Are Chits Really Beneficial? – Chit Funds vs. Fixed Deposits in Banks

In our previous article, Are Chits Really Beneficial, we discussed how chit funds work and their advantages and disadvantages. We learnt that chits are suitable only for people who either don’t report their income, who work in unorganized sector or those who have no access to other investment options. In this article, we will compare chit funds with fixed deposits, considered as one of the best investment options and see which investment option is better.

Without any doubt, we can say that many middle class people today go for chit funds to save their money. Whether it is for daughter’s marriage or son’s education, chits are the only option for many. Although they have access to other investing options like fixed deposits, they still go for unorganized chits.

One of the major reasons why people go for chits is that they think that investing in chits is easy and lack of awareness on the fixed deposits and their benefits. No one will spend time assessing the advantages and disadvantages of both investing options to make a right investment decision.

The first point you need to know is that chit funds are inefficient with “Interest earnings”. Compared to FDs in bank, the interest earnings in chit funds are less.

Comparison of chit funds with fixed deposits in banks

Let us consider two persons investing their money for an investment amount of Rs.1,50,000 for a period of 25 months and the installment amount of Rs.6,000 per month. One person invests his money in chit funds and the other invests in a fixed deposit in a bank. The person who joined chit fund will pay some amount between Rs.4,500 to Rs.5,800 every month (here, installment depends on the auction).

For this Rs.1,50,000 investment, the person investing in chits, will get around approximately Rs.1,44,000, while the person investing in fixed deposit will get around Rs.1,63,000 (approximately) after the last month of the investment. This is due to the low dividend rate in chits and some amount is taken by the chit fund company as organizer fee. Also in fixed deposit, the person will pay regularly a certain fixed amount and save up more while the person investing in chits will save up less money – since the discount will most likely be spend on other useless expenses.

It is also important for you to know while comparing chits with bank FDs. The person investing in bank’s fixed deposit is on the safer side, while the person investing in chits for the same investment of Rs.1,50,000 is at more risk. This is because most chit fund companies are unregistered companies and they can run away anytime with the investors’ money. The other important point is that frauds and scams by unregistered chit fund companies are increasing day by day in many parts of the country. As per the report from All India Association of Chit Funds (AIACF), “The number of unregistered chit funds is almost 100 times the registered ones.” Whereas, banks are regulated by the government. The government monitors their financial activities.

Moreover investing in FDs, you can access to loans and credit cards offered by banks, whereas in chits, loan facility is not available. Your money is safer in banks than in chit funds. Thus, relying on chit fund for saving is dangerous.

While a bank protects the borrower against the usury of money lenders and the inability to pay of the loans in installments. It is not something that is beneficial to the salaried person working in a decent job. It is like quitting drinking to start smoking. Thus somebody who needs a chit fund is not able to manage expenses, provides lower returns, more riskier and reduces the savings accrued. So, by investing in regular Fixed Deposits (recurring deposits), you can earn better earnings than chit funds.

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