All about Chit Funds

What are Chit funds?

Chit funds are simply savings plans conducted by a group of people who contribute to the fund. Everybody who contributes to the chit fund is called a subscriber.

The person or company who organises and manages the fund is called the Foreman. The Foreman supervises the procedures, keeps an account of the money, calculates the subscribers’ share and arranges the bidding or the lottery. It is mandatory for the Foreman to be a subscriber of the specific chit fund. Every week, the subscribers of chit funds receive their portion of money according to the funding rules and the Foreman additionally receives a small portion of it as a fee for his Supervision. A chit fund can be created to collect money for a specific purpose too.

Creation of Chit funds

Subscribers have to contribute a certain amount of money to the fund over a stipulated time period. When the collection is complete, under the supervision of the Foreman, all subscribers bid to decide a certain amount of prize money. Everything works as per the subscribers’ agreement which they have to decide on before the first collection of money.

After all the subscribers agree to the rules of that specific chit fund, each contributes a certain amount of money. The bidding starts after the entire fund is created. The bid winner gets a portion of the money which is higher than his contribution but not more than the specified limit of that chit fund, according to the agreement. The Foreman then distributes the remaining amount among other subscribers. The process is cyclical and restarts after a small gap of time.  The number of courses during those days equals the number of subscribers. That is exactly how everybody gets their chance of wining the prize money.

Purpose-based Chit fund

A chit fund created for a specific event works differently than a savings chit fund. When a group of people are interested in a particular event, they contribute equal portions of money to the chit fund. The total amount in the fund is used for that event under the management of a Foreman.  It is important that all the subscribers are given equal returns from the proceeds of that event.      

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