CHIT FUND
A chit fund is a financial scheme, popular in India, where a group of members pools money by making regular contributions over a specific period. In each cycle, one member receives the total pooled amount, determined either by a lottery system or an auction where members bid to receive the funds first. The amount forgone by the highest bidder is then distributed as a dividend among all other members.
How it works
Group formation
A group of members joins the chit fund for a fixed duration.
Group formation
Each member agrees to contribute a fixed sum of money in regular installments (e.g., monthly).
Pooling
These contributions are pooled into a common fund.
Distribution
In each installment, one member receives the total pooled amount. This is decided by:
Lottery
A member's name is drawn from a box.
Auction
Members bid for the amount, and the member who bids the highest discount on the total amount gets the money first.
Dividend distribution
The amount forgone by the winning bidder in an auction is distributed as a dividend to all members in that cycle.
Process continuation
The process repeats until every member has received their share.
Key characteristics
Combined savings and borrowing
A chit fund acts as both a saving and a borrowing tool, providing access to funds for those with limited banking access.
Managed by a foreman
A manager, or foreman, is responsible for collecting funds, conducting auctions, and distributing prize money.
Regulatory oversight
In India, chit funds are regulated under the Chit Funds Act of 1982.
Example
25 subscribers agree to contribute ₹4,000 for 25 months.
The total chit value is ₹1,00,000.
Each month, one member receives the ₹1,00,000 through a draw or auction.
The foreman charges a commission for managing the fund.