Chit Funds Explained: Your Guide to Smart Savings and Investment

A chit fund is like a group savings plan. People join together to save money regularly. Each month, one member receives the total amount collected from all members.

Example: In a chit fund of 25 people, each person contributes ₹4,000 every month. The total chit value is ₹1,00,000. Every month, one member receives the full ₹1,00,000.

How the Auction Works

Members who want the money earlier can participate in an auction. The auction works by agreeing to take less than the full chit value. The member who agrees to take the least amount wins that month.

Example: If a member takes ₹70,000 instead of ₹1,00,000, that is a discount of ₹30,000.

Even after winning with a discount, the member still pays ₹4,000 every month until the chit ends.

Discount and Dividend

The discount given to the winning member is shared equally among all members as a dividend.

Example: The discount is ₹30,000, shared among 25 members. Each member gets ₹1,200. This reduces their next monthly payment from ₹4,000 to ₹2,800.

Foreman’s Fee

The foreman manages the chit fund and charges a small fee.

Example: The fee is 5% of the chit value = ₹5,000. Each member pays ₹200 as their share of the fee.

Final Monthly Payment

After considering the dividend and the foreman’s fee, the final monthly payment per member is calculated.

Example:

• Monthly contribution = ₹4,000

• Minus dividend = 4,000 – 1,200 = ₹2,800

• Plus, foreman fee = 2,800 + 200 = ₹3,000

So, the final monthly payment per member = ₹3,000.

Summary / Key Points

• A chit fund combines saving, borrowing, and investment.

• The auction/discount allows members to get money early.

• Dividends reduce monthly payments for all members.

• Foreman’s fee is small and transparent.

• It is a simple and fair way for a group of people (like 25 members) to save together.

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