A chit fund is a collective savings and borrowing plan widely practiced in India. It is a traditional tool for financial inclusion, offering a combined system for regular savings and access to pooled funds on a rotating basis. Here’s a comprehensive guide covering the meaning, working, advantages, types, online options, regional practices like those in Kerala, and answers to common questions.
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A chit fund, also known as a “chit,” is an agreement among a group of individuals (called subscribers) to contribute a fixed sum regularly to a common pool for a specified period. Each month, or interval, the entire pooled amount is given to one member, chosen either by auction or lottery. This arrangement continues until all members have received the lump sum, effectively making chit funds a blend of savings and credit programs. A chit fund can be managed either by formal institutions or be unorganized and based on mutual trust.
How Chit Funds Work?
Formation: A specified number of members agree to contribute a set amount at fixed intervals.
Collection: Each member contributes the decided amount, forming a pool.
Distribution: Each cycle, the pooled amount is given to one member via bidding (where the member willing to forego the largest “discount” wins) or a lottery.
Continuation: This process repeats each period until every member has received the fund once.
Organisers/foremen may take a commission, and any discounts offered by the winner are distributed among remaining members.
Types of Chit Funds
State-run chit funds: Managed by government institutions. Example: Kerala State Financial Enterprises (KSFE).
Registered chit funds: Regulated by state authorities and protected under the Chit Funds Act, 1982.
Unregistered chit funds: Informally managed among friends, family, or colleagues, generally riskier due to lack of regulation.
Features and Benefits of Chit Funds
Combines credit and savings.
Provides access to lump sum when required.
Works as an alternative financial tool in areas underserved by banks.
Lower borrowing cost compared to informal moneylenders when run properly.
Flexible structure, suitable for various financial needs.
Online Chit Fund
Advancements in technology now allow users to participate in online chit funds managed through regulated platforms. These services offer transparency, digital payment tracking, and accessible customer support. Online chit funds replicate the traditional model but with improved reporting, easier management, and regulatory compliance.
Chits in Kerala
Kerala is renowned for its widespread adoption of chits, locally called “chitty” or “kuree.” The Kerala State Financial Enterprises (KSFE) is one of the largest and most reputed government-run chit fund providers in India, offering secure and transparent chit schemes for individuals and businesses. Private companies and local societies also operate chit funds, but due diligence is essential before joining.
Best Chitty in Kerala
KSFE Chitty: Kerala State Financial Enterprises (KSFE), owned by the Kerala government, is considered the safest and most reliable chit fund option in Kerala because it is regulated and offers various chitty schemes with different ticket values and tenures to suit individual needs.
Muthoot Chits: Another popular private provider with a large presence and reputed service.
Conclusion
Chit funds are a unique financial tool that merge savings and credit, widely used in India and especially popular in Kerala as “chitty.” They’re flexible and accessible, but participants should choose only regulated schemes like the KSFE Pravasi Chitty in Kerala, to minimize risk.
FAQs
Are chit funds legal in India?
Yes, chit funds are legal in India, provided they are registered and operate under the strict governance of the Chit Funds Act, 1982. Unregistered or informal chit schemes should be avoided as they fall outside the regulatory framework.
What are the risks in chit funds?
Risks include mismanagement, fraud, and loss of funds, especially in unregistered schemes. Participating in registered or government-run chit funds reduces these risks.
How can I participate in an online chit fund?
You can join online chit funds operated by licensed companies, where digital processes ensure transparency and legal compliance.
Which is the best chitty in Kerala?
Kerala State Financial Enterprises (KSFE) offers the best and safest chitty options in Kerala due to its government backing and transparent operations.
˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in
Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.
Past 10 Years' annualised returns as on 01-11-2025
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
Tax benefit is subject to changes in tax laws. Standard T&C Apply
++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).
Generate wealth Earn 1 Cr# in maturity with Zero LTCG tax¶
Double tax savings^ On premiums (under 80C) and on maturity (under 10(10D))
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