Finance Management

A Chit fund is a kind of savings scheme practiced in India. A Chit fund company means a company managing

"Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount".

Such chit fund schemes may be conducted by organised financial institutions or may be unorganised schemes conducted between friends or relatives. There are also variations of chits where the savings are done for a specific purpose.

A collection of members called a chit group makes their contribution in the form of money to collect a chit amount and they bid in an auction to be awarded with the prized money which is equal to the chit amount minus the discount and the foremanís commission.

How it works: Example
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by many private firms. The basic necessity of conducting a Chitty is a group of needy people called subscribers. The foreman - the company or person conducting the chitty - brings these people together and conducts the chitty. The foreman is also the person responsible for collecting the money from subscribers, presiding over the auctions and keeping records of subscribers. He is compensated a fixed amount generally 5% of gross chitty amount monthly for his efforts; other than that the foreman does not have any specific privileges, he is just a subscriber of the chitty.

The general pattern of the chitty can be readily noticed by a simple formula:

Monthly Premium ◊ Duration in Months = Gross Amount

E.g.: 1000 * 50 = Rs.50,000 Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.