People can save and invest their money using various financial products available on the market like Stocks, Mutual funds, FDs, Bonds, Chit Funds, etc. Chit funds started in India more than 1000 years ago. The first attempt to regulate the sector was made by the government of Travancore in 1914. This was followed by the Tamil Nadu Chit Funds Act of 1961. Chit funds have long been a feature of the financial system in our nation. If investors use it as a savings vehicle, it can produce strong returns. Additionally, in the event of a financial emergency, consumers can rely on chit-money.
Differences between a Chit Fund and a Mutual Fund
| Basis of Difference | Chit Fund | Mutual Fund |
| Expense | The person who operates the chit fund takes huge amount as expenses (5% to 10% per annum) | The asset management companies charge a small annual expense. (0.5% to 2% per annum) |
| Regulation | According to Section 61 of the Chit Funds Act of 1982, the Registrar of Chits, who is chosen by the relevant State Government, regulates chit funds. In many circumstances, chit funds are poorly regulated. | Mutual funds in India are regulated by SEBI (Securities Exchange Board of India). These are strictly controlled and monitored. |
| Volatility and Risks | There is no market risk involved in mutual funds. | Mutual funds are highly affected by market risk. |
| Taxation Rules | The Income Tax Act classifies chit funds as 'income from other sources’ hence they are subject to tax. | The taxation rule depends upon what kind of fund you’re investing in. Funds like ELSSyou may also be eligible for tax reductions. |
| Transparency | Chit funds managers may fail to give detail information about the investment pool allocation | Mutual Funds give clear information about the investment |
Here is the List of Best Mutual Funds to Invest
| Mutual Fund | AUM (In Crs) | Expense Ratio | 3 Yr Return (%) | 5 Yr Return (%) | Invest Now |
| Quant Small Cap Fund Growth Option Direct Plan Mutual Fund | ₹9521 Cr | 0.77 % | 46.08 % | 33.11 % | Invest |
| Quant Infrastructure Fund Growth Option Direct Mutual Fund | ₹993 Cr | 0.77 % | 41.96 % | 31.32 % | Invest |
| Quant Tax Plan Growth Option Direct Mutual Fund | ₹4957 Cr | 0.76 % | 35.22 % | 30.01 % | Invest |
| Nippon India Small Cap Fund - Direct Plan - Growth Mutual Fund | ₹37319 Cr | 0.71 % | 42.02 % | 28.99 % | Invest |
| Quant Mid Cap Fund Growth Option Direct Mutual Fund | ₹3268 Cr | 0.76 % | 37.39 % | 28.91 % | Invest |
What exactly are chit funds and how do they operate
A chit fund is a scheme that may be organized by a financial institution or can be conducted informally among friends, relatives, etc. A pool of people invests a certain amount of money equally, and either it gets auctioned among the pool of people who ever bit the lowest or the balanced amount is distributed among the same pool of people.
Let's use an example to better learn this - A chit fund with a duration of 12 months started by 12 members where each member invests Rs 1000 every month. So at the end of every month, the chit fund has 12000 as the balance, and once the chit fund manager collects the money, an auction is conducted. Suppose member A bids 11000, B bids 10000, and C bids 9000.
So the member with the lowest bid i.e. C gets 9000 from the pool of 12000 and the balance figure (12000 − 9000 i.e. 3000) is distributed equally among all the members i.e (3000/12 i.e. 400 each). The person who manages the chit fund takes some amount from the remaining pool of money as expenses ( 5% -10% p.a.). A new bidder enters the process each month, and it lasts for 12 months.
How does a mutual fund work?
A mutual fund is a regulated financial instrument that pools money from different investors and invests it in other securities like stocks, bonds, and short-term debts. The mutual fund's portfolio is made up of all of its holdings where the money is invested.
A mutual fund is made by an asset management company that collects money from the investors and invests in various other securities. The investment pool is managed by financial experts called fund managers who do various research and development to invest the money.
Conclusion
For decades, chit funds have been a popular savings and credit plan. They make it simple for individuals to pool their resources and get a lump sum payout regularly. Investing in chit funds has its pros and cons. Many times in the past, chit-fund companies have departed with the money of the investors.
On the other hand, some people, particularly those from small towns, have profited from such funds. To invest in a mutual fund, one needs to conduct thorough research and due diligence.
Are chit funds legal in India
Yes, chit funds are legal. The Chit Fund Act of 1982 governs the regulation of chit-fund companies, ensuring their safety and legality.
Which fund is safer for investment between mutual funds and chit funds?
Mutual funds are professionally managed investment portfolios that pool funds from various investors who share similar financial goals. Mutual funds are thought to be a safer investment than chit funds because they are heavily regulated by SEBI.
Are chit funds eligible for GST
GST is levied on chit-fund commission income. It will be included in the income you make and subject to GST.