
33	2500	91938	613	92551
34	2500	95051	634	95685
35	2500	98185	655	98839
36	2500	101339	676	102015
37	2500	104515	697	105212
38	2500	107712	718	108430
39	2500	110930	740	111669
40	2500	114169	761	114930

Hence as per the above calculation if you put Rs. 2500 per month for 40 month finally you will get a total of Rs. 114930 thus earning a interest/profit of Rs. 14930 .

In chit fund the fund amount so collected is auctioned among the members with the highest bidder allowed take the amount deducting the bidding amount. In some places the bid amount is divided among members immediately and one has to pay a lesser amount by deducting the interest received. In some places the organizer retains such amount and the bidding amount is allowed to grow till it reaches the fund amount and in the following month two chit is auctioned. This practice is continued till the end and at the end the chit fund closes before the pre-determined period of 40 months and it gets closed in 37 or 38 months as per the bids by the members.

No chit fund pre-closes beyond 05 or 06 months thus giving the benefit of 2500*05= 12500 or 2500*06=15000. Further even if you bid at the last installment you cannot bid for full amount and you have to discount some amount. In the instant case if we take such sum as Rs. 2000 the final profit made by any person will be 15000-2000= 13000. Hence the benefit derived is less than what you get in GPF and to derive the benefit more than the GPF, the chit fund has to pre-close more than 07 months or so and it will be impossible to get a such return.

Hence we can see that chit fund does not offer any substantial benefit and only increased risk of principal and returns less than the GPF .