My parents want me to invest in chit funds

[simanjuntak]

Hi long time lurker here .I 21(M) am from South india.I got placed in a top tier MNC.I currently will recieve 50 k for intern stipend and 1 L for the full time.But the increment may not be good from what I hear from seniors.i also get a stock component worth around 20k usd(vested 25% annually).I won't touch it though in the next 10 years or so.

I will have no expense for the stipend since it's wfh my father wants me to invest in chit funds the tenure is for 25 months per month 80 k.the fund will start from the month when I start my full time.

Is it worth it to invest in chit funds when there are a range of options outside like MF,equity,crypto ?

My father is kinda old fashioned he doesn't like those mf,equity(I personally think he doesn't want me to do stocks is bcoz he is addicted to it and doesn't want me to do the same)

Advice needed guys help me out

Ps: first post, grammar may be a little off don't mind it.

 

[darioush]

@simanjuntak

Is it worth it to invest in chit funds when there are a range of options outside like MF,equity,crypto ?

All of them are different.

MF and equity are regulated by the government, so there is very little chance of fraud. If something happens you can complain in SEBI and ensure that you will get proper resolution.

Chitfund is actually cheat fund, not regulated by government and no one will help you in case somet6wrong happen. ** See edit.

Crypto is a highly unregulated and risky bet but return would be high too. No one will help you in case someone goes away with your money.

for 25 months per month 80 k.the fund will start from the month when I start my full time.

This is too much to invest in chit fund, my suggestion would be refrain from this all.

Learn the basics of mutual funds and start investing in It.

Word of adwise: The intention of parents is never wrong but it doesn't mean the decision they are taking is not wrong.

Edit: Chit funds are also regulated please check @lukechester reply below.

But as he mentioned it would be really necessary to verify it is really a chit fund.

 

[lukechester]

@darioush

Chitfund is actually cheat fund, not regulated by government and no one will help you in case somet6wrong happen.

While I agree with your pther points, this is just plain wrong. Chit funds are administered by the state goverment and the chit trust is registered by the RBI. It varies from state to state, but since the 2000s, most states regulated chits and nidhis stringently, particularly southern states and Maharashtra.

Chit funds have collapsed, but the most infamous Saradha scam was not even a chit fund scam. The company fraudulently sold debentures to financially illiterate people as chit funds (I can thank my CS classes for this tidbit).

 

[darioush]

@lukechester My bad, first time I do deep research and find out that it was also regulated by the state gov. But due to the scam around I had the notion that it is fraud.

By the way thank you, I learned something new.

 

[lukechester]

@simanjuntak Chit funds are a savings-cum-borrowing scheme. How it works is people pool money, in your case 80,000 a month, and then the 20 lakhs that is collected monthly will be reverse auctioned to the person who wants to draw the lowest amount (called "prize money"). Then next month's installment will be proportionally lower.

It is useful if you need access to the money that you save, think of it as a more flexible recurring deposit. Another advantage is that the tax on your prize money is calculated based on the amount of money you deposit. Without getting into complications like accrual, if you get a prize of 19.5 lakhs, and you deposit 18.5 lakhs to the pool in 25 months, you pay tax on 1 lakh. Whereas in an RD, you would be paying tax on the entire interest amount earned from 20 lakh rupees. Conversely, if you only win a prize of say 17.5 lakhs, you don't need to pay taxes since you technically lost money on the chit fund.

Chit funds are highly regulated in certain states (while they are registered with RBI, states give the license and adminster the rules), and some state goverments have their own chit fund companies (KSFE, MSIL). Kerala in my experience is stringent with the member vetting, caps the administrative fees of the chit company, and mandates a security deposit to withdraw the prize money. The security can be a house, FD, etc.

Now to your question - should you invest in a chit fund? If you need the flexibility of withdrawing the money at any time, go for it if the chit fund is reputable. I'm assuming you're a Keralite since your father is such a believer in chit funds. KSFE is the most stable one, and since it is a government owned chit fund, it will not be allowed to fail.

If you don't need access to the money, equity is obviously better. Its your money, put your foot down and don't be a bitch.

 

[simanjuntak]

@lukechester I am from tamilnadu and the chit is managed by my relatives. my parents are doing this with them for more than 15 years so I can say it is pretty safe

 

[lukechester]

@simanjuntak That explains why your father is pushing you to invest in chits. It's generally not allowed, but try to sit in for an auction to gauge the popularity of various schemes.

My personal experience in KSFE is that small denomination funds (e.g. 25×30) will be more popular than large denomination funds like those with 80k, 100k commitment. My guess is since chits are a means for the financially disenfranchised to participate in savings and borrowings, small denomination will be more popular. So the discounts in small funds will be higher, as more people have a need for it.

If you do put your money in the chit, check their prize process also. I haven't studied the Chit Funds Act, so I'm not sure if taking a security deposit for prize disbursement is mandatory or not, but KSFE is stringent about this. They don't even accept out-of-state security deposits.

 

[annefaye]

@simanjuntak The greatest advice you will ever get is

NO don't involve financially with your relatives or friends

NO don't do chit funds- 20 people involved in it, and even if one cheats and runs aways its a loss.

Do not buy any single stock.

My advice, invest in low cost mutual fund nifty 50 and a flexi cap fund, after 10years you will come here and thank me

 

[kasie]

@simanjuntak Chit funds are not investment, they can be considered as a type of loan. You can use the amount to meet your immediate necessities.

 

[brione]

@kasie How do those who don’t need a loan earn through chitfund? Sorry never understood how it works

 

[kasie]

@brione

 

[brione]

@kasie Thanks now i feel bad for not googling first.

 

[summertt5]

@simanjuntak Your father can be old fashioned. But you are a grown man now. Do your own research and come to conclusion. Make it 120% clear that your money will be invested where you decide, not where they decide. They can put their money wherever they decide.

MF is currently the best option for your income class. Avoiding it and looking for something else that is magically better is a fools errand.

 

[andy12385]

@summertt5 He is 21 , he is a grown kid at best.

He is yet to face the reality of the world beyond college drama.

 

[pureinchrist]

@simanjuntak Talking about the strategy, Chit funds, MFs, equities – they're all on the table. But what about a balanced approach? Consider diversifying your portfolio. Allocate a portion to chit funds for stability, throw some into MFs for a balanced ride, and maybe dip your toes into equities for growth. It's not about choosing one; it's about crafting a financial plan that suits your goals. Let's make those hard-earned bucks work for you! Also, I see a lot of serious discussions going on in various subreddits regarding topics like small business loans, merchant cash advance, alternative funding and other related stuffs. I am not promoting as such, definitely not, personally I have gained a lot from one of the similar subreddits : MCA Legend. That's actually a good repository of knowledge.

 

[simanjuntak]

@pureinchrist Thanks will look into it

 

[fullyintoyou]

@simanjuntak You’re putting your 80% salary for more than 2 years on just one instrument, which doesn’t give any returns per se, unless you need to loan some money. Maybe you can invest a smaller portion of your salary(less than 20% maybe), and put the rest in something like mutual funds and see what it could grow into (still make some cash reserves). 2 years is bit long for you to put 80% and you wouldn’t know what comes in the middle.

 

[everette]

@simanjuntak !Remindme 1 Days

 

[holytheophany]

@simanjuntak Chit funds and mutual funds are different.

Mutual funds are used for investments usually gives 10-12% per year where as chit funds are for loan purposes, if you use it for investment then maximum it will give RD interest rates after gst.

Some people use chit fund loan amount for business purposes there by increasing returns .

 

[resjudicata]

@simanjuntak

https://www.reddit.com/r/personalfinanceindia/comments/1ab7u0i/_/kjlwlo0