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To give you a clear idea, here's an example of how chit funds work
  • Foreman = Chit fund company (Navashakthi Chits Pvt Ltd.)
  • Term Period = Duration of the chit (Technically, this is equal to the number of subscribers)
  • Subscribers = Members like you who register in the chit (50 members in this example)
  • Monthly subscription = Amount you have to pay per month (10,000 in this example)
  • Dividend = Chit discount you will get once a member wins the bid
  • Chit value = Total sum of money from all the members/subscribers (10,000 x 50 = 5 lakhs)

Note: Existing law of chit funds is that the chit fund company must deposit 100% of the chit value with the Government, the Registrar of Chits before starting a chit fund. As a registered company, Navashakthi Chits Pvt Ltd. must first deposit 5 lakhs with the Registrar of Chits.

The following simple illustration helps you understand the working mechanism of a chit fund.

To give you a clear idea, here’s an example of how chit funds work.

The foreman (Navashakthi Chits Pvt Ltd) gathers 50 people interested in taking part in a chit. When all the members are ready, the foreman registers the chit with the Registrar of Chits and deposits the chit value (5 lakhs) as a security deposit. When Navashakthi Chits Pvt Ltd. completes the chit by settling all its payments, it can withdraw the security deposit.

Now, if a member needs money, they will bid. The maximum bid permit ranges from 30-40% of the chit value. After announcing the auction, assume a member wins the bid by 35% of the chit value (₹175,000). This value is known as chit discount. The company charges a commission of 5% of ₹500,000, which gets deducted from the chit discount, which is ₹175,000-₹25000=₹150,000.

This sum of ₹150,000 is then divided equally among the remaining 49 members as a dividend (one member won the bid among 50 members). Because every member earned a ₹3000 dividend, they will pay ₹7000 instead of ₹10,000 starting next month. This cycle of one member bidding and 49 members earning dividends will continue until the chit period ends.

This is how a chit fund works. Based on the competition, the dividend percentage may vary.