Chit Fund vs Mutual Fund

Mutual funds offer diversification by investing in a broad range of securities and Chit funds primarily rely on contributions from a limited number of participants.
Chit Fund vs Mutual Fund
3 min
24-May-2024

Chit Funds are for people who like saving money together with others from their community and neighbourhood. However if you want your money managed by professionals, spread out across different investments, and have the chance to grow a lot, then Mutual Funds, especially through SIPs, are a better choice. Of all the options available in India today, mutual funds and chit funds are particularly well-known by a large portion of the population as investment vehicles.

Chit funds have a long history dating back more than 200 years in certain Indian villages. These funds, which are overseen by chit-fund businesses, provide a unique method of borrowing money that is strongly ingrained in the community.

Understanding chit funds with example

Also known as Kuri, the chit fund is a type of saving plan that started to help small shopkeepers and sellers who didn’t have easy access to regular bank services. In this setup, a bunch of people agree to put a set amount of money regularly into a shared pot.

To understand better, consider the following example:

In a mutual fund, 20 people each invest Rs. 5,000 monthly. This Rs. 1,00,000 pool grows to Rs. 2,50,000 monthly with everyone's contribution. Instead of a game, the fund manager invests this money in various assets like stocks and bonds.

When it's time to distribute returns, the fund manager calculates. Let's say Member A wants Rs. 2,000 less, Member B Rs. 3,000 less, Member C Rs. 4,000 less, and so on. The person asking for the least extra, let's call them Member E, with Rs. 5,000 less, receives their share first.

Member E gets Rs. 2,45,000 (Rs. 2,50,000 minus Rs. 5,000), and the remaining Rs. 5,000 is divided equally among all members. This process repeats monthly for 20 months, with each member getting a turn to receive the least extra amount until everyone has had a chance.

Understanding mutual funds

A mutual fund is a way to invest money that brings together cash from many people to buy a mix of things like bonds, stocks, and other funds. It's overseen by pros who choose what to invest in for the group. The cool thing about mutual funds is they spread out the risk. The people putting in money, called unit holders, get parts of the mutual fund. These parts show how much of the funds they own.

Mutual funds vs. Chit funds – Which is better for you?

Chit funds and mutual funds are both popular ways to invest money with some key distinctions:

Difference

Chit Funds

Mutual Funds

Objective

Investment vehicles for individuals pool their money to invest in a diversified portfolio of securities

Acts as a savings and borrowing scheme where members contribute regularly and take turns receiving the pooled funds as a lump sum

Diversification

Offer diversification

Limited diversification

Investment Size

Can be started with small amounts and then proceed to select investment possibilities according to one's financial capability

Contributions are flexible, and determined by the consensus among the members

Management

Professionally managed by fund managers

Can be self-managed by the members themselves or overseen by a fund manager within the group

Risk

Carry investment risks associated with market fluctuations and the performance of the underlying securities

While relatively low-risk in terms of capital loss, may pose risks related to the reliability and integrity of the group or the designated manager

Returns

Based on the performance of the underlying investments

Lump sum amount during one's turn, with no direct correlation to investment performance

Regulation

Subject to regulations and oversight by financial authorities

May have less regulatory scrutiny, leading to potential risks for investors if not properly managed or regulated

Accessibility

Accessible to individuals through various channels, including banks, financial institutions, and online platforms

Preferred by individuals with limited access to formal banking services

Duration

No fixed duration, investors can stay invested for as long as they like

Fixed duration for each chit-fund cycle


Before investing, it is important to weigh several aspects when comparing mutual funds and chit funds. Risk tolerance is important since mutual funds have different profiles and chit funds have risks associated with the dependability of the organisation. Investment objectives vary between the two, with mutual funds emphasising capital appreciation and chit funds focused on lump sum payouts. These objectives can be long-term wealth accumulation or consistent savings. Time horizon and diversification requirements should also be considered.

Unlike chit funds, which have set tenures and little diversity, mutual funds offer wide diversification and are therefore more suited for long-term investments.

Key takeaways

  • A chit fund is a type of saving plan that started to help small shopkeepers and sellers who didn’t have easy access to regular bank services
  • A mutual fund is a way to invest money that brings together cash from many people to buy a mix of things like bonds, stocks, and other funds
  • Before investing, it is important to weigh several aspects when comparing mutual funds and chit-funds
  • Risk tolerance is important since mutual funds have different profiles and chit funds have risks associated with the dependability of the organisation

Conclusion

In conclusion, mutual funds are distinguished by professional management, whereas chit funds necessitate member engagement. Chit funds are a last resort for people, especially in underdeveloped areas, notwithstanding the hazards involved; nonetheless, those with other investment options. When comparing chit funds and mutual funds, it's essential to understand their differences and evaluate which aligns better with your financial goals and risk tolerance.

The Bajaj Mutual Fund Platform features multiple tools, from an online lumpsum calculator to a SIP calculator, intending to make mutual fund investment planning easier. The Bajaj Finserv Mutual Funds Platform, with over 1,000 mutual funds to choose from, can be the ideal place to begin your investment journey.

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Frequently asked questions

Which is better chit funds or mutual funds?

https://www.smallcase.com/learn/mutual-funds-vs-chit-funds/#:~:text=Mutual%20funds%20offer%20diversification%20by,the%20same%20level%20of%20diversification.

Mutual funds offer diversification by pooling money from multiple investors to invest in a diversified portfolio of securities. They are managed by professional fund managers and provide liquidity, transparency, and regulatory oversight. On the other hand, chit funds involve a group of individuals contributing money into a common fund, which is then disbursed to members through an auction process. Chit funds typically don't offer the same level of diversification as mutual funds.

Is SIP better than chit-fund?

https://www.mstock.com/articles/chit-fund-vs-mutual-funds#:~:text=Chit%20Funds%20bring%20a%20sense,offer%20a%20robust%20investment%20avenue.

Systematic Investment Plan (SIP) allows investors to regularly invest a fixed amount in a mutual fund scheme. SIPs offer benefits like rupee cost averaging and disciplined investing, making them a popular choice among investors seeking long-term wealth creation.

Is it good to invest in chit funds?

https://www.bankbazaar.com/recurring-deposit/recurring-deposit-vs-chit-fund.html#:~:text=Chit%20funds%20are%20not%20necessarily,are%20a%20much%20safer%20investment.

Whether it's good to invest in chit funds depends on various factors such as your risk appetite, investment goals, and understanding of the chit fund's workings. Chit funds can offer returns, but they may not be as regulated or transparent as mutual funds. Additionally, chit funds may carry higher risk due to factors like the credibility of the organizer and the reliability of the auction process.

Who controls chit funds?

https://pib.gov.in/newsite/PrintRelease.aspx?relid=115736#:~:text=Chit%20Funds%20are%20registered%20by,implementation%20resting%20with%20the%20States.

Chit funds are registered by the respective state governments, with the regulation and implementation primarily resting with the states.

Is chit fund legal or illegal?

https://www.5paisa.com/blog/chit-fund#:~:text=Yes%2C%20in%20India%2C%20a%20chit,making%20them%20safe%20and%20legal.

In India, chit funds are legal entities, regulated by state governments. They operate under specific guidelines and regulations to ensure investor protection and fair practices.

What is the return percentage of chit fund?

https://www.quora.com/How-much-returns-can-be-expected-in-chit-funds#:~:text=If%20you%20are%20taking%20at,27%25%20for%20the%20remaining%20period.

The return percentage of chit funds can vary based on factors such as the duration of the chit, the number of participants, and the bidding process. Returns from chit funds are typically in the range of 15% to 30%, but this can vary depending on the specific chit fund and market conditions.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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