The borrowers continue to get the dividend as per the above scenario. This process is repeated for the next 19 months until each member has had a chance to take home the auction amount while other subscribers, including the previous winners, continue to contribute their monthly installments. For the winner, the chit fund acts as a borrowing scheme and for the remaining members, the fund provides returns on the amount that they have invested (INR 1,000 in this case).

The discount amount, INR 20,000, is distributed equally amongst all the 20 members, after deducting the organizer’s fee which is typically 5% of the chit value, i.e., INR 5,000. So, if the maximum discount is INR 25,000, the prize money of INR 75,000 will be received by the winner.

This can be best understood via an example: If we start with a chit fund scheme with 20 members, each paying a monthly installment of INR 5,000, the first month’s corpus will be INR 1,00,000.Īt the time of the auction, whichever member bids the maximum discount gets to take home the amount called prize money. This amount is auctioned to the lowest bidder and the left over funds are distributed equally amongst the remaining members as dividend after deducting the organizer’s commission.

At its most fundamental level, in a chit fund, a group of people or subscribers agree to contribute a fixed amount every month for a fixed period of time to a corpus. It has been a part of India’s financial system for more than a century. A chit fund is a financial instrument that is a combination of savings and borrowings.

Chit fund calculator excel template