Mutual Funds vs Chit Funds
When it comes to investment schemes, both chit funds and mutual funds are viable options. Hence, the question still stands- which one is better? This article aims to answer the question as best as possible. Here, we present you with a detailed comparison between chit funds and mutual funds so you can judge for yourself which one would be better suited for you.
HOW DO CHIT FUNDS WORK?
Mutual Funds are a hugely different product from Chit Funds and command much more respect and dependability among investors.
Chit funds are registered financial tools that bring borrowers and lenders together. It primarily caters to the underserved population where there is limited accessibility to banks for borrowing money. Let us understand Chit funds from an example :
There are 10 people who come together and decide to invest Rs10,000 every year for the next 10 years at a chit fund company. After 10 years, every person would have deposited Rs. 1,00,000.
Among them is Kunal who needs money immediately to start his own shop but can’t go to the bank and borrow. Sanjeev on the other hand wants to save money for his daughter’s education after a few years.
Every year, an auction happens at the chit fund company where people requiring money at that time participate in a bidding process. For example, Kunal decides to take Rs. 90,000 now to start his venture and offers the highest bid.
This means that the remaining Rs10,000 is divided among the rest of the members and some part is kept by the Chit fund company (around 5% of chit fund value). Kunal would keep on submitting Rs10,000 every year as promised before.
Similarly, bidding happens every year and at the end of the 10th year, Sanjeev not only gets his Rs100,000 but also a healthy dividend amount foregone by other bidders.
Chit Funds are a great financial inclusion tool but It has a bad reputation because it has been misused in the past to scam naive investors. There are Government-run and registered chit funds that are safe to invest in.
Click on the link to read about What is a Mutual Fund?
COMPARISON BETWEEN MUTUAL FUNDS AND CHIT FUNDS
The comparison between mutual funds and chit funds are as follows-
- Both mutual funds and chit funds have their investors pool their money. In the case of mutual funds, this money is invested in stocks/bonds. Chit funds, on the other hand, use it to lend money and the income is equally divided among all subscribers.
- Mutual funds are operated by a fund manager, who takes a very small amount of charges. In chit funds though, the organization that operates the scheme scoops out a chunk of money as annual expenses.
- Mutual funds are closely monitored and regulated by SEBI. Chit funds are not regulated by any such government body, which is easily exploited by fraudsters.
- The strict regulation ensures that mutual funds are safe and reliable. There is no such assurance of security when it comes to chit funds. In fact, there have been many chit fund embezzlement cases in the recent past.
- Mutual funds invest in the market, thus they can be unpredictable as the market when the market goes down. Chit funds are not exposed to the market, hence they are free of any market risk.
In conclusion, it can be said that both mutual funds and chit funds can yield profitable results if invested wisely. True, there have been many incidents of swindling in chit funds, but there are many chit funds that are ethical and safe. Mutual funds come with their own risk as well. Thus, it boils down to your choice, preferences, and financial goals.
CHIT FUNDS VS MUTUAL FUNDS
When it comes to investment schemes, both chit funds and mutual funds are viable options. Hence, the question still stands- which one is better? This article aims to answer the question as best as possible. Here, we present you with a detailed comparison between chit funds and mutual funds so you can judge for yourself which one would be better suited for you.
HOW DO CHIT FUNDS WORK?
Mutual Funds are a hugely different product from Chit Funds and command much more respect and dependability among investors.
Chit funds are registered financial tools that bring borrowers and lenders together. It primarily caters to the underserved population where there is limited accessibility to banks for borrowing money. Let us understand Chit funds from an example :
There are 10 people who come together and decide to invest Rs10,000 every year for the next 10 years at a chit fund company. After 10 years, every person would have deposited Rs. 1,00,000.
Among them is Kunal who needs money immediately to start his own shop but can’t go to the bank and borrow. Sanjeev on the other hand wants to save money for his daughter’s education after a few years.
Every year, an auction happens at the chit fund company where people requiring money at that time participate in a bidding process. For example, Kunal decides to take Rs. 90,000 now to start his venture and offers the highest bid.
This means that the remaining Rs. 10,000 is divided among the rest of the members and some part is kept by the Chit fund company (around 5% of chit fund value). Kunal would keep on submitting Rs.10,000 every year as promised before.
Similarly, bidding happens every year and at the end of the 10th year, Sanjeev not only gets his Rs. 1,00,000 but also a healthy dividend amount foregone by other bidders.
Chit Funds are a great financial inclusion tool but It has a bad reputation because it has been misused in the past to scam naive investors. There are Government-run and registered chit funds that are safe to invest in.
Click on the link to read about What is a Mutual Fund?
COMPARISON BETWEEN MUTUAL FUNDS AND CHIT FUNDS
The comparison between mutual funds and chit funds are as follows-
- Both mutual funds and chit funds have their investors pool their money. In the case of mutual funds, this money is invested in stocks/bonds. Chit funds, on the other hand, use it to lend money and the income is equally divided among all subscribers.
- Mutual funds are operated by a fund manager, who takes a very small amount of charges. In chit funds though, the organization that operates the scheme scoops out a chunk of money as annual expenses.
- Mutual funds are closely monitored and regulated by SEBI. Chit funds are not regulated by any such government body, which is easily exploited by fraudsters.
- The strict regulation ensures that mutual funds are safe and reliable. There is no such assurance of security when it comes to chit funds. In fact, there have been many chit fund embezzlement cases in the recent past.
- Mutual funds invest in the market, thus they can be unpredictable as the market when the market goes down. Chit funds are not exposed to the market, hence they are free of any market risk.
In conclusion, it can be said that both mutual funds and chit funds can yield profitable results if invested wisely. True, there have been many incidents of swindling in chit funds, but there are many chit funds that are ethical and safe. Mutual funds come with their own risk as well. Thus, it boils down to your choice, preferences, and financial goals.
