How do Chit Funds Work?
Once chit fund begins it has to register itself with the authority and submit 100% amount of chit as security amount.
A chit 1,00,000 begins when n(20) members for a duration of n(20) months with a monthly contribution of Rs.5,000 per month.
20 people x Rs 5,000 = 1 Lakh
The amount is collected from all members in accordance with the month in which the chit begins. i.e.,every member is liable to pay the instalment amount/due amount prior to the auction. The subscriber can take part in the auction only after payment of the previous dues.
Once this amount is collected it is placed for the auction among subscribers. The subscriber who agrees to take the lowest amount will get the prize money. Suppose for the first month one subscriber bid lowest say 70% of chit value. This means 70,000 (70% of chit value) will be given to this subscriber as a prize.
1 Lakh - 70,000 = 30,000 (Remaining amount)
5% commission is charged by Foreman. Foreman is a person or company who started chit fund.
5% of 5 Lakh (Chit value) = Rs 25,000
The remaining amount will be 30,000. This amount will be distributed among other subscribers. All remaining subscribers get Rs.1250 each. So, effective contribution for the first month would be Rs.3750 for every subscriber. The process of auction will continue every month till all subscriber get the prize money at least once. In next month auction only non-prize subscribers can participate as a bidder.
