What is Chit Fund and How it Works?

What is chit fund?

Chit fund is a type of savings scheme which is practiced in India. There are many variations of chits where the savings are done for a specific purpose. These funds are also misused by its promoters and we can say that there are many instances of the founders running what is a Ponzi scheme and absconding with their money. As per we know in section 2, (b) of the chit funds act 1982, the chit means a type of transaction whether called chit, chitty, chit fund, or by any other or different names by or under which a person agrees with specified number of persons that every one money them shall subscribe a certain sum of money and some other different manner as it may be specified in the chit agreement and it can be entitled to the prize amount.


In India, chit funds are normally governed by various state or central laws. All acts are

  • Union Government- Chit funds act 1982
  • Kerala- Kerala Chitties act 1975
  • Tamil Nadu- The Tamil Nadu chit funds act, 1961
  • Karnataka- the chit funds (Karnataka) rules, 1983
  • Andhra Pradesh-  Andhra Pradesh chit funds act, 1971
  • New Delhi- the chit funds act, 1982 and the rules of Delhi chit fund act, 2007
  • Maharashtra- Maharashtra chit fund act 1975


There are three types of chit funds:

  • Chits run by state governments
  • Private registered
  • Unregistered

Chits run by state governments

State government runs some of chit funds schemes, for instance, the (KSFE) Kerala state financial enterprises and (MSIL) Mysore sales international limited are PSUs that run that chit fund business transparently and cleanly.

Private registered

There are several registered chit funds, some run by prominent business houses like Hyderabad-based Margadarsi chit fund, part of the Ramoji Rao group, or the Shriram chits of the Shriram group. Some cooperative societies also run chits.


Through not legal, there are many unregistered chit funds. These should be avoided because in case of a dispute there is no recourse for the member. Such chit funds usually include colleagues, close friends, or neighbors.


  • It is flexible for savings.
  • The rate of chit funds is cheaper than other financial schemes.
  • There are no policies needed to join chit-fund companies.
  • The cost of intermediation is the lowest.

Investment and Advantages

  • Chit funds have the advantage both for serving a need and an investment.
  • The money can be drawn if there is an emergency or it could be continued as an investment also.
  • The subscribers will determine the interest rate, it is based on mutual decisions, and it varies from one auction to another auction.


  • In the chit fund, the rate of borrowing is very much cheaper than other non-banking loans like money lenders. In these, you can borrow up to 70% of the chit value with only paying the first installment.
  • It is helpful for unorganized economic groups or for needy people who are unsure of their cash flows and unexpected expenditure.
  • The chit fund is also getting finance easily.
  • It is easy to join.
  • it promotes door to door collections by agents
  • It provides small deposits schemes.
  • For any unexpected financial requirement, the subscribers can bid at the auction for the lump sum amount, which could prove to be a better option.


  • The organizer gets benefited much more from your savings.
  • There is very little/little protection.
  • There is no guarantee for any fixed returns.


This is a kind of contract between the managers because the promoter is named, and also the subscribers, world health organization are a part of voluntarily.

E.g., 20 members, 20 months, RS. 5000/- a month. Range the number of members and also the number of months square measure to be constant.


  • With the excessiveness of in-voice fund firms around, the protection of a coupon fund lies in selecting the correct one.
  • In an exceeding invoice fund company, below legal binding, the activities area unit regulated and institutionalized by the invoice fund act.
  • And therefore may be thought of safe.


TO detect unauthorized chits and irregularities committed by the chit fund companies, a chit vigilance cell has been formed which is headed by the additional registrar of chits. The personal assistant (chits) to the inspector general of registration and chit inspector of Chennai- north, south, and central are members of the cell.


A chit fund scheme has generally a predetermined value and duration

  • Each scheme admits a particular number of members who contribute a sum of money every month of the `pot’
  • The pot is auctioned out every month.
  • The highest bidder (known as a prized subscriber) wins the pot for that month.
  • The bid or discount amount is distributed among other members.
  • In case of delayed payment or default from the members, the chit fund organizer will put the money.


In conclusion, After a deep study on the topic of chit fund and how its works.it covers the objectives which I have set ( complete information of chit funds, their acts, types, benefits, advantages of it and disadvantages also and the main point how it works.) I have observed that chit funds are very important and preferable as compared to other sources of finance, this study fulfilled the objective. Here I have learned how a chit fund can be of help to the people in the business community in providing adequate financial resources.   This all provides me the knowledge of chit funds how it is helpful for others and in my suggestion, I believe that to save the innocent public from being cheated by chit conducting Companies, the periodical checking must have to be conducted by the department. The officials of the registration department are keeping a strict vigil over the conduct of unauthorized chits. The department has to take strict action against the cheaters and the frauds also.

You may refer to this video if you want the explanation in Hindi

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