Different savings plans have a long history in India. We all understand the value of conserving money and how even small sums may go a long way toward realizing larger life objectives. Therefore, one should know the difference between Chit Funds and Mutual Funds. Even modest savings made today can accumulate over time and lead to financial security, enabling us to accomplish our goals. Moreover, there are numerous investment possibilities and tools on the market to store little funds today.
Chit funds vs Mutual funds are both excellent possibilities for investment programs. The difference Between chit funds and mutual funds is that they both entail the periodic pooling of investor cash, but they each have unique traits and qualities. Investors should know each option’s advantages and hazards before choosing one to create their investment portfolio.
Therefore, the original query-which is better between mutual funds vs chit funds-remains. This article seeks to provide the most comprehensive response to the question regarding the difference between Chit Funds and Mutual Funds.
Read more: 10 Best Chit Funds in India
What Are Chit Funds?
Individuals frequently use chit funds in the battle of chit fund vs mutual funds-an ancient form of borrowing and saving in the lack of banking services, particularly in rural areas. Many people manage Chit funds for more than a century either formally or informally (usually by family, neighbors, relatives, friends, and so on).
In some places, these funds are also known as chits, Kuree, or chitty. Chit funds in mutual funds vs chit funds enable people to obtain a lump sum of money when they need it urgently for a wedding, a medical emergency, or business needs by bringing borrowers and lenders together. A person enters into a contract with a group of individuals in a Chit fund so that each party can contribute to a certain percentage of the fund and receive it in periodic payments.
A chit fund is a rotational savings plan where numerous people periodically contribute a specified amount. Members gather here via an organizer known as a subscriber. Every month, they each make a specific amount of contributions.
Following the collections, a drawing or auction is undertaken to choose the recipient of the funds raised. Once their name is called, investors can withdraw the money they need and continue making regular payments according to the schedules they have set. All of the other fund members receive a portion of the leftover funds.
How do Chit Funds work?
Let us understand Chit Funds through an example:
The total collected at the end of each month, if there are 20 subscribers to a fund and they each give Rs. 2,000, would be Rs. 40,000. If a bidder places an offer for Rs. 38,000 at an auction and it is the lowest bid, they will withdraw Rs. 38,000 from the Rs. 40,000. The extra Rs. 2,000 is then divided equally among the remaining members, who each receive Rs. 105.
What are Mutual Funds?
In chit fund vs mutual funds, a mutual fund is a business that raises money from numerous customers and invests it in securities such as bonds, stocks, and short-term loans. All of a mutual fund’s holdings are its portfolio. Investors buy shares of mutual funds. Each share represents an investor’s ownership stake in the fund and the earnings it generates.
How do Mutual Funds work?
Let us understand Mutual Funds through an example.
Take a non-stop bus that moves from city to city throughout India while adhering to a predetermined route. Similar to any other bus, this non-stop bus features a driver and a large number of passengers. When their destination is on the route, some passengers board the bus during the journey, while others board the bus once they arrive.
If we relate this to mutual funds, this bus would stand in for the scheme of a mutual fund, with the fund’s objective as the destination, its management as the driver, and the shareholders’ money as the riders. The non-stop bus traveled to several sites while occasionally becoming stuck in traffic. It will occasionally move swiftly by using desolate roads. There is also a chance that the tires will puncture.
Currently, this nonstop bus would not stop despite everything. It will continue on its path and eventually reach other cities. Similar to how markets fluctuate are the occurrences that non-stop bus experiences. Although the market may occasionally fall, it will eventually reach the highway. A single fund is pictured by the nonstop bus. There are several mutual funds with diverse objectives and modes of transportation, just like the numerous buses that travel the nation.
Read more: Recurring Deposit vs Chit Fund: Difference
Chit Funds Vs Mutual Funds: What is the Difference?
The following table showcases the difference between mutual funds vs chit funds:
|Point of Comparison||Chit Funds||Mutual Funds|
|Definition||An instrument for saving and borrowing that primarily makes money accessible to people who need it.||Savings and investment tools that promote capital growth by exposing investors to a range of capital market products.|
|Method of Operation||Securities are purchased using a pooled amount of investor money.
|The fund receives monthly contributions from individuals, which are subsequently auctioned off to one member.|
|Transparency||Since chit-fund organizers are not required to disclose how funds were used because they are not subject to any sort of regulation, there is a lack of transparency.||According to SEBI requirements, mutual funds maintain an appropriate level of transparency when disclosing financial performance.|
|Expenses||A minimum of 5% is what organizers charge for their services.||AMCs retain a portion of the revenue, often between two and three percent.|
|Operated By||A financial institution informally. Unofficially, a reliable individual for each subscriber.
|Investment firms or asset management companies (AMC).|
|Minimum and Maximum Investment Value||Plans for systematic investments (SIPs start from as low as Rs. 500) There is typically no maximum value.||According to the law, the maximum chit amount changes based on the number of subscribers.|
|Reason to Invest||As a source of borrowing or short-term investment.
|Typically, to increase returns on excess income.|
|Return Rate||It differs from person to person.||It is flexible and dependent on the performance of the market and the fund managers’ plan.|
|Risk Factor||The lack of regulation makes unregistered chit funds very dangerous. There are many examples of fraud.||Risk levels differ for various funds.
Additionally, they are exposed to market risk.
|Maturity Tenure||It often lasts for the same number of months as there are Subscribers.||There is no set time or tenure. Investors are always free to withdraw their money from the fund. Investing can be done for the short, medium, or long term.|
|Types||Regarding formality, there are registered and unregistered.||Closed-ended and Open In terms of entering and leaving the fund, ended. Regarding investment categories, equity, money market, and debt funds are available.|
|Liquidity Level||Formally, after receiving the organizer’s consent, money can be withdrawn from the chit. Approval is only granted for particular purposes. Members may formally leave after paying a small exit fee.||High level of liquidity in comparison. Investors can withdraw their money from mutual funds even after one day. If an investor seeks to withdraw their funds before a predetermined period, AMCs typically levy a fee known as the “exit load.” Only open-ended mutual funds are covered by this.|
|Tax Efficiency||Even though chit-fund returns are typically not taxed, they must be disclosed when submitting income tax forms.||Tax rates for short and long durations vary depending on the type of mutual fund (equity, debt, or hybrid).|
Chit fund vs Mutual fund: Which is the Better Option?
In Chit funds vs Mutual funds, Chit funds have a reputation for taking a risk that the organizers may misappropriate the money and fail to reimburse investors. Although some societal groups tend to profit from them, risk-averse investors would be better off avoiding such investments. It is preferable to choose chit funds vs mutual funds registered with the government with the necessary certifications if an investor wishes to invest in these.
Contrarily in Chit funds vs Mutual funds, mutual funds offer investors the ideal possibility for growth depending on the fund chosen. Additionally, investors have the choice of making small installments through SIP or more significant deposits in one lump sum. Finally, transparency has advantages for investors as well, particularly when it comes to a fund’s risk-return profile.
mutual funds by professionals in mutual funds vs chit funds could provide market-linked returns to all stakeholders instead of just one member with chit funds. Prior to choosing a mutual fund to invest in, it is essential to carefully assess the historical fund’s performance as well as the style of management, risk ratios, and other elements.
Which of the two (mutual funds vs chit funds) is preferable has no definitive, obvious answer because it all relies on the goals that the investor has for their investments. In addition, each investment in mutual funds vs chit funds comes with a unique set of benefits and drawbacks.
The best course of action would be to weigh the advantages and disadvantages of both options chit fund vs mutual funds and make a decision in line with the investor’s financial position plan after considering what they hope to gain from the investment, their risk tolerance, the length of the investment, and other relevant factors.
If trouble with the battle of chit funds vs mutual funds, as an investor one can put money into a mutual fund, chit fund, or both depending on their preferences. The decision between the two is based on the investor’s financial needs, investment objectives, and investment capacity. If you choose and invest appropriately in mutual funds vs chit funds, these investment strategies can result in rewards. However, before investing in mutual funds vs chit funds, it is crucial to conduct exhaustive due diligence on each.
Chit Funds Vs Mutual Funds – FAQs
Is it legal to put your money in Chit Funds?
Ans. In Chit fund vs Mutual funds, Chit funds are now authorized in the vast majority of Indian states and union territories. However, because these are not financial institutions, there is no regulatory agency that oversees them.
What is the maximum number of chits an individual can participate in in the same group?
Ans. A subscriber may take part in a maximum of three chits in a single chit group. This limitation could decrease subscriber concerns about discounts.
What is the chit fund’s duration?
Ans. Its duration ranges from 12 months to 50 months.