Hello,
I am back with my articles on Caclubindia. Thanks for the support shown by all of you for my previous articles. Inspired by that I would like to share my thoughts about chit funds.
The whole article is based on the investor's eye view. In my next article about chit funds I will write about the company's eye view.
Chit has subscribers & foremen. If a chit is for 25 months then it means there has to be 25 subscribers (including foremen). The concept of chit is every month one person shall take the money which is contributed by all the 25 members including the prized winner.
Who are subcribers & Foreman?
Subscribers are members of the chit; foreman is the person who will manage the chit. A foreman is also a subscriber to the chit. The foreman always takes the first month chit without any discount. Foreman must also accept the liability if any subscriber fails to pay his share or in case of defaults.
Eg: In case there are 25 subscribers and the chit is for 10,000 every month Rs.2,50,000 is collected by the foremen. First chit will be taken by the foreman and from second chit onwards bidding will take place for the chit.
Such money brought in by all will be taken over by one person called as the prized winner. To determine prized winner the subscriber interested to take the money have to bid. The bid will decide the winner. To win the subscriber who agrees to take the least amount for his claim will get the money.
In case are there are multiple bids for the chit and for the same value of discount lottery system shall be used to pick the winner.
Eg: there are 3 subscribers wanting to take the money A B & C & they bid as follows
A – Rs.20000
B – Rs.30000
C – Rs.25000
The winner of this month bidding will be C who will get Rs.2,25,000 against Rs.2,50,000.
Now the question is what happens to the money which the prized winner has agreed as discount. Such amount will be shared amongst by all the subscribers of the chit.
Eg: Rs.25000/- here is the chit pidend and there are 25 subscribers to the chit hence, each person will get Rs.1,000/- towards their respective share.
This will continue until all the 25 members of the Chit fund receive their money. Hence at the end of 25th month the chit also will come to an end.
Any investor would want to maximise his returns. Intially the chits are taken at huge discounts. These are people who either are in deep trouble with their cash flows are having a very good investment oppurtunity. Many people who give loans to others at high rates of interest take the first few chits at high discount rates.
If you are a normal investor and looking to maximise the returns the best time would be somewhere around 10 - 12 month in a 25 month chit. You could put the same into a FD to maximise the returns and have a safe investment.
Start with meagre 1000 or 5000 Rs / month chit untill you get hold of the concept. Once you are confident you can go for a higher amount. Be careful with whom are dealing.
Stay safe !!! Happy Investing !!!
CAclubindia
