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Tuesday, November 21, There are many chit funds that are managed by the state governments and are hence safe, while others are managed by companies that have been in the business for many decades now. Before we take a look at some of the kapil chit funds in bangalore dating and best known chit funds, take a look at how they work. How chit funds work? Some small artisans tend to put money in chit funds if they need money for a particular occasion. For example, if they have a marriage one year down the line, they can withdraw the chit fund amount at that time.
If there are people in need of money in the very first month then they could bid for the amount and if the bid is settled at Rs 12,, then the person who has won the bid would get Rs 12,, while the rest would not pay Rs 1,, but less, since the chit fund amount has gone for lesser amount.
The one who picks last would get near Rs 15,, but his benefit is that he has never contributed Rs 1, for 15 months, which means he contributes less and gets more. In any case take a look at some of the best chit funds in India. The chit funds business started in The company has schemes that cater to all. These schemes are very popular as they incorporate small amounts to start with.
The best part of this chit fund is that it is very safe, since it has the government of Karnataka backing. To that extent they are very safe and there is no reason to worry. The advantages of the chit fund is that they provide hard cash and are available during a crisis.
This again is a very safe and one of the best chit funds, simply because it is backed by the government of Kerala. The total of the subscription amount or the chitty amount, is given to the person who bids by allowing for the maximum reduction in the prize money.
This fund is largely restricted to people in Kerala and that is probably the disadvantage as the network is largely based in that state. Shriram Chits This is the largest chit fund in the country and probably a very safe one.
Interestingly, it has almost 6, employees and also serves states like Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra. This is one of the oldest chit funds in India from the private sector. One can invest in them if one has plans to accumulate money for an event. The company has a staggering 22,00, customers. Also remember the tax liability that could arise from chit funds, which one needs to pay.
Chit fund is an individual financial concept, which has the flexibility to borrow or save. Individual chit funds can keep a higher floor level. As mentioned earlier, most chit funds fail because the members who have already received the prize money fail to keep their commitment for the remaining term. To make sure this doesn't happen, the Chit Funds Act has laid down that the beneficiary will have to pledge a collateral if his bid for the chit money is successful.
One can pledge gold, property, insurance policies, NSCs and bonds, or even provide a personal guarantee from any other member who hasn't yet received the prize money. Should you save or borrow? We have already explained that a chit fund is both a saving and borrowing option. If you don't bid for the money till the end, it is like a recurring deposit. You get your money back at the end of the chit's term.
Though the sum received will be fixed, your returns will depend on the distributable surplus over the months. There is no assurance of return, nor a fixed formula for how much you can gain. In our example see table on page 1 , the person who waits till the 20th month pays Rs 18, over the entire tenure and gets Rs 19, in the end. The return works out to 6. The low returns from a chit fund are basically due to the very high commission that goes to the organiser.
Now you know why chit fund companies try to lure investors with freebies and gifts. If no commission was payable to the organiser of the chit, the return in the 20th month works out to Similarly, the chit fund is an easy way to borrow, but the rate of interest is prohibitively high. Though no interest is charged, the contribution keeps rising every month and the total outflow is more than that received. In our example,the member who bid in the first month received Rs 15,, but had to pay Rs 18, over 20 months.
Despite these shortcomings, investors flock to chit funds in large numbers. This is because the option offers tremendous flexibility to the member. He can treat it as a recurring deposit till he needs the money, just like an overdraft facility with a bank.
Most people use chits to save for short-term goals, such as buying a vehicle or setting up a business. They are especially useful for goals that can crop up anytime during the tenure of the chit, such as a child's wedding or the purchase of a house. The commission may be higher if you take into account the sum received by the bidder. In the example, the foreman's commission of Rs 1, works out to be 6. The impact of the commission is lower if the chit fund is for a longer duration.
In other words, the gap between the cost of the loan and the return on investment narrows down in longer chits. Tax benefits and treatment There are also some tax benefits in chit funds. A member who wins an auction by accepting a lower payment can set off the loss from the chit against business income. This reduces the cost of capital for the borrower.
However, this benefit is available only to businessmen and traders. Salaried persons cannot set off the loss against their income. On the other hand, any profit made by the last person in the chit is taxable. The amount is to be shown as income from other sources in the tax return and taxed at the marginal rate applicable to the individual.
This further reduces the attractiveness of chit funds as a saving instrument. Should you invest? Considering the high cost of capital and the low returns offered by chit funds, this option is not advisable for the average investor. Only if you have a rather bad credit history and a bank loan is out of the question should you consider joining a chit fund. However, keep in mind that the chit fund company will also insist on a collateral when your bid for the kitty is accepted. For those looking at chits as a saving option, a bank fixed deposit or a recurring deposit will offer better returns.
Only if you don't have access to regular banking should you consider a chit fund. Automate your investment if you lack the discipline to save.