Once indigenous to India, Chit Funds grew to become a global financial tool, known by different names around the world. In India, Chit Funds are among the favorite investment tools used by millions for building wealth through sensible savings and achieving short- and mid-term goals.
Despite this, there are many prevalent myths and misconceptions about Chit Funds, many of which you might believe as well. On closer inspection, however, you’ll find the truth often seeps through the cracks of these superficial falsities. Here are the top 5 myths about chit funds and the actual truths behind them.
Myth 1: Chit Funds don’t offer any significant advantage as a financial tool
Truth: Chit funds are great because of the low cost of borrowing and they offer great monthly returns. The higher the value of chit and longer the duration, the better the advantages for the investor. Especially when compared to other financial tools, in the short- and mid-term, chit funds compare favorably to other asset classes and tools like bank savings, FDs, RDs. etc.
The biggest advantage of chit groups (as each group in a chit fund is called) is that they allow you to borrow a lump sum at any time so that you can actually plan your short-term financial goals with ease. Moreover, the overall interest rate when you borrow turns out to be far lower than a loan product. It is especially a great alternative to personal loans. Because along with your monthly contribution (EMIs), you also earn dividends every month.
Moreover, chit funds are not subject to market risks, unlike mutual funds or stocks as they are dependent only on the group’s performance.
Myth 2: Chit funds are not government recognized and are unregulated and unsecured
Truth: The chit fund industry is a safe and regulated industry, governed by the Chit Funds Act, 1982, which is enforced by state laws across India. There are various rights in place to protect both the end users and the financial institution.
Myth 3: Chit fund returns are taxable
Truth: Chit funds returns (called ‘dividends’) are tax-free and are not subject to TDS deductions, because dividends are not classified as interest under Section 194A. Yes, you read it right. Any dividends or prize money won during a chit cycle is not subject to tax deductions. You can also offset the total gain or loss at the end of the chit group against a business profit or loss, if the chit is taken as a business investment.
But it should be clearly understood that if any of the gains from a chit group remain in your bank account and earn interest or are further invested in any other asset class, you become prone to tax deductions as per the normal taxation rules.
Myth 4: Chit funds are just a local, informal tool
Truth: The digital revolution has brought about salient changes in the finance industry and chit funds are keeping pace too. Today, we are witnessing the dawn of digital chits.
In order to regain transparency and trust, KyePot has partnered with India’s most reputed chit funds to offer India’s No. 1 digital chits platform. It is simple, convenient, and easily accessible with an internet connection. You can easily find and join chit groups, make online payments, bid for auctions, track your money, and much more with the KyePot App.
Myth 5: Chit funds are only used by lower income people from small towns and villages
Truth: Probably the biggest myth so far. If you go to any respectable chit fund, you’ll easily find more than a handful of examples of people who have built their wealth using chit funds as their primary financial tool. Chit funds are the most versatile financial tool available on the market. Apart from housewives, students, and young professionals, chit funds are also used by well-to-do individuals from all strata of society to accomplish their goals. Because of the secure savings and flexible borrowing options, high net worth individuals like businessmen, IT professionals and even banking professionals often participate in chit funds.
To sum it up, chit fund is actually an underrated financial tool whose true potential is immense. If you are dedicated to your plan of securing your financial future, participating in a chit fund can help you achieve your goals.