About Chitfund

A Chit fund is a kind of savings scheme practiced in India. A Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, Chits as defined in Section 2 of the Chit Funds Act, 1982. 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 number 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".
Different chit funds operate in different ways. The basic necessity of conducting a Chit Fund is a group of needy people called subscribers. The Foreman the Company or Person conducting the chit Fund brings these people together and conducts the Chit Fund. Foreman is also the person responsible for collecting the money from subscribers, presiding the auctions and keeping records of subscribers. He is compensated a fixed amount (generally 5% of gross Chit amount) monthly for his efforts other than that the foreman does not have any specific privileges, he is just a subscriber of the Chit Fund.
The General pattern of the Chit Fund can be readily noticed by a simple formula:
Monthly Premium * Duration in Months = Gross Amount
Eg: 1000 * 50 = Rs 50,000/-. Where Rs 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the Chit Fund in months and Rs 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month. The Chit Fund starts on an announced date, every subscriber come together for the auction/lot. As per Maharashtra Chit Act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is Rs 35,000 in the above example. When there are more than one person willing to take this minimum sum, lot are conducted and the 'Lucky subscriber' get the price money for the month. If there is no person is willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from Rs 50,000 >> Rs 49,000 >> Rs 48,000, and so on. The person bidding lowest sum get bid amount. In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example if the auction is settled on a sum of 40,000, then the auction discount of Rs 10,000 (Rs 50,000 – Rs 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of `200. The same practice is repeated every month and every subscriber get at least a chance of receiving money. Illustration :
Functioning of Chit funds are better explained using an example. Take a typical chit fund with 25 members contributing Rs 100 per week. This fund will run for 25 weeks. On the first week all members will contribute Rs 100. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs 2,500. The auction will start with this amount. Bidders will start bidding by discounting this amount (reverse bidding). Let us consider that lowest any person bids is Rs 2,150 (a discount of Rs 350). This amount (Rs 2,150) is given to this winning bidder. Rest of the amount (Rs 350) is divided by 25, bringing the discount per person to Rs 14. This discount amount is returned back to each member. Sometimes a part of this may be kept by the foreman as service charges, usually in organised chit funds.