A chit fund is a unique financial tool that combines saving and borrowing into a single product. It is a rotating savings agreement among a fixed number of people for a fixed duration.
A group of people (members) agrees to contribute a fixed amount of money every month for a specific period.
Every month, an auction is held. Members who need a lump sum "bid" by offering a discount on the total pot. The member willing to take the lowest amount (highest discount) wins the pot for that month.
Protection Cap Maximum bid limit is often 30% to protect members.
The "discount" offered by the winner is distributed equally among all members after deducting the foreman's commission (usually 5%). This is called the dividend.
The winner receives the "Prize Amount" (pot minus discount) after submitting necessary guarantees or collateral. Funds can be used for any purpose — business, education, or emergencies.
Cycle repeats monthly until every member has won the pot exactly once.
| Feature | Chit Fund | Recurring Deposit (RD) / Loan |
|---|---|---|
| Purpose | Dual (Save & Borrow When Required) | Single (Save OR Borrow at the end) |
| Returns | Often higher due to dividend sharing | Fixed interest rate |
| Speed | Quick access to funds via auction | Requires lengthy bank approvals |
| Usage | No questions asked on end-use | Loans often require specific intent |
Once the chit group commences, the foreman ensures complete regulatory compliance and member protection: