How does Chit Funds work ?
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Let us understand How Chit Funds work with an Example:
Group Formation:
Imagine the start of a new chit group with a Pool of 10,00,000 (10 Lakhs). The group is set to run for 20 months with 20 members. So, you have 20 members, each committed for the entire 20-month duration.
Subscriber Recruitment:
The Chit Fund Company, known as the Foreman, plays the role of gathering these 20 reliable individuals interested in investing in the chit group. These individuals are officially called Subscribers
Monthly Subscription:
To keep things simple, let's say each subscriber contributes Rs. 50,000 per month. Now, multiply this monthly contribution by the number of subscribers (50,000 X 20), and you get the total amount collected each month, which sums up to the Chit Value of 10,00,000.
Imagine a financial instrument that not only helps you save for the future but also opens the doors to instant borrowing when you need it the most. Enter the world of Chit Funds—an innovative financial tool that seamlessly blends the art of saving and borrowing. The roots of this ingenious concept trace back to the Rotating Savings and Credit Association (ROSCA), a simple yet powerful form of a savings group.
It's not just about putting money aside; it's about unlocking a dual opportunity to 'Save and Borrow' simultaneously, creating a financial dance that caters to both present needs and future aspirations.
The Pool:
The total amount collected from all the subscribers each month, i.e., 10 Lakhs, is termed as the Pool
First Month Subscription and Pot Collection:
In the inaugural month, all 20 Subscribers contribute Rs. 50,000 each, amassing a total pot of 10,00,000 (10 Lakhs).
Auction Process:
Now, the pot is up for grabs through an auction. The bids will be placed within the Minimum and Maximum bid cap.
Bidding Scenario:
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Bidder 1's Offer:
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Bidder 1 decides to bid Rs.40,000.
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Bidder 1 is essentially saying, "I'm willing to forego 40,000 to other subscribers, and in return, I want 9,40,000 as my Prize Amount."
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The 60,000 that Bidder 1 is willing to forego is termed as the Discount, while the 9,60,000 he takes home is the Prize Amount.
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Dividend:
The amount Forgone by the Highest bidder as discount is then distributed amongst the other members.
The same process is repeated every Month.
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