A Chit Fund (Chitty) is basically a contract between the foreman and the Subscribers. As per the contract, each subscriber agrees to remit a fixed amount of money every month for a number of months. Chit Fund is a unique scheme incorporating the aspects of a recurring deposit and loan (cash advance) In chit fund, the subscriber has an opportunity to bid and avail of cash in advance which amounts to a certain percentage of the total denomination of the chitty (sala), whereas in recurring deposit the advance can be availed only on the paid up amount. In case bidding is delayed due to draw of lots in the initial installments, one can resort to availing of chitty loan, which is a loan that "bridges" the gap between the need of the subscriber for money and the delay in the chitty getting prized.
A Chitty is conducted by a person or an institution and this entity is called the foreman
How many tickets can be enrolled in each chitty?
The number of tickets enrolling in a chitty will be equal to the number of months for which the remittance
have to be made or the duration of chitty in months.
What is Chitty "Prize Money"?
The total of the periodic subscription, called the chitty amount, will be given out as "prize money" to the person who bids by allowing for the maximum reduction in the prize money. The maximum reduction possible is 25% as per the prevailing Chitty Act and if there are more than one subscriber interested in bidding at 25% reduction, the numbers of the such bidders will be put to a draw. Thus each subscriber gets an opportunity to receive the prize money once during the tenure of the chitty. All the promoters have to contribute the periodic subscription till the end of the chitty. The first installment is normally for the promoter, and that is his seed capital. From the second month onwards the total sum will be auctioned among the members. Those who are in urgent requirement of money take part in the auction. The person who is willing to accept the least amount is given preference.
The foreman is entitled to a certain percentage of the chitty amount (not more than 5% of the chitty amount) as his commission from each member
What are the Securities Acceptable for Payment of Prize Money?
The types of security acceptable for chitty prize money payment, belong to various categories like personal sureties (of employees of Government, aided schools, public undertakings, banks etc.), financial documents (like fixed deposits with banks and reputed organizations, Deposit-in-Trust, LIC policies, bank guarantees, National Savings Certificates etc.), landed property or Gold ornaments etc.
No:1 - As a borrower
Bid the chitty at the maximum rate, since cost of chitty is always much less than the borrowing cost.
In case you want to take personal loan from the bank or financial institutions, you need to pay annual interest in the range of 15-20%. But in case of chit funds the cost of money borrowed is much less than the bank loans and more over it is easy and convenient.
I. Per unit (in % terms) of discount foregone correspond to interest earned on the prize money should be arrived to maximize the return from chitty.
II. Discount forgone in auction should be suitably compensated with the interest/return earned by prize money receipt during the course of the chitty.
See the following example
Ex : Mr. X enrolled for a chitty for a total value (sala) of Rs. 1,00,000.00 for period of 50 months and Rs. 2,000.00 pm as installments.
ii) Interest accrued on price money deposit for the balance period of (50-14) = 36 months @ 9.5%.
Therefore total interest for Rs 90,000 @ 9.5%(compounded Annually) for 36 months is = Rs 28,164.00
Total prize money received Rs 90,000.00
Total receipt/ inflow from chitty = 28,164.00+ 90,000.00 = Rs 1,18,164.00
iii) If the total dividend earned is Rs 6,000 during the entire chitty period,
The net outflow of the chitty payment is Rs1,00,000 – 6,000 = Rs 94,000.
Note : above calculation is without considering the Forman's commission
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