Do you think chit funds are safe?

Hi all,

I saw in many places that chit funds give high returns which can be much greater than any share market profit, but is it safe enough to put the money in chit funds? How to belive the person who is conducting chit fund business ? Does he has to take an agreement with any of the government office to start business ?

- Dileep.

None of the established finance corporations are into chitfund business. Only few small players in this segment which is by and large un regulated....

CHIT FUNDS form a significant part of INDIA's unorganized(
unregulated)financial market. The chit funds generally operate in 2 forms (
there are other as well let me limit to these )

Form1 :
An organizer collects a set of like minded individuals. Each individual commits
a certain FIXED amount of money over a period of time. The names of the
participants are pooled in a box and by lucky draw the name of the individual
is selected to whom the money collected for that time duration is give. A small
% of this money is given to the organizer both as a token of gratitude and to
ensure that the person who got the money during the earlier draws still remains
committed till the end ( ontara rowdism )
Advantage: Say a chit fund runs for 24 months. The person who is lucky gets the
full money in the first month. which will in turn earn him interest if invested
else where.
Disadvantage: If the person is unlucky and gets it on 24th month the venture is
really bad. You have no control on the draw system

Form2:
Again here a person forms a group of like minded individual each individual
commits a certain FIXED amount of money over a period of time. ( note same as
form1) but the similarities end here.
Ex:
1.Say there are 10 people each committing Rs.1000 for 12 months. Hence each
month we have a collective amount of 10,000
2. Each person starts bidding for Rs.10, 000 by forgoing certain amount say
Person1: 10000 ( 0 )
Person2: 9500 ( 500)
Person3: 9000 (1000)
3. The contract is handed to Person3 since he was ready to forego highest
amount. in this case 1000. This 1000 is distributed as dividend to the group
and each person earns instant profit in this case Rs10. ( 1000/10)
Advantages: Unlike the scenario1 you have total control on the resources. You
can plan to stay away from the bid if you have sufficient liquidity. Higher the
competition among the participants for the resources higher is your divided (
higher competition makes the contract dearer, dearer the contract higher is
your dividend)
Disadvantages: High risk. If there is no race for contract you loose your
dividend.

NOTE: However all this CHIT fund business has high degree of risk associated
with it. The success of the instrument depends on the collective behavior of
the group and the management skills of the organizer. Its a unorganized sector
and every thing is works purely on trust. No law can come to your rescue if you
are instrument goes for a toss. ( Bangalore
nalli bejan kole case galu chiti vyavahara indane agirodu duranta )

Hope this explanation was exhaustive............

Thanks for the detailed explanation Bharadwaj... Will read in detail later and respond

Margadarsi http://www.margadarsi.com/ is an organized chit fund organiser as of my knowledge. Don't know how worth it is investing in this...

Parents of some of my friends have been investing in Margadarsi and have good good returns...

hello all
Thanks for the explaination...

regards,
phe9oxis,
http://www.guidebuddha.com

Hey i think chit funds are more risk level in funds because it is small scales funds so i think chit funds are not good than other funds..
for more information visit : http://www.dspblackrock.com/product/opportunities-fund.asp