What is a Chit Fund? The Pros and Cons of Chit Funds

What is a Chit Fund?

If you’re not familiar with the term chit fund, this loan type could be an option for you if you’re looking to borrow money to buy land or property, pay for your child’s education, or finance other real estate-related expenses. But what exactly are chit funds? A chit fund can be described as an informal lending mechanism through which one party (the lender) loans money to another party (the borrower) at an interest rate of his choice.

All About Chit Funds

A chit fund, also known as chitya in parts of Karnataka and Tamil Nadu, is an Indian money lending institution. It’s a form of saving where members invest sums at regular intervals over periods ranging from six months to seven years. A kitty system enables members to pool their savings which are then lent at rates determined by the system. Returns on investment range from 8% to 10%. 

Chits usually serve as an instrument for regulating credit demand within the community by limiting borrowing through rationing. This type of lending works especially well in poorer regions, such as those in rural India, because it allows small enterprises to borrow at low interest rates while paying back loans with short-term cash flow. Some people argue that these institutions provide more liquidity than banks do and allow low-income families to maintain access to financial services. However, there are some drawbacks: in order to take part in this program, you need to be very financially literate or have someone who can help you manage your account – if not, you risk losing all your savings. Additionally, since this is a time sensitive service (i.e., your money will be invested for a set period of time), should something happen like an emergency where you don’t have access to funds or you need the money sooner than expected – you’re out of luck! Finally, many countries have regulations governing these types of institutions; so before investing any funds into this system, consult your country’s rules first.

Biggest Reasons Why People Invest In Chit Funds

Chit funds work by pooling money from various individuals, called investors, and then paying them back interest on the principle with this pooled capital. This can be good for those who cannot save their money in traditional savings accounts because often times chit funds will have higher interest rates to pay out than most banks. They can also come in handy for investors looking to take a riskier investment. 

Chit funds have been around for centuries but have really taken off as an investment option since the 1990s. A lot of investors choose to invest in chits because they don’t require much effort or understanding when it comes to managing them (outside of following a simple set of instructions) and they are liquid, meaning you can use your money anytime you want without being penalized. However, there are many reasons why people might not want to get involved with these investments. 

Chit funds require more trust that all goes well than other investments so if you’re someone who gets nervous easily or doesn’t like taking risks, chits may not be the best option for you. Additionally, people have complained about high fees associated with some chit funds which can lead to less profit over time. Finally, there’s always the chance that some of your money could go missing – so if investing feels too risky for you this may not be a great idea either!

What is a Chit Fund? The Pros and Cons of Chit Funds

3 Biggest Pitfalls Of Investing In A Chit Fund

1. High Sales Tactic – More times than not, an investor in a chit fund will get approached by someone who tells them about how successful their last investment was and encourages them to invest. It can be difficult to make your voice heard if you’re not educated on the pluses and minuses of investing in one.

2. Risk Factor – Investing in any type of investment carries some degree of risk, but chit funds take this factor to the extreme by being marketed as too good to be true. As the name implies, there’s no certain rate or percentage that investors can predict when it comes to their return because it’s all at the discretion of those operating the fund. 

3.lack of liquidity – The biggest pitfall that one can experience with chit funds is the lack of liquidity. For example, let’s say that you invest $1000 in a chit fund with an objective of receiving 5% interest per month. If the chit fund doesn’t pay the 5% interest, you have to wait until it reaches maturity, which could be up to 15 months. To withdraw the money before maturity, you would need to pay taxes on any capital gains made by the fund in addition to losing some of your principal investment if there has been any growth. 

How To Do Your Own Research Before Investing In A Chit Fund

It’s important to make sure you have all the information about any investment before you commit to investing. It’s best to consult as many reputable sources as possible so that you can make an informed decision. 

1) Investigate the Company You’re Investing In: Make sure that this company is a stable, viable, long-term company with the funds necessary to cover both your investment, as well as their own. 

2) Check out Online Reviews and Ratings: A lot of sites exist now where people discuss different companies or products and include reviews. Search for reviews on this particular company and see what others are saying about it before deciding if it’s worth investing in. 3) What is the Return On Investment? Be aware of the return on investment percentage and also know how much time will pass before you receive a return on your initial investment. 

4) Does this Risk Impact Your Financial Goals? Think about how much risk you’re willing to take based on your current financial goals. 

5) Will I Need Additional Capital Along The Way? Understand whether or not there will be any capital requirements along the way that may require more funding from investors down the line.

What Is Risk Capital And Why It Is Not For Everyone

The cash in your savings account, or maybe the money in your checking account. This can be considered as equity-free financing. If you have this much cash sitting around, go ahead and use it to start your business! You may have other sources of funds, like personal savings or outside investors (angel investors), but if not, this option is available for you. However, just because risk capital isn’t that risky doesn’t mean that it’s always the best way to go about funding your business – especially if there are more favorable opportunities for financing out there for you. There are two major types of equity-free financing: debt financing, where your assets serve as collateral for the loan, and bootstrapping. Bootstrapping means starting with nothing, literally; all you need is yourself and an idea. To pull oneself up by one’s bootstraps means to take matters into one’s own hands and make something happen without help from others; which is what bootstrapping entails.

4 Things To Consider Before Investing In A Chit Fund

1. Can you afford to lose the money that you invest in the chit fund? 

2. Do you have other assets to fall back on if this one doesn’t work out for some reason? 

3. What are the overall savings rates offered by the institution, is it better than what your bank offers (which may be 0% interest) ? 

4. What are the terms of withdrawals, are they up-front or over time (or both)?

An Introduction To One Time Investments, Recurring Investments And Regular Savings Plans

Chit funds are savings clubs that help people get out of debt. Participants invest the money in one-time investments, recurring investments or regular savings plans. They make payments into their own individual fund on a regular basis, such as weekly or monthly. If the participants don’t withdraw their money for six months, it becomes non-withdrawable and cannot be withdrawn until 18 months has passed since the last withdrawal. This structure can prevent people from taking out loans to pay off debts because they won’t have access to their funds for 18 months. There are also risks associated with chit funds; you may not receive your investment back, which means you will lose all of your initial investment if you need to withdraw your funds before they become non-withdrawable. Additionally, interest rates can change over time so you could end up losing more than what you initially invested if the rate falls below what you were expecting. For these reasons, chit funds aren’t always seen as an ideal way to go about saving money because there are risks involved with them and they may not offer high returns on investment like other traditional methods of saving money might do. It’s important to weigh the pros and cons of any type of financial product you’re considering investing in.

Be the first to comment

Leave a Reply

Your email address will not be published.