The mutual fund schemes are open ended schemes that enables you to redeem the total invested amount without any kind of time restrictions.
What is the Difference Between a Chit Funds and a Mutual Fund?
In terms of profitability, both chit funds and mutual funds are noteworthy. Chit funds are ideal for both savings, in which it offers high returns, and borrowing, wherein it provides emergency funds. Alternatively, mutual funds pool money from various sources and then use them for buying bonds, stocks etc.
Therefore, if you are keen to invest, it would be better to have a deeper insight into these investment options. Read on to learn more about chit funds vs mutual funds alongside their features.
What Is an Emergency Fund?
The phrase "emergency fund" refers to money set aside for use by individuals in times of adversity. The goal of an emergency fund is to improve financial stability by providing a safety net that may be utilised to cover unforeseen costs like a medical emergency or significant home repairs.
Cash and other assets with high liquidity tend to act as emergency fund assets. This lessens the need to deplete retirement savings or jeopardise your future security by using high-interest debt options like unsecured loans or credit cards.
What Is Chit Fund?
Chit funds are a rotating saving scheme which has taken a crucial part in the financial system of India for beyond a century. They are a form of collective savings scheme wherein a group of individuals decide to contribute a pre-determined amount of money into a mutual pool of funds at fixed intervals.
One group representative is appointed by lottery or any other way to collect the total pool of funds for that specific period. Consequently, the team members rotate receiving the fund, and each of them gets the pre-determined amount as per agreement. Chit funds are also called Chitty and Kuri.
What Is Mutual Fund?
Mutual funds are a trust that collects money from several investors with a common investment goal and invests the same in bonds, shares, equities, money markets or other securities. These investments are beneficial for high capital appreciation and investment growth over a considerable period.
While investing in these funds for an extended tenure, i.e. 5 to 10 years, you can get substantial returns. Furthermore, being an investor, while investing in mutual funds, you have to own the company’s stocks directly. However, you have to share the profit or loss equally alongside other group investors.
What Are the Differences Between Chit Funds and a Mutual Fund?
Although both chit funds and mutual funds are investment options, diving deeper into them will show several differences in their functioning. Check out the major differences between these two:
Method of Operation
In chit funds, people contribute a specified amount to the fund every month, which is auctioned off to one person.
Funds have been pooled from investors and invested in securities.
Organisers charge about 5% or more for the services they provide.
In mutual funds, AMCs take a portion of the profit, around 2 to 3%.
Reason for Investing
For short-term investment or borrowing purposes.
Generally for earning returns on surplus income.
Rate of Return
It differs from one to another.
Mostly it remains constant and is based on market competition and fund managers’ decisions.
Usually, unregistered chit funds are very risky owing to fewer rules and regulations.
Mutual funds are mainly prone to market risk.
Mainly, it persists for as many months as the number of members.
There is no fixed date or tenure. Investors can invest on a short, medium, or long-term basis.
The amount of returns obtained from chit funds is not taxed.
Various mutual funds possess various tax rates for long and short terms.
What Are the Benefits of Chit Funds?
Mentioned below are some of the common advantages of chit funds you should be aware of before availing this investment option:
- Substantial Deposit Amount: When it comes to chit funds, each member's deposits build up a substantial amount.
- Acts as an Aid for Households: Chit funds act as a major source of financial backing for lower-income households.
- Interest Rates: The chit funds bestow you with much more reasonable interest rates than other moneylenders.
- Pre-Set Value and Time Limit: Chit funds come with a pre-determined value and time limit.
- Act as Micro-finance Institutions Usually, chit funds serve as micro-finance institutions, and they are an amalgamation of savings and credit schemes.
- No-End Use Restriction: These funds can be used for weddings, child's education, festivals, ceremonies, travel, healthcare expenses, shopping, etc.
- Higher Dividends: Generally, investors get higher dividends than the interest received on the savings in several deposit schemes.
- No Collateral: In case of chit funds, you can borrow funds without collateralising any asset or property. Unlike NBFCs and banks that demand tangible security, it depends only on personal sureties.
- Instant Funding: It helps you get instant cash in the event of a financial crisis. You also get to borrow a substantial amount once you clear the first instalment.
- Less Documentation: Chit funds require very minimal or sometimes no documentation while fulfilling the financial requirements of individuals.
What Are the Benefits of Mutual Funds?
Following are some noteworthy advantages of investing in mutual funds. While going through them, you will be able to understand the importance of this investment option:
- Very Convenient: Investing in mutual funds is very convenient. This has made it simple for an individual to invest in them online rather than visiting a fund department physically.
- Flexibility: One of the most striking benefits of mutual funds is that it comes with investment flexibility. Thus, you can choose between SIP or lump sum to invest in mutual funds.
- Regulated by SEBI: The Securities and Exchange Board of India (SEBI) regulates the mutual funds scheme. Thus, SEBI opposes any arbitrary use of investors' money. This way, it makes mutual funds a safer investment option than others.
- Operated by Professionals: Highly skilled professionals, called fund managers, operate mutual funds. They possess accurate knowledge about the market condition, and on that basis, they invest your money in debts or equities.
- High Liquidity: Another attractive feature of mutual funds is that they offer high liquidity. So, if there is any emergency, you can withdraw or redeem the funds. Liquid funds will be credited to your account within 2-3 working days.
- Tax Benefits: Mutual funds also offer Income Tax benefits on long-term investments, wherein you have to pay fewer taxes owing to their decent tax efficiency and substantial returns.
- Host of Options: Mutual funds are available in plenty of choices, out of which an investor can select the scheme that suits them the best.
- Helps in Creating Diversified Portfolio: These funds enable you to build a diversified investment portfolio alongside balancing your profits and losses.
- Minimal Charges: Mutual fund features minimal charges wherein you have to pay a very small amount called the expense ratio while making your investment. Although this ratio and other additional charges can differ from one institution to another, it remains reasonable throughout.
Having a crystal-clear concept about chit funds vs mutual funds should help streamline your investment process. However, remember that investing in either tends to be risky. Therefore, before investing, you should conduct thorough market research and make prudent decisions.
FAQs About Chit Funds Vs Mutual Fund
Some well-known chit fund houses in India include Mysore Sales International, Government of Kerala Linked Chitty, Amruthadhara Chits and Finance Private Limited, Kerala State Finance Enterprise (KSFE), Shriram Chits, and so on.
Although both investment options are prone to risks, a mutual fund is comparatively more secure than a chit fund since it is controlled and regulated by the Securities and Exchange Board of India (SEBI).
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- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
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