Chit Funds

Chit funds are rotating savings and credit associations in India, where members pool money for periodic payouts. Read to know more in detail.
What are Chit Funds
3 mins read
26 March 2024

The Rajya Sabha took a significant step forward in bolstering the financial security of India's economically weaker sections by passing the Chit Funds (Amendment) Bill, 2019. This legislative action, undertaken in the year 2019, was aimed at streamlining the operations of collective investment schemes, commonly known as chit funds, with a focused objective to safeguard the interests of investors.

While chit funds have played a significant role in the financial inclusion of the unbanked and underbanked segments of the Indian population, the emergence of the Bajaj Finserv Mutual funds platform provides an alternate opportunity for investors to invest in 1000+ mutual funds and potentially achieve higher returns.

In this article, we will explain what a chit fund is, how they work, what their benefits and risks are, and how to invest in them.

What are chit funds?

A chit fund is a rotating saving scheme that involves a group of people or subscribers who agree to contribute a fixed amount every month for a fixed period of time to a common pool or corpus. The amount collected is given to one of the subscribers, who is either selected by a lucky draw or an auction. The subscriber who receives the money is called the prize winner or the beneficiary. The process is repeated every month until all the subscribers get the money once.

How do chit funds work?

The basic mechanism of a chit fund is as follows:

  • Fixed number of subscribers, monthly instalment, and duration.
  • Managed by an organiser/foreman (also a subscriber): responsible for collection, auctions, distribution, and record-keeping.
  • Organiser's fee: Percentage of chit value.
  • Chit value: total monthly collection.
  • Prize money: Auction/lucky draw winner's amount, less than chit value due to organiser's commission and subscriber discount.
  • Discount: Amount the winner agrees to forego, shared as dividends among non-winning subscribers.
  • Dividend: Profit is shared among subscribers from the discount, reducing next month's instalment.
  • Net liability: Monthly payment by subscribers after dividend deduction decreases over time as dividends increase.

The following table illustrates the working of a chit fund scheme with 50 subscribers, each paying Rs. 1,000 per month, for 50 months, with a 5% organiser commission.


Chit Value (In Rs.)

Prize Money (In Rs.)


(In Rs.)

Organizer Commission

(In Rs.)


(In Rs.)

Net Liability

(In Rs.)




































The table shows that the first prize winner gets Rs. 40,000, after deducting Rs. 10,000 as the discount and Rs. 2,500 as the organiser commission. The remaining Rs. 7,500 is divided among the other 49 subscribers, who each get Rs. 153 as the dividend. The dividend is added to the next month's instalment, reducing the net liability to Rs. 847. The process is repeated every month, with the prize money increasing and the discount decreasing. The last prize winner gets Rs. 49,000, after deducting Rs. 1,000 as the discount and Rs. 2,500 as the organiser commission. The other subscribers do not get any dividend in the last month, and have to pay the full instalment of Rs. 1,000.

What are the benefits of chit funds?

Chit funds have several advantages over other forms of saving and borrowing, such as:

  • They are easy to join and operate, as they do not require any documentation, verification, or collateral.
  • They offer a high rate of return, as the subscribers share the profit from the auction among themselves.
  • They provide liquidity and flexibility, as the subscribers can access the money anytime they need it, without any penalty or interest.
  • They encourage saving and financial discipline, as the subscribers have to pay the instalments regularly and punctually.
  • They foster social bonding and trust, as the subscribers belong to the same community or network.

What are the risks of chit funds?

Chit funds also have some drawbacks and challenges, such as:

  • Prone to fraud and mismanagement.
  • Subject to legal and regulatory uncertainties.
  • Vulnerable to economic and social shocks.
  • Depends on the honesty and reliability of the subscribers.

How to invest in chit funds?

If you are interested in investing in chit funds, you should follow some basic guidelines, such as:

  • Choose a reputable, registered chit fund with a good track record, transparency, and security.
  • Understand the chit agreement's terms: Subscriber count, instalments, duration, auction method, organiser commission, and dispute resolution.
  • Verify the organiser's and subscribers' identities and credibility.
  • Pay instalments on time, keep receipts, and regularly monitor the scheme's progress.
  • Actively participate in auctions, bid wisely, and claim prize money judiciously.
  • Report irregularities to authorities and pursue legal action if needed.

Who should invest in chit funds?

Investing in chit funds may be suitable for individuals who:

  1. Seek a disciplined savings mechanism with periodic payouts.
  2. Are comfortable with a group-based investment approach.
  3. Have a steady income and can commit to regular contributions.
  4. Are willing to accept the potential risks associated with informal financial systems.
  5. Prefer investment options that offer flexibility in terms of contribution amounts and payout timing.
  6. Have a moderate to high-risk tolerance, as returns may vary based on auction outcomes and fund management.

However, it is essential to conduct thorough research, understand the terms and conditions of the chit fund, and assess personal financial goals and risk tolerance before investing.


Investors should be careful and prudent while investing in chit funds, and follow the best practices and precautions. Notably, Bajaj Finserv Mutual Fund platform offers a range of investment solutions that cater to the needs of investors looking to explore beyond traditional schemes like chit funds. Investors can seamlessly manage their mutual fund sip or lumpsum investments through the Bajaj Finserv Mutual Fund platform, leveraging the convenience and security of digital transactions.

Frequently asked questions

What is the difference between mutual funds vs chit funds?

Mutual funds pool money from various investors to invest in stocks, bonds, or other assets, managed by a professional fund manager. Chit funds are a type of rotating savings and credit association system where a group of people contribute to a pool of money that is distributed as a lump sum to one member at a time, based on bids.

What are chit fund regulations?

Chit fund regulations are governed by the Chit Funds Act, 1982, along with rules framed by respective state governments. These regulations ensure transparency, protect subscriber interests, mandate regular audits, and require chit fund companies to be registered.

How to invest in chit funds?

To invest in chit funds, one must choose a registered chit fund company, understand the terms and conditions, decide on the chit amount, duration, and then subscribe by paying the periodic contributions.

What are some limitations of investing in mutual funds?

Mutual funds come with risks related to market volatility, management inefficiency, and potential for loss. Fees and expenses can erode returns, and there's a lack of control over investment choices.

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