Chit fund is one of the oldest forms of the financial system where people can invest, earn and borrow money. Even though chit funds were quite common in the past, they lost some steam in the past few years. However, thanks to some legislative changes and the emergence of fintech players, it’s being believed that chit funds will become a popular financial tool once again. In fact, the chit fund platform is believed to promote financial inclusion in India.
ROSCA vs Chit Fund
Rotating Credit and Savings Association (ROSCA) is an informal financial institute comprising a group of individual contributors. The Indian version of ROSCA is chit fund, also known as kitty, chitty, or kuri.
They both are a traditional savings and borrowing mechanism where the members contribute money in a common fund. This fund is then offered as a loan to one member each month. This type of informal financial lending system is quite common in many countries.
Chit Funds Can Drive Financial Inclusion in India
We have almost 10 crore people working in blue-collar jobs, who along with other lower-income strata individuals do not engage with the banking sector. It could be due to numerous reasons like lack of trust, no credit history, or strict policies that make it difficult to engage with a bank.
Therefore, they prefer a community-based financial setup such as the chit fund. They find it trustworthy and dependable. Even Indian MSMEs who face a credit gap get help from chit funds.
These factors are responsible for being the driving force towards financial inclusion in the country.
But, with any financial tool, there may be one question on people’s minds.
Are Chit Funds Safe?
Yes, absolutely. Sure, there were some safety issues in the past but once chit funds got fully regulated and governed by the Chit Funds Act in 1982, chit fund investments have proven to be safe. Ensure you invest in companies offering chit fund groups and digital chit fund platform that are registered under this Act. It covers various aspects of chit funds, thus protecting the contributors and the company.
Benefits of Chit Fund
The five main advantages offered by chit fund are:
- Ease of use
- Minimal paperwork
- No interest is levied on the loan
- Free from fluctuations in the market
- Great way to raise money if the emergency fund falls short.
Challenges of Chit Funds
It isn’t surprising that modernizing and streamlining such an age-old mechanism will experience some speedbumps along the way. Chit funds are facing two main challenges which are being tackled efficiently by the financial sector.
There were, unfortunately, a few scams in the past due to which chit funds are still being associated with them. With the right governance and stringent policies in place, chit funds have become a safe and risk-free method to save and borrow money. The progress may be slow, but it is surely falling in place.
Another challenge chit fund is facing is attracting the tech-savvy generation. Being a traditional system, the younger generation isn’t that familiar with nor do they seem too keen to invest in chit funds. The fintech companies are aiming to change that by offering online chit fund where investing in chit funds is easier and safer.
If you are looking for a good short-term investment option, consider chit funds. This community-based setup is also a great way to instil the habit of saving. Though there are several financial institutes in the country, certain gaps are left unaddressed by the banking sector. The chit fund platform can fill those gaps. If channelized in the right manner, thousands of people and businesses can benefit from chit funds.
Author Bio: Aatish Khanna
Aatish Khanna works with the Content Marketing team at Money Club, a digital chit fund platform that makes saving, borrowing, and investing your money more efficient. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.