Chit Fund – Why It Is Popular Yet Being the Worst Financial Product?

There are two types of chit fund. One organized chit fund where there are an organizer and participants and others by personal friends or relatives only participate.

In an organizer based chit fund, the organizer brings in the participants. Some people may need money early whereas others at a later time in the period. Those who need first get less amount compared to those who take it at a later stage. The amount reduced is often pre-decided based on when they choose or is even auction based where the reduction is on the lowest bid for the sum for that particular month.

All the chit funds in India are governed by The Chit Funds Act, 1982. Because of scams in chit funds, people have become cautious about them.

We aren’t discussing the organizer based chit fund, but some friends use funds where everyone takes equal amount based on the lucky draw. There is no organizer, and so there aren’t any fees either.

How Personal Chit Fund Works?

A group of people (Typically living in the same society or even friends) decides to contribute an equal sum of money every month.

For instance, say 12 members agree to deposit Rs. 2000 every month for 12 months.

Every month, all the 12 members deposit Rs. 2000, which amounts to a total of Rs. 24,000 (12*2000).

The money so collected every month is then up for a lucky draw. Each of the 12 members in the fund is given one slip to put their name in the auction. One winner of the lucky draw winner takes the money for that month.

Already winner doesn’t participate in the future lucky draw but continues to contribute in the fund for the rest of the tenure.

So all in all, every member contributes ₹24,000 in the tenure of 12 months and get back ₹24,000 back as well.

Neither one loses nor anyone has any financial gains out of it.

Why Personal Chit Fund Works?

My wife was (maybe is) a part of such personal chit funds from the household expenses that I share with her every month.

When I discussed with her, I told her, why not give me the money and take it back at the end of the year.

She wasn’t very eager in doing so.

I was so confused as to why?

After all, it meant the same. I will give the same amount at the end of the tenure.

But I found, it helps her in more than a few ways, and they aren’t financial.

Its when I realized why chit fund is so popular.

It helps you to Dream

I found first of every month when they were doing the lucky draw; the excitement was quite high.

She decided what she will do if she gets the money in the next few days.

It will be a new dress or some jewelry, and the list continues.

More importantly, they enjoy the process of who gets it and how they will spend.

Again, the fun part is, they didn’t complete the lucky draw and decide who is taking first and who is taking last. It was being conducted every month, and so the excitement continued every month.

Money is Accumulated

Some are very bad at accumulating. It just never happens for them. I am one of those. If I haven’t invested the money, the temptation is to spend.

As the money is being kept aside in the chit fund, it is accumulated. It helps in paying off some of the significant planned purchases that are once a year expense. Kids school fees, purchases of household items like fridge/washing machine, etc.

One can fulfill the Dream

With chit fund, you are sure to get the money in the entire tenure for sure.

The adrenal rush is on every month, but it is also a sure shot way to materialize once.

So, not only one can dream about getting what they want, but it also makes it a reality. It makes the process as one of the most preferred product.

Final Thoughts

Many use such personal chit funds for basic family needs whereas some use it as fun part.

It is a fun part for my wife, but it also means when you get the lucky draw, and your friend needs the money, you have to give your draw to them.

It happened with my wife most of the time, and so she was second last to get the money.

It is part and parcel of being a friend, but then it is something which every wife loves being part of it as well.

Is your Wife or Mother part of it? Share your story in comments below.