How Chit Funds Works

What are Chit funds and how do Chit funds work ? There are lots of chit funds in india like shriram chit funds , margadarsi chit funds and I would like to show you how chit funds exactly work and what are pros and cons in Chit funds. Over the past many years there has been large scale frauds and scams done by large chit fund companies. However, a lot of people do not understand the working and wonder how chit fund works.

Chit Funds in India

What are Chit Funds & How they work !

Let’s say there are 20 people who come together and form a group. Each one will contribute Rs 1,000 per month and this will continue for next 20 months (equal to number of people in the group). In this group there will be one organiser, who will take the pain of fixing the meetings, collecting money from each other and then doing other procedures.

So each month all these 20 people will meet on a particular day and deposit Rs 1,000 each. That will make a total of Rs 20,000 every month. Now there will be a bid on who will take this money. Naturally there will be few people who are in need of big amount because of some reason like some big expenses, liquidity crunch, business problem, Beti ki Shaadi etc etc … Out of all the people who are in need of money, someone will bid the lowest amount, depending on how desperate he is for this money. The person who bids for lowest amount wins. Suppose out of total 3 people who bid for 18,000, 17,000 and Rs 16,000, the one who bids the lowest will win. In this case it’s the person who has bid Rs 16,000.

There will also be “organiser charges” which are around 5% (standard) of the total amount, so in this case its 5% of Rs 20,000 , which is Rs 1,000. So out of the total 16,000 which this winner was going to get, Rs 1,000 will be deducted and the winner will get only Rs 15,000, Rs 1,000 will be organiser charges and Rs 4,000 is the profit, which will be shared by each and every member (all 20 people), it comes out to be Rs 200 per person, and it will be given back to all 20 members. So here you can see that the main winner took a big loss because of his desperate need of getting the money and others benefitted by it. So each person actually paid just 800, not 1,000 in this case (they got 200 back). Note that when a person takes the money after bidding, he can’t bid from next time, only 19 people will be eligible for bidding.

Now next month the same thing happens and suppose the best bid was Rs 18,000 , then winner will get 17,000 (after deducting the organiser fees) and the rest 2,000 will be divided back to people (Rs 100 each) . So each person is paying effectively Rs 900. This way each month all the people contribute the money, someone takes the money by bidding lowest, organiser gets his charges and the rest money is divided back to members. You will realise that the person who takes the money at the end will get all the money except organiser fee, as there is no one else to bid now. So the person will get around Rs 19,000 in the end, if you try to find out the returns which he got out of the whole deal, it will depend on two things, how much lower bids were each month and the fees paid to organiser, if bids and charges are very low, then a person will make more money at the cost of other situations.

So this is pretty much how a chit fund works, there are various versions of chit funds and how they work , but the idea was to communicate the basic model and how it works.

Trusted and untrusted Chit Funds & Some experience

A big question which is in every one mind is “Should I invest in Chit funds?“. Chit funds are not some investment products in which someone invests! By design you can see that it’s only a support structure for needy people who are unsure of their cash flows or some big expenses coming on the way. It’s only for those who can’t get loans from banks or some lender. In which case chit funds provide that structure where one can take the benefit of it. But beware!  Whenever someone says “Chit funds”, the only thing which comes to the remind is “Fraud”, “Scam” and “Something Fishy” and its true to great extent as there many chit fund companies which come in market and run with the money. The only condition where I feel one can go for it is if all the participants of the chit fund are known to each other properly and there is high level of trust between them. For example, you can do it with your colleagues at office whom you trust and are friends with for long. But if you dont have liquidity issue and can get loan from a bank, then I dont see any need of doing this.

Good experience

In smaller cities, you can see your father, grandfather and even many housewives form these groups with friends with whom they are from last many years. A lot of people on this blog might have experienced how their father used these networks to get huge cash at the time of need. One of the readers Jagadees shared his experience with me on mail

The great advantage for the village people would be availability of immediate funds in the times urgent need. My father would say that he met all his life obligations like his sister’s marriage, his marriage expenses, my grandpa’s medical emergencies, our education expenses were met solely through this type of monthly chit fund investment.

Bad experience

Greed has no limit. What was created for help to each other under a trusted network is now converted as a business and many people have started opening Chit fund shops where they become the main organiser and pocket the organiser fee. Investors have started looking at these chit fund companies from investments point of view and in greed of high returns, they invest their hard earned money with these chit fund companies and at times there are frauds and scams. Chit fund companies are regulated in most of the states by Central Chit Funds act,1982 and they come under the purview of state governements. RBI has no role in regulating them. But still you know how easy it is to do frauds and scams in India (don’t forget commonwealth & 2G and 3G and 4G scams, wah !  I am futuristic). Let me share with you a horrible experience how an old man lost his 40 yrs of earning in chit fund

My father-in-law when he retired, without telling any of us he put all his money in a chit fund. nobody knows how much & in which chit fund he deposited. That was the time when a series of chit funds went bust in chennai. Pity the chit fund in which he deposited also went bust. he had a mild heart attack. The pain he underwent other than the heart attack was terrible. He was in an ordinary job & after 40 years of hard work he had earned that money.

More than the loss of the money, it’s the shame, foolishness and the iyalaamai to take any action by us, the government kills.we supported him, but he wanted to be independent even after retirement. that objective was defeated by his shear foolishness. none of us ever asked him anything about it. but every day he must have been repenting for that . (via)

Easy & MicroFinance Tool

Can you believe that as high as 5-10% families are associated with chit funds in South India ? For example – The share of households participating in Chit Funds increased by 9% in Andhra Pradesh, 89% in Delhi, 15% in Tamil Nadu and 4% in Kerala between 2003 and 2006. You can see below graph that shows Kerala having 9%+ penetration in Chit funds which means 1 out of every 10 family is in some chit fund.

Chit Funds in India

Source : IFMR research

As per a report from IFMR on Chit Funds , most of the people in smaller places are attracted to chit funds, because of easy availability of easy credit and simplicity of chit funds. In small places banks are not much interested in lending to poor people and poor people see chit funds as perfect way of getting a loan, though at a high cost. So you can also look at them as microfinance tools. All of south India and Delhi is deeply flooded with chit fund companies (thousands of them) and its reach is much above what you are thinking right now.

Should you invest ?

Overall, chit funds are not recommended unless it’s a person group formed by friends and relatives whom you trust a lot. I don’t think one should put money with chit funds which are not among their social circle. It might make sense for people in smaller cities to look up to them. As the last note, these chit funds are not investment vehicles where you park your hard earned money, So please avoid them unless you want to exactly take that kind of risk.

Please share your personal experiences about chit funds , I am sure all the readers who are from smaller places , they have seen it and for sure there father or grandfather had used chit funds at some point of time to fund a financial goal :) .

252 CommentsAdd Comment

  1. Nilesh

    Manish again a nice article on chit funds.

    I would like to add here about the chit fund my mother used to play with her close friends & family members. Total 12 people are there in the group & everyone contributes 2000 per month in this chit fund. But here there is no organizer fees or bidding. Everyone’s name is written separately on the small piece of paper & then one of the member have to select one of the name. The selected name was eligible for the whole amount to take home. From next time onwards that selected person’s name was deleted from the list.

    Here the advantage is that the whole money is distributed equally :-)

    Sometimes even with mutual understanding money selected no was circulated among the needy person.

  2. Srinivas

    Good post, providing basic info on the instrument(if it can be called so).

    The article seems to say that chit is not to be used unless in dire need. I donot fully agree with this. To my knowledge there are many standard organisations whoch run these schemes with a good track record. However, caution is needed when opting for it.

    I feel that a mathematical illustration with return comparion will help reader analyse the scheme better.


    • Srinivas

      The reason I said of not investing in chit funds which are outside of trust circle is that those can become highly unstable at times depending on others conditions . Even if chit fund is registered and has some history , I personally dont feel that one should invest in them , because trust and history is many times created deliberately inorder to take in confidence and then run away .

      You would agree that all the chit funds which ran away has some history and were registered .


      • Srinivas

        I tried this(chit) long time ago once. When i calculated for my particular group, the return is no more than 11-15%. As some one rightly pointed out, it varies from group to group.

        I read that the bid amout(amount obtained when one bids and gets) is not taxable as there are no gains and all members get less as there is comission(organisation charges). However, organiser has to pay tax on the commission as business income.

  3. Nice article, but basic in nature.. Targeted at explaining the functionality and risks involved. Please provide return calculations as well to make this more rational.

    • Amit

      I didnt some return analysis ,. but did put it in the articles as it might be looked upon as “promotional” . What exactly you want to know . As far as my calcualtions in excel , the returns can range from 0% to 20-30% .

      The high returns would come when organisor charges are lower and the people in need bid for as low as 65-70% of the actual money in start and then as months pass by , the margin reduces (80% , 90% , 95% … ) … So unless people dont leave huge margins , these wont give much returns .

      But if they do , then there can be really good returns with high risk !


  4. gowri shanker

    good manish
    i have never seen anyone writing on this very important issue all these days

  5. Abhishek Kadiyala

    I am a south Indian from Andhra Pradesh.
    I can share the fact that my families’ major financial needs were met by putting money in chit fund by my dad (Sis Marriage, education etc…).
    There are many well organized chit funds in AP. Margadarshi, Shriram, Kapil to name a few…..
    I have been investing in Margadarshi since long time…..Myself and many Andhra people feel safe investing in this chit fund because:
    1. The owner of Margadarshi is Mr. Ramojirao…..The director of Enadu new paper, Priya pickles, film city etc. So I don’t feel bankruptcy is possible….
    2. If someone wants to take money in a month he has to show some surety…he cant easily take the money..This makes sure that no one is running away with your money.
    3. Things are well organized…you get a payment reminder, auction reminder etc. every month. Also the dividend distributed is also shared properly will all the fund members every month.

    So I feel that investing in a well organized and reputed chit fund is good.


    • Abhishek

      Thanks for sharing your case . good to see that you are comfortable investing in those chit funds and I am sure many else will agree . But many wont , may be because they dont have that kind of trust which you have .

      overall , I hope you put your money from liquidity and emergency point of view and not just to make money .


      • Praveen

        Getting duped in chit funds is frequent, but I saw more no of persons losing money in share market then getting duped in chit funds & I know a lot of s/w engineers who also participate in these chit funds in their home towns

        • Praveen

          I am not sure if the comparision if right . Stock markets do not run away with you money , its a timing issue due to which people loose in stocks . Chit funds can run away . What do you think ?


        • PRABHAKAR

          Authorised registered chits doing only 10% business.But non registered chits doing 90% business in SOUTH INDIA.Most of the people having non account[zero money] & corrupted money.Registered systamatic chit funds given to money through account payee cheq only.most of the un-employes started with out experiance new chitfunds.Please select very good track & good experiance chitfunds like SHRIRAM CHITS,MARGHADARSHI,SHRIRAM RAGHAVENDRA CHITS,……. .

    • ravi thatavarthy

      I have a similar story. My father and mother was able to meet all the major expenditures such as my sister marriage, my education etc by saving in the chit fund companies. One shud go for investing in reputed chit fund companies or known people who are into this business for quite some time. If you are lucky enough, the rate of return is more than 15%.

        • PRABHAKAR

          We are enclosed one example chit statement.
          Chit value 10,00,000/ Monthly instalment Rs 20,000/ Tenure 50 months.
          Share paid amount Rs 7,91,100/
          Dividend means profit Rs 2,08,900/SHRIRAM RAGHAVENDRA CHITS PVT. LTD. Date :28/12/2013
          Branch Name : SECUNDERABAD
          SECUNDERABAD. CELL: 99595 56605,06, PH : 040-27700605.
          Cum.share : 791100.00
          Cum.div. : 208900.00
          |INST| INST| PENAL | | CUM.SHR |
          | 1F| 20000.00| | 20000.00| | 20000.00|
          | 2F| 12000.00| | 12000.00| | 32000.00|
          | 3F| 12000.00| | 12000.00| | 44000.00|
          | 4F| 20000.00| | 20000.00| | 64000.00|
          | 5F| 12000.00| | 12000.00| | 76000.00|
          | 6F| 12000.00| | 12000.00| | 88000.00|
          | 7F| 12000.00| | 12000.00| | 100000.00|
          | 8F| 12000.00| | 12000.00| | 112000.00|
          | 9F| 12000.00| | 12000.00| | 124000.00|
          | 10F| 12000.00| | 12000.00| | 136000.00|
          | 11F| 12000.00| | 12000.00| | 148000.00|
          | 12F| 12000.00| | 12000.00| | 160000.00|
          | 13F| 12100.00| | 12100.00| | 172100.00|
          | 14F| 13200.00| | 13200.00| | 185300.00|
          | 15F| 12300.00| | 12300.00| | 197600.00|
          | 16F| 12000.00| | 12000.00| | 209600.00|
          | 17F| 12760.00| | 12760.00| | 222360.00|
          | 18F| 12580.00| | 12580.00| | 234940.00|
          | 19F| 12000.00| | 12000.00| | 246940.00|
          | 20F| 13400.00| | 13400.00| | 260340.00|
          | 21F| 13300.00| | 13300.00| | 273640.00|
          | 22F| 14000.00| | 14000.00| | 287640.00|
          | 23F| 14980.00| | 14980.00| | 302620.00|
          | 24F| 14798.00| | 14798.00| | 317418.00|
          | 25F| 14880.00| | 14880.00| | 332298.00|
          | 26F| 15780.00| | 15780.00| | 348078.00|
          | 27F| 15980.00| | 15980.00| | 364058.00|
          | 28F| 15940.00| | 15940.00| | 379998.00|
          | 29F| 16720.00| | 16720.00| | 396718.00|
          | 30F| 16898.00| | 16898.00| | 413616.00|
          | 31F| 16820.00| | 16820.00| | 430436.00|
          | 32F| 17598.00| | 17598.00| | 448034.00|
          | 33F| 17584.00| | 17584.00| | 465618.00|
          | 34F| 17682.00| | 17682.00| | 483300.00|
          | 35F| 17820.00| | 17820.00| | 501120.00|
          | 36F| 18678.00| | 18678.00| | 519798.00|
          | 37F| 18480.00| | 18480.00| | 538278.00|
          | 38F| 18860.00| | 18860.00| | 557138.00|
          | 39F| 18600.00| | 18600.00| | 575738.00|
          | 40F| 18998.00| | 18998.00| | 594736.00|
          | 41F| 19100.00| | 19100.00| | 613836.00|
          | 42F| 19198.00| | 19198.00| | 633034.00|
          | 43F| 19370.00| | 19370.00| | 652404.00|
          | 44F| 19580.00| | 19580.00| | 671984.00|
          | 45F| 19560.00| | 19560.00| | 691544.00|
          | 46F| 19780.00| | 19780.00| | 711324.00|
          | 47F| 19840.00| | 19840.00| | 731164.00|
          | 48F| 19940.00| | 19940.00| | 751104.00|
          | 49F| 19998.00| | 19998.00| | 771102.00|
          | 50F| 19998.00| | 19998.00| | 791100.00|

          EDP A.O Branch Manager

    • krishna

      yes u r xactly right i am one of the customer of margadarshi it is safe and trustworthy
      if one who reads it if from andhrapradesh i suggest that margadarshi is the best chit fund u can start with

  6. Nagarajan Santhan

    Hi Manish

    Nice article ….

    I wish to add one more point.

    Normally the org fees included in bid amount. Say example, if bid amount is 16000, org fee 1000 deducted from 4000 and remaining 3000 will be shared to all 20 people and the lowest bid person will get 16000 + 150 (as share amount) also he need to pay 850 for his contribution.

    This is normally happened in chit organized by individuals.

    Thanks and Regards
    Nagarajan S

    • Nagarajan

      So incase when the big amount is 19600 and the money left is only 400 , then how to pay organisor fees of 1000 ?

      I think you are talking about hte model which happens at your area . there are various models of chit funds and they run differently at many places !


      • Nagarajan Santhan

        Hi Manish,

        Bid will start based on Org fees i.e Rs. 1000 (so no way for <1000) .

        If the bid amount is 1200, 1000 for Org Fees and 200 for Share amount for all.

        Yes, your final point is true. I am talking about chits happed in my area (Coimbatore, Tiruppur and Erode)

        Thanks and Regards
        Nagarajan S

  7. Nikhil

    Hi Manish,

    I have a question. What happens when one or more members of chit fund are unable to pay their monthly investment? Suppose that member has already got money in 2nd/3rd month and is unable to pay from say 4th/5th month onwards… What generally happens with chit fund?

    For example in chit fun you described above, say in 5th month 2 members do not pay. That makes contribution 18000. How do organisers and members deal with this situation?

    • narasimha

      Organizer is responsible for payments, he need to take some kind of surety from the members who auction before giving the auction amount to him.

    • Nikhil

      As Narshima said, it becomes very risky and the organisor need to take care of this that the person gives some kind of guarantee or assurity ,

      This is exactly the reason why I discourage to put money in chit funds which are external and one does not know participants , it its a close group of friends , they can make adjustments and compromise on few things .


  8. Govind

    A great article !

    I wonder how the promoters run away with the investors money, if the money is returned back (minus the administration charges) to the investor each month. Could you provide with a illustration how the promoters are able to loot the investors money ?

    • narasimha

      These Promoters/Organizers may auction in the first month and then vanishes. They may be managing multiple chits at the same time.

      • How about this , I am a promotor and you both are my group members , you also become part of the group , Narshimha takes first month money by bidding , then Govind bids second month and takes the money , I take money in third month , in 4 month i collect the money from all and we all run away , considering the money is collected 1 day before and it was to be distributed 1 day after .


        • ravi thatavarthy

          Generally the chit fund people offers whopping rate of interest if we invest the bid amount with them itself. The rate of interest is 4%-5% more than the bank rate. If the organizer was not able to maintain the show, he will run away with every one money.

  9. Shiva

    Am from A.P. so we keep hearing a lot about Chits regularly. It has evolved from being handled by many small companies & ultimately only few companies settled down in the business. Similar to banking or any other business.

    Many have been duped,many have been saved, remember 20 years back getting a loan from bank is hell. Chits were the only tools for immediate needs apart from the money lenders( now MFI took up moneylenders).

    Chits have to be used only for requirements preferably where we need a LOAN not for saving the money. If we compare mathematically it costs almost the same as Personal loan. Hoping we are going to cash in < 6months.Relying on chits for savings could be dangerous.

    Know of a case where a good business man was doing chits for the past 20 yrs suddenly he faced huge losses had to close shop along with the chit.

  10. Krish

    I am always eager to know whether Chit funds are investment tools as they are compared at par with Recurring Deposits. I agree there are too many variables and not one chit would be similar. Even within the Chit, the returns could vary between first month winner and the last one. I am not sure from the investment point view, which is the right approach to be the first one, middle picker or last one.

    Also for the Rate of Return. Would they beat RDs at least with formal players like Shriram & Margadarshi. With 5% every month into organizer fee, I doubt whether investors would generate any positive rate of return.

    However as an emergency tool, it may make sense but am yet to see the credible information on the returns front. All the risks are heavily loaded in favour of investor and it surprises me in real that formal players are still in this business happily operating by blind folding customers.

    • Krish

      As far as organisor is concerned , I personally see them making a cool 5% profit each month , considering the other expenses are in control for manageing the group .


  11. Sampath

    Good Article Manish…

    I always have a heated discussion with my mother about the chit funds. She just loooooves putting money in that & she believes that she gets best returns in it.

    I feel this is not really beneficial when there are many other instruments in the market which are safe and give decent returns.

    As you said, Chit funds should be the last option. But yeah, if there is a reliable company ( Margadarshi or wat ever.. ) , i’d love to try once 😉

    • Ram

      Dear Sampath
      As Manish said most of the chit fund agents are fraud (including Margadarshi). They do lot of tactics to cheat the members. I (also some of my colleges) had faced lot of problems with Margadarshi Chit Fund.
      They want lot of guarentees (incl guarantee from any one Govt employee) while paying the money. They delay the payment atleast 2-3 months.
      Percenge Returns for investment is also very less (in the range of 30 paisa to 50 paisa per 100 rs per month).
      I advise never invest in Chit Funds (specially companies like Margadarshi Chits. You know a lot of cases are pending in the court on them).
      Thanks, Ram

      • vikram

        Yes,Margadarshi is right in demanding guarantee to safeguard other participating members.Do you expect them to give other members money freely to you with out surety so that you can runaway or default.

        • PRABHAKAR

          yes,Margadarshi is taken good decision.Good chit funds maintained some systems for safety of other non bidding chit members.Systamatic Chit organiser followed by only central chit fund act .

  12. Kartheek

    Hi Manish,

    Really appreciate your time & effort to educate us on all forms of financial issues. About this article, I always wonder how these small financials groups in India are common and easy way of rotating the funds. Of course, trust is the primary factor!

    In Karnataka, Mysore Sales International limited (MSIL) a govt run organisation which has Chit funds schemes. As it is run by the govt, the funds are secured and they are running it from past 30 years are so without any obligations. I’m sure these kind of govt run institutions should be there in other states as well.

    below is the link for more information:


  13. Raj

    Hi Manish,
    Thanks a lot for ur invaluable advice on chit funds…I have heard that KSFE runs a reliable chit funds organisation. It has the backing of the State Government of Kerala, I am told! Is this true?? I have a fundamental question. If the safety factor is ensured by going in for KSFE type chit funds; then, mathematically, is investing in chit funds a wise option ALWAYS?? What are the unknown variables that may affect returns adversely??Is it useful for someone who does not require ‘lump-sum’ money as a loan, to go in for a pure investment purpose in chit funds?? What would happen if, for example, after the first half or so of the duration of a chit fund, no one bids any more?? Could you kindly consider analysing some of these issues mathematically?? It would of a great help to all of us, I feel. Thanks a lot.

      • Shinu

        Hi Raj and Manish

        It’s true that KSFE run by the state govt is running similar type of bussiness and too many are benifitted from the same. Dont know much details but still sure of it / monthly autions…etc. One thing i was wondering is the data post 2006 which i feel need not be showing the same growth as before because of the bans penetration in the last 5 years in the rural areas. I personnally know many chit funds which have closed down during this period.


  14. Vishnu

    I too had little bit of fear in investing in Chit Funds because of the chance of risk. But, because of the trust on the organizer, that he is running the chit fund for 20 years smoothly, I had experience in investing in this for the past 4 years. I have got decent returns of around 12% and did not face any issues.

    Only recently, after subscribing for the Basic Financial Planning from Manish & Nandish, I decided to close all the running chits with little loss.

  15. Murali

    For all registered chit company, it is mandatory to register all chit groups in government registration office. To register a chit group, some specified backup security needs to be shown. Also, as mentioned in a earlier comment, a customer who won the bid needs to give 2 to 3 sureties.
    So reputed companies like margadarsi, sriram are legally backed with law. Only unregistered chits have associated risks.

    • Murali

      mostly true , but I dont think one can conclude it like that ,there are many companies which run away even though they are regiustered , rememebr that if one’s intention is to do a fraud, no one can stop him :)


  16. Amit Patel

    Really good to know.
    In Gujarat private chit funds are also known as “VISHI”, where people invest Rs 20/200/2000 as per capacity.

    I heard from businessman “Arent you a part of VISHI, strange” ?
    Sometimes it is a status for participant.

  17. Raghavendra

    The returns in a chit fund scheme are not equal for all. The later a person bids, the higher is his return. Since the organiser is also a member of the group, he normally retains the previlege of being the last person to bid – i.e. in the 20th month as in the example given by you. If an investor could use “influence” to ensure that the investor is the 19th (example) person to bid, his returns would be higher than others.

    • Raghvendea

      It can be even the first poerson who makes the most return provided he does not have to take a lot of loss , remember the outflow is same , so if a person can get max money earliast , he will make max profit .


  18. One major point for the success of Chit Fund companies in India is that loans are easy to raise as compared to the formalities and eligibility procedures in Banks.
    Moreover, the repayment in Banks has to be made by Cheque whereas repayment to Chit Funds Companies is made in Cash.

    Infact Muthoot Finance was earlier organiser of a Chit Fund only and he started his business as a Chit Fund Company

    • Karan

      Yea .. Given that 95% people fall in that category who do not easily get loan from banks and need small ticket loand , chit funds are the perfect way for them , only if its from some trusted network


  19. Sushil

    A large number of such type of schemes are running in my city. no doubt, organisers are earning a big and housewives are attracted to these schemes….though the members are socilly known to each other and trust factor is there, yet the biggest gainer is organiser who earns a hefty intrest on the money collected becoz the methodology is different…
    here suppose 200 people depsoit Rs 1000/- per month and a winner gets 200 x 1000 nearly 180000 but the winner need not pay further installments…in this way the first month winner gets a lottery of Rs 180000/- by paying just 1000 and his name is struck off from scheme. next month remaining 199 people do the same and here organiser earns a very heavy intrest…or in other words we can say that he gets money for his personal use without intrest

    • Sushil

      I am not sure if I agree to this model . Is it really in existence . because if thats the case , then a person who pays 1000 , will be ready to bid anything above 1000 , because he will not have to pay anything later , so why will; anyone loose that first opportunity ?

      Please reconsider what you said in your comment , give me the logic for that .


      • sushil

        Ya the same things going in my city in haryana.
        i have mentioned right
        even my family relatives run this type of schemes and moreover logic is the intrest earned from acumulated money becoz the schem is for 12 or 18 o 24 months and at last all unlucky fellows get their money back but the intrest is of organiser

      • Shinu


        Its not bidding here but lots – lotterry.

        Even gold shops do run this business. monthly Rs 10000/- for 24 months from say 100 people. each month lot is taken and the lucky one will get gold “ornaments” worth 24*10000, and he dont have to pay anything further. At the end of 24th month all the 76 (100-24) will get gold “ornaments” worh 24*10000. The gold shop is having ensured business + intrest free loan and the lucky one by lot the gold too. The more number of participants the better for the shop keeper :). Makes the ladies save.



  20. Mani

    Hi Manish,

    Nice article…. now I understood how Chit Fund works…..

    Thanks once again for posting this article…


  21. Avinash Dodal

    Dear Manish,
    I am a chit fund agent and doing this business since 2007. I am associated with Shriram Chit Fund and have AUM around 10 cr. Personally I am too get benefited with chit fund. Here are some facts about Registered chit fund.
    1.There is Central Chit Fund Act 1982. According to this act every state has authority to frame their own Chit Fund Act. So for Maharastra it is Maharastra Chit Fund Act 1984.
    2. There is a regulator for every Chit Fund. It is called as Ragistrar of Chits (ROC)
    In Maharastra Joint Commissioner Sales Tax is ex-offico ROC.
    3.For starting any group there are legal procedures such as to frame bi-law for collection of money and commencement to run the group and organize the oction. Regulator is involved in these procedures.
    4. Minutes of oction should be submitted to the Regulator(ROC) on regular basis.
    5.For consumer grivences ROC acts as arbitrator. You can appeal to civil court.
    6.There is a specified bid limit as per act.(It is 5% 40%max. This is the amount of Loss).You can claim this amount as “loss on chit” in your returns.
    7.Organizer (called as Foreman) commission is set 5% (of Chit Value)max as per the act. This amount is deducted through the bid amount. Not through the prized money.
    8.While disbursing the prize money company takes guarantee either in personal form or liquid form. This is subject to the Foremen satisfaction.
    9.There is a long tenure such as 40 or 50 months.
    10.Chit fund is a double Decker vehicle where you can borrow money cheaper than banks( @10 to 14%) or you can save by generating very good returns (14 to 18%)
    11.This is very good and different instrument for financial planning.
    12.As per the best of my knowledge no REGISTERED chit fund company has ran away.
    13.According to one report there is 10 times money is in circulation with unregulated chit fund.


    Avinash Dodal CFP CM
    Aurangabad, Maharastra.

  22. Raj

    Dear Manish,
    Thanks a lot. I am now quite convinced about the safety aspects of registered Chit Funds.My question is…Avinash has said that it is a very good instrument for financial planning generating 14 to 18 % returns. On the other hand, you feel that it is very difficult to get returns over 5 to 8 % in most of the conditions. Can we have a mathematical or logical analysis to this aspect please?? So, is it better than PSU Bank FDs ?? And what about FMPs with CDs only , Company Deposits in Blue Chip companies , SIPs in Mutual Funds etc. Also, what about the Income Tax aspect in Chit Funds?? I am planning to invest some money systematically every month and I feel that your and Avinash’s considered advice will be most valuable. Thanks a lot.

  23. Sebastian


    One major threat here is the party who has won the Chit, decides to discontinue or runs away or for that matter impaired further payment, then the chances of Chit failing is very high. Unless it is a proper NBFC, they cant excercise lein on the borrower’s assets also. Most of the fraudulent companies run multiple schemes at the same time and run away once thousands of people are remitting money. So be cautious when the Chit Companies miss payments to people. Another common trend is most of them would be registered in far off lands say a Cochin Chit Fund would be registered in ‘Faridabad’ etc

      • Sebastian

        Dear Manish,

        I belong to Kerala. The land of lakes, letters, latex and lenders. Kerala has the maximum number of Chit Companies and every 2nd or 3rd year we see massive scams of Chit Funds running away with Investors Money. Kerala Goverment has started a Chit Company by name ‘Kerala State Financial Enterprise (KSFE)’ to help the investors to invest in chit and protect them against exploitation. I am a beneficiary of KSFE where we invest just like a SIP monthly and keep getting dividends monthly. I also make it a point to call the Chit on very early stage and put the same as FD that fetches around 10.5% now

  24. Deiva


    Nice article.

    * My family uses chit funds and as u said trust is a major factor in selecting the moderator / group. Though they are not a part of group, they have trust in moderator who in turn selects people and takes the responsibility of running it.
    * I try to analyse the returns made from these funds, but since the amount we are paying is varying per month and other calculations involved i am not able to see the exact returns. Do you know what kind of calculation strategy one needs to follow to know about the returns? In my case lets say one pays around 1,60,000 and ends up with 1,80,000 at the end of 20 months? How can i say that i got a return of x % in this? Mainly in chit funds the amount we pay in the first 10 months is lesser and in the next 10 months its higher.
    * From my experience i can say that its good and if one waits till the end he is sure to get a good return when compared to FD’s or RD’s


      • Sreekumar Menon

        From my experience, Chit fund is useful for Small and Medium businesses .Chit Funds generate money with little effort and capital.

  25. Nisha

    Hey friends, I have a query related to chit funds.

    1-What if I want to cancel my chit fund?
    2- prematurely withdraw my chit fund?

    In both the above cases, what will be the maximum amount I will get?

    Eg- I have paid for 7 months. 18 months more left to pay.(25 months total)
    30000 per month.

    What is the maximum amt i will get in both the above cases. And what are the chit fund bye-laws/rules for both the above cases?

    What amt will i get if i cancel after paying for 7 months? what percentage?
    What amt will i get if i want to prematurely withdraw after 7 months? what percentage?

    please reply as as possible. thanks!!!!


      • Deiva


        I think that it depends on the rules formed by the group. There is no concrete rules as we are aware and we need to check with the group moderator for this.


        • Srinivas

          I think the concept was not understood fully.

          1-What if I want to cancel my chit fund?
          2- prematurely withdraw my chit fund?

          There is nothing like cancellation. Is the doubt that what happens when one stops/default paying after certain time. If yes, there can be two cases. He took the chit(bid) money before, in which case the organiser will recover the money from the sureties provided by the member. If he did not take the bid, then there will be a penalty (which will be agreed up front). The organiser cuts this from the amount paid and returns the balance after the chit duration is over. Also organiser cn take another member to fill that place.

          • Nisha



            What is the maximum amount a person gets in chit fund?

            Eg- 20 months, 50000 per month.

            If a person is in NEED of the money, and wants to PREMATURELY WITHDRAW, what is the amt he would get? If—
            1.there is no other bidder except him?
            2.other bidders….(bidding maximum permissible amount)

            will it be—–

            1. 10 lacs( is this possible? can a person get full amount if no other bidder, except him?)
            2. 10 lacs minus 30 percent( max permissible amount for bidding)

            Awaiting reply….



            • Nisha

              THe max amount is the least bid , so if a person is alone , then the max amount he can get is what he bids , but the max amount comes only after deducting the organisor fees , so if its 5% , then he can get 9.5 lacs .

              If there are more peopel , then max he would get is what ever is the mix bid , what if someone bids 7 lacs , then he has to bid less to get the money , hence the bid would be low than 7 lacs


  26. Hem

    I’m from a small village in AP, where chits are very common. There more than three groups that run chits. The chit fund mentioned in this article (frequently called dividend chit) is different from that is run at our place. The dividend is not given back but it is accumulated and once it is a sizable amount, this amount too goes for bid (till the amount becomes sizable enough, it is given for one month interest to one of the participates). So there can be multiple bids in a month and this reduces the number of installments to be paid.

    I calculated the returns for a few chits (not dividend based). on an average I see it is around 15%. If you are an intelligent bidder, you can bid at a time where you can get the money just for 2% interest. I see people who bids and later lends the bid money for interest. I see that is profitable sometimes. The interest earned is payed back as installment.

    Btw, I’d like to understand the tax angle on the money earned.


    • Hem

      I am sure it can be 15% many times , but you need to accept that it comes with a high risk and thats the reason the returns are so high . I am sure that from tax angle there is no seperate provision . The money you get in excess of what you put becomes your taxable income .


  27. Murty

    All Chit fund Companies are bogus.Whether it is Ramoji or Laxmoji…..they all play on the minds of the people who easily fall prey.They promose a lot but hmmmmm! let me tell you something.
    There is a 20 Month Chit for 1000 rupees.Say, it is a chit without auction.
    So, you need to pay 50 rupee a month, and get 1000 at the end.
    If you want money in the first three months, you will get 700, from then on,it will be 720,740,760,775,790,805,820,835,850,865,880,895,910,920,930,940,950.Remember, it is never 1000.
    So what is the catch?
    1.The Organizer gets an assured 50 per month.He doesn’t need any surity.
    2.It is your choice to get the lumpsum amount as per your requirement.If you can rotate it for a higher interest, you can get good returns.
    3.In total, you pay 874.So, if you stay up to the end, your Returns would be 8.7%, without considering the time value for the 20 months.
    4.Safe? Not sure.
    5.Why there are so many such companies mushroming around?

    • Murty

      Now the Dark Side of it!
      Watch it guys!

      You have 20 – 20 game on hand!
      You need 20 Months time and you need only 10 people to make money.
      Why 10? Because the other 10 would be “ARTIFICIAL”.
      Then how does it work?
      There is a technique called auction:
      Say you need 700 in the first month, but, the auction by the fictitious members(Normally a Chit fund company Employee) would bring it down to 500.Let us put it safely to 60.And for the 10 months of outsiders, who want to go for the auction, the average outgo would be 750.As a whole, the company would dole out 7500 in 10 months out of the 10000 collected.Where is the remaining 2500?
      500 for Processing fee, remaining 2000 for “Dividend”, out of which the 10 outsiders will get 1000 and the remaining would go into the company account.Hence the company made 1500, without trouble.This has to be subtracted from a fictitious amount of additional investment of 10000 by the company, which it will only show on paper.If you do not participate in auction, it will create it’s own auctioner, and reduce the outgo.If no outside bidder is there during that month, there will be no auction, and there will be less dividend.This will contnue for 10 months

      • Murty

        It is now the time comes for the RETURNS!
        Don’t be fooled for your return! The returns I am talking about is the Company returns.
        Since you have already participated for the first 10 months, the next 10 months would be getting MEAGRE dividends, since it is an out flow of cash from the company.Still , out of this dividend, the companywould get half of such dividends.say,out of the 1000 given on dividends, the company will get 500 back, for 10 of its own chits.
        Now How much the company is made out of a 20 month chit?
        Since it will get at least 900 for the next 10 months, the total would be 9000 Plus the 1500 plus the 500 it will recieve.Hence it would be 11000.How much it invested? Do you think it is 10000 and say it is 10%?Wrong!This 10000 investment is FICTICIOUS.It has invested NOTHING!

        • Murty

          The worst part of it is not yet over!
          The trouble starts if any of the outsider defaults.Since you are not playing the game, some one else has to be roped in.Now the agent lures you that it is a 20 month chit, and there is a vacancy, as a person opted out of the chit.They say if you can pay the total upto the period of the exit of that person, you can join the chit.Say a person left in the 8th month.He asks for his money, which will be less than his actual payment, for his own decision, but the Chit fund company needs the same amount for contnuity.So, it attracts another BAKRA, with the same amount, who has to pay the next 10 installments!

          • Murthy

            I agree that there are heavy chances of fraud and these tactics in pvt chit funds .. thats the reason one should only get into trusted friends network and only see it as a way of getting fast cash instead of loans .


  28. Raju

    Suppose no one in the chit group is interested to take money or to participating in the bidding then what will do the organiser that particular month?

      • I work in KSFE, which is a government-owned chit company in Kerala. This [that no one in the group being interested in bidding] can happen. What we do is we do a draw of lots of eligible subscribers – that is subscribers who are prompt in their remittance and have not won the prize money till then – and choose a winner. There should be one winner each month.

        Here is the answer to your next possible question too. If there are no prompt customers, the foreman itself will substitute one ticket. As I said earlier, there has to be a winner each month.

  29. rahul


    Nice article…. I had a big question about rate of interest that i am going to receive at the end of chit term.
    i.e. If i bid for 20000 amount and received 14000 what will be interest rate?
    similarly there are chits which give dividend in the form of making payments for lesser period i.e. 20 months in your example to 16 months..
    then how to know interest earned on this…….

  30. Vivek

    Every thing mentioned in this article is correct, EXCEPT the deduction of Organiser Fee.

    Organiser Fee or Foremans commission is 5% of the Chit Value and is deducted from the “Forgone Amount”.

    In the above example, the Rs.1000/- as commission would be deducted from Rs.40oo that was foregone by the bidder. Remaining Rs.3000/- would be equally distributed among all the members including the prized bidder.

    Chit Funds are an alternative source of raising funds and should be considered only when banks loans are not available (propably due to bad credit history).

  31. Sanjay Thorat

    Thanks Mainsh for this nice article. I was planning to invest in the registered Chit Fund that my friend has started. But, after reading this articles, a lot of contemplation and talking to few people, I came to the conclusion that Chit Fund is not for me and it’s not the risk that I need to take.

  32. Binu sasidharan

    This is an interesting article. Thanks for all the comments. Chits are for raising money in times of urgency. Consider it like that and not as an investment tool. When there is a govt. sponsored chit like KSFE, the chance of fraud is virtually nil. If the whole issue is surrounding trust and fraudulence why not KSFE chitts…………..

    • Binu

      You can invest in them at your own risk , note that till any fraud happens , everything is safe only .. satyam was safe ..,. Lehman brothers were safe .. so if you label something as “safe” its safe only till the point something happens ..


  33. Ravindra Deshpande

    1. List of documents required from members ( if sm1 doesn’t have PAN Card).
    2. How is the dividend treated from taxation point of view.
    3. Is any TDS applicable for the amounts ( both dividend & lumpsum
    chit fund ) paid to members of the chit fund ?
    4. Generally at what discount range the needing members of the group
    pick up the fund ?
    5. What would be foreman’s charges ?
    6. Are the payments contributed to chit funds covered with insurance (
    as the bank deposits up to 1 lakh per account are covered.). If so up
    to what limit ?
    7. Can the HUF be member of the fund ?
    8. If a member picks up the chit fund, initially at discount ( loss ),
    can the dividend be set off against the amount of discount ?

  34. Shyam Ranjan

    hey, it’s Owsum game but lil risky also, my grandmother also played chit-fund without knowing that her friend will cheat her, my grandmothers all money took by her best friend she was Brahmin., dont trust your friends and family in chit-fund.

  35. bkrajaganesh

    good article, as said this is not recommended for investment. only of peolple who need money and an able to get credit form bank .

  36. ravikanth

    Hi all,

    i i read almost opinions from all perspectives. I am from Hyderabad. my mother had chits in margadarsi for almost a decade where she had nearly 4 chits in different periods.
    it’s very safe here and also shreeram & kapil to my notice where we get close to 12- 16 % return after deducting 5% charges. it’s a good way of saving money.
    lets wish these organizations reduce charges to 4% then return can be really good upto 18%.
    never invest in unfamiliar chits at all. split the money if investing in your social circles.

  37. Ashwin

    Hi Manish,
    Its a nice article about chit fund, i was asking many people to explain about this , but you really did a great job by explaining chit fund in simple illustration.

  38. prasanna

    hi manish
    currently the recurrent deposits are giving almost 9.5% interest. In investment
    perspective is there any chit fund scheme(reliable) which may yield more than
    that. Where to know about such schemes

  39. Vishnu


    There is this online chit fund –

    They claim to take zero commission. But they have a joining fee. But still that sounds far better than 5% commission. And they have online auctions and payments. Super convenient.

  40. Phani

    Nice articial. It is risk and no guarantee of returns. But it is same with many of the mutual funds we have. Though it is big companies but still no guarantee of returns from share market they invest. The percentage they take for maintaince is more then 5%. Bottom line. It is same with any investment. Investor has to be very careful and should know and plan where he is investing. After all thinking, I felt LIC is safe then anything else.

    Thanks for the article.

    Phanindhar reddy Jagganna

    • Hey Vijay

      thanks , I can see that you copied an article on chit funds without permission , never do that please without asked the original author , it leads to palagarism and is illegal, your hosting account will disable your account if I complain . Please remove it


  41. Srinivas

    Hi Manish,

    Thanks for the good information. Many people think chit fund is for investment. But chit fund helpful only need of maoney. RD/FD investment will give more returns than Chit fund. Insteadof borrowing personal loan@ high % of interest on principle chit fund can save the interest amount.


  42. Sada

    Thanks for this Article. Its very informative.

    All i can say is, Go ahead, get into Chits… But be prepared for the worst. You may end up loosing it all. If every thing works well, this thing really is a life saver. (Only if everything works well).

    I am from Bangalore, I stay right next to a street full of jwellers and pawn brokers. They are into chit funds from decades. Not as organisers, but as members/investors. Thats how they run their business. They understand the risks invloved and put their money in more that 5 chits at a time. They have done really good so far in terms of making money.

    But a normal salaried person like me really cant affor to run life on that risk. So I say, talk to banks and see if you can arrange the required money. If not, get into some very known and trustworthy chit fund organisers. Its difficult to find one, but they do exist. I have heard Shriram’s name couple of times as a good one. But again, just heard.. never tried. You never know when these guys will make you a Bakra. :-)

  43. Manoj

    Dear Folks,

    I have been following this blog for some time and finally thought it’s time to write. I come from a family where we run chit business for the last 65 years and I must admit that my opinion below is not biased but only based on facts that I am aware. I am yet not in the family business but still I have been breathing this for a while.

    Let me clarify few Myths:

    If you put money in a chit funds company they will run off:

    1)Please go and look for registered chit funds and make sure that the chit plan that you are entering is registered in the registrar office (registration dept – same place where you register your land, house etc). What this means is every time a chit promoter decides to form a new chit group, he needs to register that particular group in the registration department and get their consent. You can ask for that document and the promoter has the responsibility to show it to you. While registering this chit scheme the promoter has to put a bank deposit equivalent to the chit value (say if you are getting in to a 5 lakhs chit, he will deposit 5 lakhs in the bank along with the registration dept). lets assume even if the promoter decides to run, your money is safe and registration dept can give that money back to the chit holders. At any instance the money collected in a particular month will not be more that the value of the chit deposit. So the chit company has no reason to run as their money is locked. Most companies work on a moderate commission of 5% and hence when they promise this and that, then it’s time to think how will they be able to give that you.

    2) Most chit funds company will also have a finance division which promises greater return on investment and that is where the main problems happen as it is not regulated. So if you next time hear that there is fraudulent chit company it cannot be on chits and it is the finance company. There is a difference between both but our media does not project it that way.

    3) Many times it is the other way, registered chit companies chase non paying subscribers, as if everyone doesn’t pay their subscription (or monthly installments) in time it’s hard for a company to pay the priced chit subscriber on time. You should also check the financial backup of a chit company so that they will have enough liquidity to run the chit group despite of few non paying subscribers. This will be the risk if you go for smaller groups within families, friends or so. End of the day each subscriber is asked for collateral guarantee before the money is released and hence the chit company can approach them legally to get their money back but during this time you need liquidity to run the group successfully. Hence scale of operation is an important aspect.

    Finding a good chit company is very difficult:

    1) You can enquire at the local registrar office to find out which are the chit companies that are running registered chits in your area and you can choose one based on their market value and few other credentials
    2) You can also write to All India association of Chit funds they will help you by answering your queries and give you a list of registered chit companies in your area.

    Few interesting facts:

    1) Chit fund is a very interesting financial product where you can take a chit for anything, holiday, buy gold, land…. (unlike home loans for home, car loans for car…). I have even seen people take the priced chit and buy gold and get benefited from the appreciation.
    2) For example you take your money at 15% interest. Your interest may go down based on the dividend that you get through others…hence no fixed interest rate like the personal loan


    The chit funds is a disciplined financial model that could be savings for few people who will get dividends through others borrowing or it could be a handy loan with floating interest rate.
    So choose the right company and make use of this model.

    • Thanks for clarifying a lot of points , even I didnt knew a lot of things here .. However the agenda of the article is to communicate that one should be cautious before investing with any chit funds . If they are trust worthy only then one should go ahead .

  44. ram thakkar

    Dear Mr. Manish,

    you article is very informative, i have query for you, take a case i want to incorporate a company ( Pvt Ltd) underwhich the main object is trading of multiple commodity and i am proposing to float a scheme under which i am take Rs. 1000 monthly contribution for 20 months and a draw would be their every month, the winner will get some article as price and exempt for rest of monthly contribution. At the end of 20 weeks all the members of scheme will get goods of value they have made the contribution, please guide whether its a chit fund company or not and requires registration or not

  45. naveen

    hi manish dis is naveen i want to open one new chit fund company in bangalore pls give me the procedure of opening new company…….

  46. ramesh

    Hai, my friend told me to invest 5000 every month in margadarsi. He, said that i have to pay 5000 for first three months, from 4th, i have to pay only 3500 and remaining 1500 is profilt for me . it goes on like this for one year . But after one year it may decrease . Is that true ? Can i invest . i donno anything about it . But according to his words I will get 1500 profit every month . do i really get that profit ? So after one year if i withdraw my money, will i get the amount with that profit ?
    Thanks !

  47. Mandagadde Shankar

    Mr Manish,
    You ave not covered as to how big players like Sri Ram Chits, MSIL, Surabhi Chits etc are functioning from decades. They are claiming thatthey are covered under Karnataka Chit Fund Act and MSIL is taking immovable property as security for releasing bid amount. Before acepting the security they are obtaining legal scrutiny report from the panel advocate, Valuaion report from the panel engineer etc. In case of Surabhi Chits, they have chit ranging from Rs 40000 to Rs 2.50 Crores.

    • I have just concluded how chit funds work and how frauds happen , there are registered chit funds and they are doing good, one has to deal wth them based on personal trust with them .


  48. joseph

    There is a central Act called CHIT FUNDS ACT,1982 which is applicable to whole of India. All chit companies are supposed to function under this law.

    Before commencing a chit the forman [person conducting the chit] has to obtain a previous sanction from the state govt within whose area the chit is to be commenced or conducted.For this,forman has to deposit an amount equal to the chit amount which is proposed to be commenced.
    Next,forman has to register the chit agreement in that state.
    So if you want to join in a chit you have to ask for the photo copy of the PSO (previous sanction order)and verify it in that state govt”s web site particularly,in the dpt which issued the PSO.
    After joining,you have to sign a chit agreement with the forman that is the back bone of a chit.It contains the rules and regulations of the chit.So,in advance you have to carefully read the draft agreement.After registration you have to obtain a copy of the chit agreement from the foreman who is bound to give you as per the law.Not later than first auction you have to verify the Certificate of Commencement issued by registrar of chits.
    You have to do all this when you want to join a chit .Otherwise,you won’t get any money if the company is collapsed.

  49. Rohith

    Hi Manish,

    Your article is very informative and cleared my doubt in chit funds, i have small doubt left in my mind. Recently all the banks started recurring deposit schemes take for example Vijaya bank came up with a scheme where every month you need to invest around 7500rs and at the end of year you will get 1,00,000.
    I am planning to take it but confused whether to go for above plan or invest in a chit fund.
    Kindly help me in taking the correct decision.


  50. vijay

    hi manish i want to open one new chit fund company in Delhi / uttar pradesh pls give me the procedure of opening new company

  51. Sanjay Thorat

    Hi Manish,

    My friend started a chit fund company with his friends last year and it is doing good. He told me that if I use chit fund borrowings to prepay my home loan, I can save more than 5 lakhs of home loan interest. He is a very trustworthy person as he is my close friend. Its really difficult for me to believe that chit funds can save more than 5 lakhs of home loan interest for me. Do you think if his proposal makes sense? Can you please provide your valuable inputs on this?


  52. Srinivas


    This is Srinivas, i am planning to start Chits in Hyderabad with in my friends(20 members).

    Can any one suggest me how to start Chits and run?

    Greats thanks in advance.

  53. Pratik

    Hi Manish,
    You said that there will be a bid everytime on who will take the money(lowest bid wins). And it would normally be someone who is in need of big amount.
    My query is what if no one is in need of money at that time. Than who will bid? And how will money be distributed?

  54. MIke

    Lets assume that the operator is honest but what if even 1 participant defaults?
    Who oays for this default?

    What asurity does the operator takes from the person who takes the money in auction?
    Specialyy debt recovery is so difficult in placer like India

    • In that case the person who defaults might have to pay his share next time with additional interest amount , else if he violates the laws, his deposited money till date will not be given back . there is no standard rules on this btw .

  55. Mike

    1) What sis the security? and in %
    If teh security is solid why would a person go this way to borrow? would they not be better offn going to main banks
    and if there is no standard rules the organiser of the CHit fund hase HUGE risk.. don;t they?

    • Ajay

      Find a Chit fund with a good track record. There are some very reliable chif funds around some run by the state Governments. The advantage of Chit fund is that it is a reliable way for you to get an amount and the opportunity strikes every month. Once you can win the bid war you can walk away with an amount by giving some suerty for the amount that you owe (number of chit installments). Compare this to a personal loan of 16%-18%. Some people might not qualify for loans from the banks.

  56. Sunil

    What happens if one of the initial prize winners (successful bidders) unfortunately dies soon after he has got the lumpsum? How does one recover the remaining instalments? How can the fund continue in such a scenario?

  57. Ajay

    Hi Manish,

    From you example, when 200 rupees goes back to each member as “divident” they don’t actually get it in their kitty instead the next month they only have to pay 800 (i.e. 1000-200). However in case you never get to win the auction you will get only what you pay e.g (1000+8000+950+900……). Matter of fact the chit fund manager will deduct his fees also from your total amount. There is no way the chitty member has earned anything here matter of fact he/she has lost money.
    Wonder how you can compute tax here when there was no interest paid out.

  58. Mike

    My question was ( assuming that The CHit fund manger is honest)
    1) From investpor’s point of view: How does the chit fund manager makes sure the person who takes the prize money keep paying the next instalment?
    What surity he takes?
    If it is FD thne why woudl the participant not use that money itself sure the % he has to pay in costs to borrow via Chit Fund is higher than what he is earning at teh FD

    2) From Borrowers point of vie .. what surity one has to give? ( sam equestion in reverse)
    I am not based in India so not aware of all the types of assurances required hence teh question

    • joseph

      Hi Mr.Mike,
      Before releasing the prize money,Foreman (operator) will collect security from each and every prized subscriber. One can offer landed property or other movable property as security as per law.

  59. Mike

    Jopseph, thanks
    I am trying to find very specifics
    What exactly is required
    Ok if it is landed property then it is not “movable ” also if default happens it is not that liquid.
    Also what is the proportion?
    For a prixe money of X Rs what is the property has to be worth?

    Does anybody know

    • joseph

      Hi Mike
      As per chit funds Act,a prized subscriber can give movable or immovable property as security.
      Example, ( in the case of immovable property;) Future liability at the time of receiving the prize money is Rs One Lakh. then you have to give an immovable property worth Rs One and a half lakh.
      In the case of movables, it’s value must exceed by one-third of the future liability. (refer S.21(1)(e) of Chit funds Act,1982).
      * * * * * *
      In case a subscriber commits default of his monthly subscription,then Foreman is bound to contribute that much of money into the chit system.Later foreman can recover that money from the defaulter.
      o k

  60. Mike

    Ok SO first of all the borrower must own teh property 100% then only he/she can pledge it with the ratio 1 :1.5 as you mention
    But in that case why woudl he not go to the bank and get a loan againt property at much lowe rate!

    I still can’t my head around the risk side? even if teh forman pays for teh first month in cas eof a defaulter it will take them ages in India to recover any money!
    and in case of large funds teh forman is not likely to know the individuals!

  61. Mike

    But Manish if there is a huge interets rate diff + there is no gurantee that you can win the auction.. does it stil work?
    ANy case I am still not clear on how an investor particioant is protected by the forman if there are multiple defaults!
    say I am looking at it purely from Investment point of view.. so after 3 months if 4 and 5 guy defauls.. the money I have invested so far is almost gone! FOrman’s FD with HGovt won’t cover all that ? woudl it? and teh property is not easy to liquidated..
    SO as an Investor the risks are huge are they not?
    Can somebody ple clarify with exact information

    • Yes, its not as secure as bank loans , you are correct in your observations , thats why its said that Chit funds are extremelly unsecure at times, but because they offer easy access and loans to people, they are very famous . I would say its high risk , high return instrument and an un regulated and un organised instrument .

  62. joseph

    A foreman must be financially sound.Whether foreman has collected the monthly subscriptions from the members is immaterial.Foreman is bound to distribute prize amount each and every month.If he is not financially sound the company will collapse.That is the reason behind the collapse of chit companies.
    A member has to verify if the auctions and payments are being conducted every month properly.In order to avoid all malpractices chit fund business must be confined to a group of people known to each other.Olden times it emerged from the farmers group, they started it as a mutual help.
    Nowadays some chit companies say to all members that they will give a fixed amount as prize amount at fifth or sixth month.In such case there wont be any auction for six months so the entire money collected from the members will be with the foreman.Some of such companies owners have run away with poor peoples money after sixth month collection.
    Chit fund is equal to modern days SELF HELP GROUPS.

  63. Kishore

    Thanks for the information, its very helpful
    Question – What happens if one of the member of the group stops paying after few months ( lets say after 5 months) and he has not bid yet ?
    1) What is the affect of that on others in the group ?
    2) Does he gets his 5 months money back ?

  64. joseph

    Hi manish & Kishore
    Default or discontinuation of one subscriber does not affect other subscribers. If there is any shortage of money because of the default of a subscriber,the foreman is to compensate such shortage.
    A defaulter subscriber(nonprized) can collect his money from the foreman after deducting the foreman”s commission from it.
    A foreman must be financially sound to meet any such eventuality otherwise the company will collapse.

  65. Manoj

    Dear Readers,

    I have participated in this forum in the past and I come from a family who are in to chit funds business for the last 65 years in Tamil Nadu and now I have taken a position as the Vice President Operations in the Company.

    With a lot of mixed views in the internet and in the market, there is a huge confusion between finance companies and chit funds hence I wanted to open up a social page which will not only serve as a face of our company but more importantly be a channel where people can get all the information regarding a Chit funds and its operations.

    Basically I would like to un-lock the Myths around chit funds…

    Please stay connected by liking the page


  66. Shyamal

    I’ve an observation to make and one one query:

    Observation: It is mentioned in the article that RBI regulates registered Chit fund companies. This is absolutely not true. RBI does not regulate any chit fund companies. Chit fund companies are regulated in most of the states by Central Chit Funds act,1982 and they come under the purview of state governements. RBI has no role in regulating them. you are requested to rectify the mistake.

    Query: Can chit fund companies give loans? which means that the borrower pays the money back. From whatever i’ve read till now, i understand that the person just needs to pay his due of instalment every month irrespective of the amount that he gets on account of bidding for the amount.

  67. joseph

    Chit company is prohibited from doing any other business including financial business. But a chit company can give advances/loans to non-prized subscribers on the security of subscriptions paid by them.

  68. naveen

    hi manish great article,
    manish i want now what is the procedure to open a private chit company? pls tell me brief detail about to open a company….pls

  69. Edwin

    Manish brother
    i am in chennai i planned to start a finance company (micro)or chit fund .i want to be a organised sector .i need perfection on my business . i need some detail of legal permission from the goverment side and guide me i have a good contact (network)in the traders sectors .

  70. manyam

    Hi Manish, Good article again.

    My dad while running business used to subscribe in local chit fund in the same social group area. No bad experiences since all organizer and members are all well known persons in business and sometimes they used to give money to needy member without competition (flexible) but organizer money will be deducted.

    One time we also tried to use registered chit fund as well. It was also used small amount ie, 2000 monthly and 25 installments. Agent used to followup us to bid it, finally we thought we don’t see much loss at 17th installment and placed a bid and we also required money for some occasion. Later realized, the procedure for getting cheque is very hard. They need one person “surety” for entire money also required. Otherwise, option is fd with the same company, finally we have to FD with them for 1 year and arranged money from outside. After completion that Fund never resubscribed and en cashed the FD after its maturity. Never allowed that agent to see us for another chance. Maybe company point of view their process and precautions are correct. But all it was hide by agent and we have no time to read that tiny lettered page full of terms and conditions as usual .. :-)

  71. Rohit Varma

    Hi Manish,

    Nice article. Can you please explain the below line mentioned by you in article :-

    So here you can see that the main winner took a big loss because of his desperate need of getting the money and others benefitted by it.

  72. Dinesh

    Dear Mr. Manish,

    I have joined a chitty on 2009 for the amount of Rs. 50000 for 50 months. I got chitty prize for the amount of Rs. 35,000/- on 2010. I have paid regulary the chitty amount of Rs.1000/- every month. Now 44 months over, I would like to close my chitty by remitting the balance amount of Rs. 6,000/-. I want to know whether I will get any balance amount at time of closing after paying the balance amount. Will I am eligible for any amount such as dividends or any balance amount. Pls reply


    • joseph

      In a chitty nobody can predict the future dividend of a subscriber.Dividend can be calculated only after the completion of each moth’s auction/draw .
      You can pay all the future subscriptions at 44th month. You are eligible for the dividends till 49th month.(50th month only one subscriber is there, so no auction).

  73. joseph

    hi Manish
    chit fund scam
    Chit fund law is there but the officers under the law are not conducting any periodical inspections in chit firms.Fund diversion is strictly prohibited under the law.Money collected must be deposited in the bank mentioned under the agreement.So without connivance of the officers diversion is not possible.

  74. R. L. Malhotra

    I would like to know the progressing Chain Business. In this kind of business one has to make 5 members (@ Rs 3000/- per member) further 5 members have to make 5 members each (@ Rs 3000/- per member)=15 members. Further 15 members have to make 5 members each (@ Rs 3000/- per member)=75 members. Further 75 members have to make 5 members each (@ Rs 3000/- per member)=375 members Further 375 members have to make 5 members each (@ Rs 3000/- per member) and game goes on like progressing chain. Thus collecting a huge amount and distributing a little part of it to its senior members with some gifts etc. The amount of commission grows in thousands and lacks with the progressing the chain of multiplication of members. I would like to know such kind of business is legal and what are the law implications.

  75. Matt

    Hi Manish,

    Informative article. Though you seemed to have passed a judgement without doing manual calculation about returns. Any investments has associated risks and a wise investor just needs to be aware of them.

    Following is the expected return calculation from KSFE chit funds (owned by Kerala Govt.). As far as trust is concerned nothing beats this in chit world (unless Indian government comes up with one)..

    (Adding the link since you seem to be repeatedly asking how the return was calculated. By the way, the return can fluctuate based on chit auction scenarios (like other investments), but KSFE chit funds will always beat the current FD returns – 9.25%)


    • NO wonder the returns can be better, but risks is always there . CHIT fund companies come and go . Many stay for years and decades like these . After all its upto the person if he wants to get exposed so something like these or not.

  76. joseph

    Hai Manish,

    In order to avoid cheating companies from Chit Funds, the government must give permission to BANKS to conduct chit funds business.Now banks are prohibited under the Chit Funds Act 1982.People can trust them.If banks come to this field fraud people cannot flourish there.Before 1982.banks were conducting chit business in India.

  77. Rajesh

    Hi Manish

    Thanks for the useful information. i would like to know how to judge when to lift the chit and which month chit is profitable. i know it depends up on the bid amounts.
    however in an ideal scenario. when there is no much competition.
    Eg: the chit amount is 2lk and 20 members. 20 months.. which are the ideal months to lift the chit.. and if there is any competition for bidding. how to decide till what amount we can keep bidding on which month.. how to calculate the profitability every month to bid for the chit. request help me to understand this calucullations.


  78. Naveen

    Hi Manish,

    I am subscribed to one Chit Fund, but its only among my colleagues (who can’t run away since its everyone’s permanent job and no transfers).
    The returns come around 15-17% for me if I don’t bid and get the amount in the last month. Here are the details.
    I pay 6000 every month and at the end of 23 months, i got back 165000. That gives me 17% returns (calculated using jago investor SIP returns calculator). So in my case I think its worth it. What do you think?


  79. geethu

    I have a doubt about chits law please clear it. A person start a chit in her home of total amount 5000(20 members,250 rs per month) without registration.She not give the money properly.She misbehave with the members and use their money for her personal needs.If members became angry for it she say to their that she will ready to give her paid amout,and forced that members to quit from it . Is it allowed our law?I think its a offence right?

  80. Santhosh Balachandran

    please see the best example of how a government run chitty company works

    KSFE is a Kerala state run non banking financial entity …the criminals robs the general public and being so called government employees they are all well protected …No action by government as politicians also get a share of money funnelled out by the scammers …

    Now this particular company is coming under the minister of finance Sri KM Mani ..who is well respected for ….please watch the news channels

  81. Latha

    I m a house wife, at the time I was in job I put a surity for my colleague. For marriage I resigned my I m getting alerts that the guy is not paying money for months and they r asking us to pay..that guy also resigned from the job and no one knows where he is staying now..and he z in I m not understanding what I have to do now n my husband doesn’t know about diz issue..I m also unable to pay r face the issue as me also not getting any income now..please tell us the solution

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