Covid-19 has become one of the greatest threats to the health of people around the world and hit the economy badly. With leading problems such as job insecurity, cut-down incomes, etc., the need for emergency funds is constantly increasing.
Therefore, saving has become a critical factor for survival that shouldn’t be overlooked anymore.
Short-term investment is the need of the hour. And the two most popular short-term investments are chit funds and recurring deposits.
Let’s discuss them in detail.
1. Chit Fund
A chit fund is a community funding where a group of people comes together to create a pool of money every month. Each month one member takes home the lump sum, which means everyone gets the pool money once during the community tenure.
Types of Chit Fund
1. State Government Chit Funds
Run by the state government; for example, Mysore Sales International Limited.
2. Private Registered Chit Funds
Run by prominent business houses, such as Margadarsi Chit Fund, Hyderabad, and some cooperative societies. Among the popular are registered online chit funds that are quite secure because users are first verified through a background check.
Private chit funds that are not legal; these usually include friends, colleagues, neighbours, etc.
How Chit Funds Work
Each month, the community members bid on the pool money; the highest bidder takes it home. The bid amount is the interest rate on the pool money paid by the winner. It is distributed equally among the group members.
Chit funds also work on a lottery basis. A lucky draw each month decides who gets the pool amount. The interest rate in lottery chit funds is fixed.
Benefits of Chit Funds
- Emergency fund without any paperwork
- Small monthly investment amounts
- The benefit of a loan for a big purchase at the beginning of the community tenure
- Higher interest rate, i.e. greater benefit of the group members, in cases of high bidding
2. Recurring Deposit
Recurring deposits fixed monthly investment with a bank over a pre-defined tenure. The sum accumulated gathers interest which is paid to the investor along with the lump sum saving.
Recurring deposits are transparent and risk-free, but the interest rates (usually 7% to 8%) remain fixed and do not go as high as it can go in chit funds based on bidding.
How Recurring Deposit Works
Recurring deposits offer the flexibility of saving a big amount with small instalments. Recurring deposit accounts are opened with banks, wherein customers can deposit a fixed amount every month till the deposit matures. The saving is paid at the end of the tenure along with the interest earned.
Withdrawal: On early withdrawal, usually a penalty of 0.5% is charged.
Tax: TDS or Tax Deducted at Source is applicable to the income. The bank deducts 10% TDS on withdrawal if the interest earned exceeds INR 10,000.
Benefits of Recurring Deposit
- Easy to open and invest
- Small instalments
- Goal-based saving
- Safe and secure
- Availability of loan against recurring deposit
Chit Fund and Recurring Deposit Comparison
|Particulars||Recurring Deposit||Chit Fund|
|Purpose||Only investment||Investment as well as loan|
|Return||Fixed Return||Low or extremely high returns through lotteries, bidding, and surplus amount|
|Fees||No charges||Small commission fees
|Tax||Taxable income||Non-taxable income|
Begin with identifying your needs and analyse both investment options accordingly. Talk to a financial expert if you require help.