Chit funds or Mutual funds? which are best for high yield?

POSTED BY Radhika ON July 2, 2011 10:38 pm COMMENTS (19)

When i decided to start SIP ,Some people advised me to invest in Standard chitfunds. They say

Both are Risky,but chit funds have definite return of not less than 18% where as Mutual funds have no definite chance of returns.Is it true? Please suggest.

19 replies on this article “Chit funds or Mutual funds? which are best for high yield?”

  1. Ramesh

    yes i didnt put the charges of 5-10% , it generally dont cross 5% , but I took it as nil as I was thinking about chit funds run by friends and relatives where it might not be there or very less .

    I agree with you that one should not look at it as investment , but rather a way of getting a unsecured loan with element of risk in it , how ever trusted the circle is . Note that we cant discourage chit funds because a large pool of people are bound to get into this as they dont come into the category of people whom banks lend the money , so there comes these kind of arrangement .

    Manish

  2. Radhika says:

    Thank u sir!

  3. Jagadees says:

    @Radhika
    Understanding difference between mutual funds and chit funds will help you to make better decision.
    Mutual funds:
    Pooling of investors money and investing in securities based on investment philosophy. Investment is simply partnering with company by lending money to them who need it for their business growth and sharing the wealth created by them.
    It is managed by a competent fund manager at low annual expenses(<2.5% p.a.)
    It is well-regulated by SEBI.
    Investment in companies are not speculation as you mentioned above. It is well-thought and proven process which made some serious money for investors not only in india but around the world in a long term. whereas

    Chit funds:
    Pooling of investors money and lending to needy people at an exorbitant interest rates and sharing the income earned among investors.
    Manager who runs it pockets huge amount as expenses (in range of 5-10% pa)
    Business is not regulated by any govt body and done based on trust factor.
    There is very high chance for default by the person who borrowed money as he borrowed at exorbitant rate.

    Now u come to a decision: whether to invest your hard-earned money
    in the one which created money to investors? or in the one which is prone to default?
    in the one which operates at low expense? or in the one which operates at high expense?
    in the one which is regulated by govt? or in un-regulated one?

    Regarding above comments:
    Few comments you made above are really unfair. If you just glance through this forum, u can find scores of contributions done by Ramesh to solve investor's problems. He and fellow members sharing their knowledge & time with one mission on increasing financial literacy and nothing else.
    I accept few lines in his comment is bit harsh but you should see this those comments in a different prism. Everybody should have aware from newspaper/media about the huge chit fund fraud in Tamilnadu which swindled huge money from investors by making lofty claims on returns. I guess it really made him sad to know people going after bait of high returns even after the scam.

    @Ramesh
    It is bit unfair to paint all the chit fund investment as speculation. It is just pooling money from investors and lending to needy people at high interest rates & sharing the returns. It is like more of microfinance in small villages and functions based on trust. I accept that it is greed to expect 18% returns but a return of 8-10% returns are achieved by chit funds run by some good people for very long term even today. This am telling from my personal first-hand experience in my village.

    Would like to take discussion further rather than finger-pointing each other.

    Regards
    Jagadees

    1. Ramesh says:

      @ Jagadees

      Maybe I have less knowledge about all varieties of chit funds. Since you have first hand knowledge about them, you maybe correct.
      Thanks for detailing more about these.

      Afaik, chit funds require pooling, auction, cut (5-10% if the foreman is genuine, entire if not), distribution. Nowhere have I read about lending (I am not saying you are wrong, I am just telling you what I know). So if you say there is an underlying mechanism of earning through that money by way of lending, then fine. So in some chit funds, you pool money, lend it, and then get the profits (As you pointed out, like a MFI/bank). But what is the percentages of such genuine schemes. What are the chances that its not?

      I made some harsh comments. Yes. I felt it was required.
      Does everyone expect a rosy picture (even roses have thorns)? I dont think I ever addressed the questioner in this thread. Everything I directed towards Manish. Yes, life is unfair and tough.
      No wonder, we have so many “unearthed” and lot more “earthed” Ponzi / MLM schemes running around. The word “investor” has been so much abused that the genuine meaning is lost. 😉

      I am always game for a healthy discussion. There are so many things to learn, that it is futile to waste time in useless things.
      Ramesh

      1. Ramesh

        Yes , there is another mechanism of making money in chit funds . this is how its common working is .

        10 people contribute 10000 per month and this goes for 10 months , each month 1 lac is collected . The person in need is ready to take less money and bid for say 9000 , so he gets 95000 and takes a loss of 5000 , this makes sure that he gets it as loan for which he is paying EMI of 10,000 per month for 10 months , very much like Bank loan , but this comes fast, without documentation .

        Now out of this 5000 , its given back to people (Rs 500 each person) , so a person actually has put only 9,500 . Suppose this thing happens each month , then a person who takes money at end , get all 1,00,000 by putting 9,500 each month .

        Thats some return along with opportunity to take some big money on credit without any documentation .

        Now coming to the question of authenticity and fraudulent chit funds , I am with you and I do not approve some one putting money in some XYZ Chit fund company , even if its registered .

        But what about a small city where people have network of close friends and relatives and even neighbors (you know how much connected they are with other in smaller parts of the world) . now at those places this arrangement is actually a system which is a competiution to lending banks and also a easy way of creating a sub-system of lending . So forming a trusted network and doing this thing seems to be good to me and who am I to say it , its going from ages in smaller cities .

        Bad experience are there in chit funds and obviously they deserve to give bad experience if some one just puts his hard earned money without with trust or findings .

        I am doing a post on this in detail , we all can share our views there

        Manish

  4. Radhika says:

    I never said about my expectations. I just wanted to know the truth about returns in chit funds. I am not a cynic like you but a novice in financial investment. I can understand that too much knowledge of investment made your brain smart and you lost the manners to be courteous. You are a bit foolish to invest your most valuable time, manpower( brain power ) and of course the cost of Internet and electricity to get dis appointed , irritated and vindictive to go on commenting on my doubt.

  5. Radhika

    Calm down 🙂

    I understand that it was your genuine doubt , Ramesh is just saying that you should put more effort in understanding the basics of investing and the underlying principles of investing , because as per them, chit fund by structure itself does not fit in as “Good investment”

    I would encourge you to read more on basics and other articles . Dont take anything personally and lets ask more and more doubts !

    Manish

  6. Radhika says:

    Sir, I feel it surprised to look at the comments by Mr. Ramesh. I don’t know why he is so much involved with my question. I had a genuine doubt regarding my hard earned money which I want to invest. Chit fund or mutual fund both are investment for me. If as per his version chit fund is not a investment then what is it? The so called mutual funds are nothing but investments by speculation. You speculate on the choice of company. You too try your luck by praying the Almighty to give profits to the company in which you invest.
    If the company won’t get gains then where is the ” chance of safety of principal and adequate returns” as quoted by Graham?
    Don’t try to discourage others with your comments. If you clarify the doubt ok
    ..or else please don’t answer. Also remember the forum is jago investor but not jago mutual fund investor.

    1. Ramesh says:

      Well,
      If you dont like a comment / response, you are free to ignore it. 🙂

      Regarding your expectations, if you expect ANY investment method to give you 18% sustainably or surely, I am sorry to say you are living in a fool’s paradise. Good luck with that.

      Ramesh

  7. Ramesh

    Ok , I will take it as a feedback 🙂 . Thanks for your inputs Ramesh , that helps in focusing for replies 🙂 . Keep up the good work .

    Manish

  8. Ramesh

    Ok , I understand your point now . But now how do we help people like Radhika who have no idea of personal finance and how things work ? Do you suggest, we ask them to read things on its own and try to understand things . I fear that this will block many people from exploring further .

    Whats your thought on this . How do we solve this .

    Manish

    1. Ramesh says:

      In my honest opinion, there are no shortcuts.

      Your blog is a great place to begin with. There are lot of good books. I think there was a list mentioned in this forum as well as subramoney’s blog.

      One thing which needs to hammered through is “there are no quick-ways to make money”. No quick-fixes. Not now. Not have been in the past. Nor will be there in the future.

      If showing a correct path, some people leave or dont pursue, its their loss, not yours. I dont think, you can please everybody no matter what you do. So you draw a line, and say i wont cross this line (in the sense, i wont recommend / do this / these thing(s).) If still the other person wants to follow that line, its their choice.

      You can tell that in nice words diplomatically. Or you can say in harsh “reality” terms. Everybody has his/her own style.

      In short, you can only nudge a person into following a correct line/path. You cannot spoonfeed each and every person, it doesnt help them in the long run.

  9. Ramesh

    I get your point , but there can be a different way to look at this . Lottery is something where there is no guarantee for getting back the money . One knows that there are hardly any chance of making money from lottery and gambling because there is “assurity” .

    With Chit funds , people have seen other people making money , There are good and bad chit funds . Some chit funds are run by proper ingroups which have high trust and people from years have been doing it . And chit funds is more of a scheme where your money will come back unless the organisor themselves are fraud (but in gambaling even if no one runs , the money will not come back) . So the perception is very different for lottery and chit funds . In my opinion they should not be compared that way .

    Hence its important to tell people about how they work , many people dont know the mechanism and I think just by telling machnism , one will not be able to conclude if its good or not .

    What do you feel ? Do you think there is some element of logic to this ?

    Manish

    1. Ramesh says:

      Manish
      I understand your reasoning (partly).
      What I want to stress is, comparing a method (like MF, in which there is underlying business which makes money, etc) with another (in this case chit fund, no underlying mechanism besides luck) is absolutely wrong.
      You tell me, is there any underlying mechanism / work in cases of “good” chit funds? The answer to that will solve the query.

      Then what is wrong with “good” lotteries. Many states sponsor them. Just because there is no fraud does not mean its an investment scheme. Just because most people get their money back over years, does not mean its an investment. No it is not.

      Gambling and trading in stock markets are less-than-zero sum games. Same is with lotteries. And what I know of chit funds, same is there. You do not create money out of nowhere. If that is the premise of a method (any of the aforementioned ones), i wouldnt consider them to be “investment”. And this blog/forum is jago”investor”. If it had been jago”speculator” or jago”free-bie-er”. yes. then its a free-for-all.

      I will just quote what Graham told.
      “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” = DEFINITION OF INVESTOR.

      I know this is an idealistic kind of stand. But thats what i feel.

  10. Radhika says:

    Thank u for the response & for the support to my question.

  11. Ramesh

    Dont you think the person asking it had a genuine doubt , I see it as teaching her the implications of both the options . Its directly related to investments .

    Manish

    1. Ramesh says:

      See, if putting “lottery” in place of chit funds, makes any difference to the meaning. To me, it doesnt.

      To a layman, it will seem it is a form of investment. It is not. And it should be indicated in clear-cut terms.
      What is underlying mechanism/work of making money in MF and chit funds?

      MF=invests in companies, which make money, etc.
      chit fund= ?? define the mechanism. take money from 10 people, and give that money to 1. etc, whatever. and its not a zero-sum game also (there is some money for the organiser too).
      is this any different from lottery? No.

  12. Ramesh says:

    Is this even a question to be answerable in a blog / forum catering to investment?

    tomorrow, we will be seeing questions related to gambling / poker / lottery, etc.

    I am very disappointed.

  13. Radhika

    You have to understand both kind of risk here .

    Mutual funds : High volatility possible , returns based on markets , historically have given good returns in long run .

    Chit Funds : Not registered most of the times , have seen cases of fraud : http://www.mlmnewsblog.com/2011/05/33-chit-fund-companies-sealed-at-gwalior-madhya-pradesh/

    Also , it might happen that chit funds are good way of making money at times , but its highly insecured . And you never know that returns are turning out to be that high .

    Manish

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