Mutual Funds v/s Chit Funds - What to Invest In?
Any individual with a regular income needs an appropriate money-saving plan for wealth managementso that they have enough for current expenses, future expenses, and security. Investments are necessary to allow one’s money to grow and counter the inflation rate.
Two popular and opportunistic investment options are chit funds and mutual funds. But before you decide to invest in one (or both), you must know the similarities and differences in their functioning, the benefits, and which one’s right for you based on your risk appetite and return requirements.
Let’s get into the details right away!
1. Mutual Funds
As the name suggests, a mutual fund is a type of investment tool wherein money is pooled in from individual and institutional investors. The corpus is managed by an asset management company (AMC) that may collectively invest the portfolio in various financial avenues like bonds, equities, and other securities.
How Do Mutual Funds Work?
One can invest in MFs through systematic investment plans (SIPs) or lump sum investments to get the MF units at prevailing market value or NAV. This NAV keeps changing for a mutual fund as per changing market conditions which can impact returns.
Mutual Funds Benefits
Mutual funds for beginners are a great option as they can simply choose the best SIP plan for 5 years to start investing with small amounts. Not only does it offer huge growth opportunities for your money, but also publicly discloses its financial performance under SEBI’s regulations.
There is no fixed maturity period for MFs. Investors can choose to invest in short-, medium-, or long-term funds, and exit anytime they want. Moreover, there exist certain tax-saving MFs which can give huge tax benefits in the long term.
2. Chit Funds
Chit funds facilitate investments and credits. In India, people have run formal or informal chit funds for several years, hence giving it the recognition of an important microfinance instrument. Think of it as a rotary saving scheme where several individuals contribute a certain amount for some time. The collected sum is then given to one person.
The details of how chit funds work are given below.
How Do Chit Funds Work?
Chit fund schemes work with an auction or lucky draw method wherein the person who bids the lowest value for the collected sum is declared as the winner. The excess amount is then distributed equally amongst the other members. This process is repeated every month until the chit fund ends.
Chit Funds Benefits
The best chit funds provide easy access to money in times of need, which can be borrowed at a lower interest rate with a good dividend income. It is a simple and safe process regulated by the Chit Fund Act, 1982. Moreover, borrowed money can be repaid in easy periodical investments.
Differences Between Mutual Funds and Chit Funds
Point of Difference
Money is pooled from investors and invested in financial securities.
Subscribers contribute a certain amount to the fund each month, which is then auctioned off to one member.
AMC takes 2-3% of the profit.
Organizers charge 5% or more.
To gain returns on surplus income.
To invest short-term or access an easy borrowing platform.
Minimum or maximum investment
SIPs start from as low as Rs. 500.
Legally, the maximum chit amount varies according to the number of subscribers.
Depends on market performance and the fund manager's strategy.
Subject to market risks.
Regulated chit funds are safe.
The principal amount is guaranteed.
The Final Verdict
To save and earn returns, an ideal way would be to analyse your investment goals, risk appetite, desired returns, and make a mutual fund or chit fund investment accordingly. Although both avenues have their pros and cons, they can yield equally good results if invested wisely and through legitimate companies. Therefore, it is paramount to do your due diligence and consult a trusted financial advisor before investing in any fund or scheme.
Author Bio: Aatish Khanna works with the Content Marketing team at Money Club - a digital chit fund platform that makes saving, borrowing, and investing your money more efficient. He writes on topics to help his readers understand processes so they can make better financial decisions. He's the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.
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