Atul Bhatnagar is a lucky man. His friend has always been there to help him with money. Right from the time he wanted to expand his business in the early 1980s to his marriage, from meeting the educational expenses of his children to buying nearly half-a-dozen properties across Delhi, the friend has backed Bhatnagar all the way. Only his friend is not a person, but an age-old investment product called chit funds.
When asked to relate his experience of being a chit fund investor for nearly 40 years, Bhatnagar could not stop talking. “Chit funds are the best financial products in the market at present,” he claims. According to him, if you are part of a wellmanaged registered chit fund, you’ll never lose money. “It’s safer than bank deposits,” he adds. Armed with Bhatnagar’s inputs, we decided to find out more.
Has been investing in chit funds for 40 years.
Started by investing Rs 125 a month in 1980. Now invests in lakhs. Has used money saved through chit funds to expand business, fund children’s education and buy multiple properties.
A chit fund is both a savings and credit product. It bears a pre-determined value and is of a fixed duration, mostly two to three years. Each scheme admits a specific number of members whose monthly contributions adds up to the total value of the chit fund at the end of the term ( See: How chit funds work).
Chit funds have had to battle much negative press, with the term often being associated with scams and ponzi schemes. The industry—comprising 50,000 registered funds managing close to Rs 70,000 crore —took a battering in the aftermath of the Saradha and Rose Valley scams in which investors lost thousands of crores. “People thought Saradha and Rose Valley were chit funds –they were not,” says T.S. Sivaramakrishnan, Proprietor of the New Delhi-based Balussery Benefit Chit Fund. “Chit funds do not accept public deposits or indulge in other businesses under the same umbrella,” he adds.
Now chit funds are trying to carve out a cleaner identity, a campaign that culminated in a slew of amendments to the Chit Fund Act. These changes have become operative from the beginning of this year. “The amendment to the Act is a recognition for the chit fund industry. It goes a long way to say that registered chit funds are safe investment products for all types of investors,” says Karthish Mohan of Panasuna Chits, based out of Salem in Tamil Nadu.
The amended Act
There aren’t too many provisions in the Chit Funds (Amendment) Act of 2019 that directly impact investors. It recognises the industry and lays down tighter operational guidelines for chitsters (chit funds). By streamlining operations, the Act aims to make chit funds a safe product for investors. For one, it stipulates that the word ‘chit’ (along with other terms also meaning chit funds) would only be used by entities managing chit funds.
According to Sivaramakrishnan, the Amendment will help change the negative perception around chit funds. “With RBI in an advisory role, state-level registrars handling on-group operations and central government being the supervisory body, chit funds are safe as any investment product available. There’s enough legal recourse available for investors,” he says.
Safety and legal recourse are important because till now several operators did not register their outfits to save on taxes, other government levies and scrutiny. The Chit Fund Act makes it mandatory for all chitsters to register themselves with designated registrars under various state governments. This apart, the chit fund manager (also called foreman) has to get separate approvals for launching new schemes, submit collection and auction records periodically and also keep a deposit security.
“The government should also add insurance to chit funds; this will make it a very safe investment product,” says Bhatnagar. “The government should host a website where you can verify the registration details of funds and schemes. This will make the industry very transparent,” he adds.
Returns and expenses
Chit funds are not guaranteed or fixed return products, as payouts (or dividends) are largely dependent on the pace of monthly auctions. Normally a chit pot or pool with lot of borrowers will yield 9-12% returns at term. On an average, chit fund returns could be in the range of 7-9%.
The latest amendment in the Chit Fund Act has approved the revision of the foreman’s commission from 5% to 7%. This hike, if implemented, may eat into the returns of investors.
“I don’t think too many funds will hike the commission to 7%,” says Manoj Padmanabhan, CEO of Mayavaram Financial Chit Corporation. “There are already many funds that offer their services at 3-4%; if any foreman decides to take home a fatter commission, he may lose a lot of clients,” he adds.
Generally, chit investors are loyal to funds that have returned their money. But every once in a while, savvy investors try out operators offering newer schemes. “This is where it can get risky… I lost money investing in two Haryana-based chit funds some years ago. I did not know they were not registered. It’s best to stick with one clean fund house,” adds Bhatnagar.
It looks like time’s up for “cheat” funds now.