Avoid Chit Funds, Invest in Tata Balanced Fund Instead

Read the article to know why investing in Tata Balanced Fund is a far better alternative of chit funds.

In the Indian financial system, chit funds have been used on a large scale for more than 100 years. These days, it is a common practice among housewives, friends, relatives, neighbours who also use it as an activity for a get together every month. Chit funds work on a lottery basis but even for the best-case scenario, you can get far better returns if you use a promising mutual fund scheme like Tata Balanced Fund. The working of chit funds may sound decent but if you look at it from an economic point of view, you may never want to use such schemes.

What is the Chit Fund?

For those who are not familiar with chit funds, it is an activity that can be commonly seen in the kitty parties and small get together. A small group of 10-12 people collect a fixed amount from every member every month which is collectively given to one out of them. The winner is selected on the lottery basis and the name of every winner is removed from the next lotteries. In this way, by the end of 12 months, all the 12 members would have received the winning amount. We can understand it better with the help of an example.

For example, there is a group of 10 members and every member contributes Rs 10,000 every month. A lottery is drawn for the first month between 10 members and one out of them will receive the collected Rs 1 lakh. In the next month, the money will be deposited by every member but the name of the winner for the first month will be removed from the lottery. The same will continue for the succeeding months until every member receives the winning amount once.

Why it Should be Avoided?

If you bring in the concept of the time value of money into chit funds then you will realise how this is reducing the buying power of your money. At the end of the complete cycle, each player has contributed a small amount and everyone has received the same amount that has been deposited. There exist no benefits. If we consider the inflation rate which is increasing constantly, there is a loss for everyone involved as the amount of money you still hold is same as the amount that you had one year ago. Meanwhile, inflation played its part and the same amount you had one year ago is slightly less valuable now. Due to the concept of the time value of money, chit funds are a waste of time and money. People involved in it can use multiple alternatives to smartly get benefits from the same amount in the same tenure.

Alternatives of Chit Funds

The best alternative is to use the SIP in a promising mutual fund which can deliver decent capital appreciation without taking higher risk. Tata Balanced Fund can be an ideal scheme for such purpose. As contributing to chit funds will not deliver any return, SIP can be much rewarding and can provide capital gains. The SIP can also be used in a collective way to gain better returns.

Collective SIP

Instead of taking out a lottery for every month. The winning amount can be invested in Tata Balanced Fund every month. After the completion of 1 year, the invested amount, as well as wealth gain, can be distributed among each contributor. In this way, everyone will receive a bit of capital gains.

Win First Gain First

If you want to keep the thrill of the lottery system, chit funds can be used in the traditional way but those who win first can invest the winning amount as a lump sum in Tata Balanced Fund which will yield better gains until the cycle is completed. In this case, the one who wins first will gain the most while the one who wins in the end, won’t get any benefits from chit funds.

Chit fund is a very old practice which was commonly used when there were no banks. However, with advancements in every field and inflation rate surging, it is high time for individuals to identify better opportunities to deal with finances. Wealth management is an extremely important part of life and your financial growth is dependent on how well you handle your finances. Stay woke stay smart & choose the best mutual funds for yourself.