Chit Funds Vs Mutual Funds

People can save and invest their money using various financial products available on the market like Stocks, Mutual funds, FDs, Bonds, Chit Funds, etc. Chit funds started in India more than 1000 years ago. The first attempt to regulate the sector was made by the government of Travancore in 1914. This was followed by the Tamil Nadu Chit Funds Act of 1961. Chit funds have long been a feature of the financial system in our nation. If investors use it as a savings vehicle, it can produce strong returns. Additionally, in the event of a financial emergency, consumers can rely on chit-money.

Differences between a Chit Fund and a Mutual Fund

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What exactly are chit funds and how do they operate

A chit fund is a scheme that may be organized by a financial institution or can be conducted informally among friends, relatives, etc. A pool of people invests a certain amount of money equally, and either it gets auctioned among the pool of people who ever bit the lowest or the balanced amount is distributed among the same pool of people. 
Let's use an example to better learn this - A chit fund with a duration of 12 months started by 12 members where each member invests Rs 1000 every month. So at the end of every month, the chit fund has 12000 as the balance, and once the chit fund manager collects the money, an auction is conducted. Suppose member A bids 11000, B bids 10000, and C bids 9000. 
So the member with the lowest bid i.e. C gets 9000 from the pool of 12000 and the balance figure (12000 − 9000 i.e. 3000) is distributed equally among all the members i.e (3000/12 i.e. 400 each). The person who manages the chit fund takes some amount from the remaining pool of money as expenses ( 5% -10% p.a.).  A new bidder enters the process each month, and it lasts for 12 months.

How does a mutual fund work?

A mutual fund is a regulated financial instrument that pools money from different investors and invests it in other securities like stocks, bonds, and short-term debts. The mutual fund's portfolio is made up of all of its holdings where the money is invested.
A mutual fund is made by an asset management company that collects money from the investors and invests in various other securities. The investment pool is managed by financial experts called fund managers who do various research and development to invest the money. 

Conclusion 

For decades, chit funds have been a popular savings and credit plan. They make it simple for individuals to pool their resources and get a lump sum payout regularly. Investing in chit funds has its pros and cons. Many times in the past, chit-fund companies have departed with the money of the investors.

On the other hand, some people, particularly those from small towns, have profited from such funds. To invest in a mutual fund, one needs to conduct thorough research and due diligence.