Chit Funds, Recurring Deposits or Mutual Funds - Where to Invest 2022
Chit Funds, Recurring Deposits or Mutual Funds – Where to Invest 2022

Chit Fund, Recurring Deposit or Mutual Fund , Often many people keep asking or giving advice to us to save or invest money but not all of them really tell us how to do it. If you want to save your money or make smart investments but you are not sure where and how to start investing or saving then you have come to the right place.

Here, we will look at three investment options that you can consider to grow your wealth and secure your future financially.

chit fund

If you must have heard about Chit Fund from many people but you are still “what is chit fundIf you do not know this properly, then let us understand it in detail.

Chit fund is a community funding method where multiple contributors come together and invest a fixed amount every month. The money collected every month is put up for auction. The lowest bidder gets that amount after paying commission to the chit fund organizer.

The balance is distributed equally among the remaining contributors. This process is followed every month till each contributor receives the amount once.

In present times it has modernized as an online chit fund where the process is conducted digitally.

How does it work?

Suppose 10 contributors invest their money in a chit fund system under which each contributor invests Rs 10,000 every month. Accordingly, the total amount collected every month will be Rs 1,00,000 and the same amount will be auctioned every month.

Now suppose out of all the contributors four people are in need of money and those four people have bid for this money at Rs. 70,000, Rs. 88,000, Rs. 90,000 and Rs. 80,000. The person making the lowest bid i.e. Rs 70,000 will get the chit fund loan.

That person has to pay 5% to the organizer of the chit fund which is 5% of the total amount of Rs. 1,00,000. 5,000, in this way an amount of Rs.65,000 is given to that person after deducting Rs.5000 as commission. The remaining amount i.e. Rs 30,000 is distributed equally among the remaining contributors with each person getting around Rs 3,333. This process is repeated every month in the same way.

Mutual Fund

It is a good option to save or invest your money which collects money from investors and invests in stocks, bonds, equities and other securities. After this the investors get the return on their investment. However, there is some risk involved as investors may lose their money instead of getting returns.

Under this, investors can invest any amount depending on their financial capacity and the risk they are willing to take.

How does it work?

Suppose a bank starts a mutual fund scheme where it collects a total of Rs 1 crore from 100 investors. The objective of this scheme is to invest the money given by the investors in 20 stocks. Therefore, the fund manager picks the top 20 stocks that are likely to deliver the best and significant returns. Returns, based on each investor’s portfolio, are shared over time.

Recurring Deposit

It is offered by investment banks. In this, salaried individuals can open a Recurring Deposit (RD) account with the bank where they have to deposit a fixed amount every month. They earn the rate of interest applicable to fixed deposits on the total amount. After the maturity of the deposit, a lump sum amount is paid by the bank to the account holder.

How does it work?

Suppose you open an RD account and deposit Rs 1,000 per month at 8% interest for a tenure of 2 years. On maturity of the deposit after two years, you will earn interest of Rs 2,029 and the amount payable will be Rs. 26,029.

Chit Funds / Recurring Deposits / Mutual Funds

If you are struggling to decide between Chit Fund and Mutual Fund or Chit Fund and Recurring Deposit, the following comparison will help you decide in the right way.

chit fundmutual fundrecurring deposit
investment typeinvestment and loanInvestmentInvestment
ReturnDepends on monthly auction and bidReturns based on market performanceFixed return as per interest rate
Securityrisksubject to market risksSafe
regulated / governed byChit Fund Act 1982SEBIRBI
Guaranteeprofit or lossprofit or losssure profit
taxable incomeNon-taxable (if declared)non taxableNo TDS, but interest earned is taxable

last word

It is important to remember that each financial investment option comes with different risks and benefits. Therefore, you need to examine and understand the details closely before making an informed choice that will work best for you.

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