Chit Funds and Ponzi Schemes

There is a huge difference between Chit Funds and Ponzi Schemes, they are both very different concepts and they shouldn’t be thought of as alike.

Chit Funds or Chitty is a kind of a savings deposits which is done by a group of people. The concept is very similar to Kitty Parties which are are organised by women to save some money for a particular community project. These chit funds can be managed by registered companies or it can also be organised by a group of people like family and friends. All the Chit Fund activities are regulated by the Chit Fund Act, 1982. Apart from that the Chit Funds are to be regulated by the various State Governments by formulating their own Acts, like it has been done is Kerala, Tamil Nadu, Karnataka, etc.

The way the Chit Funds work is very simple. There are a group of people who all contribute a particular sum of money to the fund for a specified number of months. The people donate the money each month. Then every month there is lottery/auction and 1 person is chosen who gets the total money that has been pooled for that month. However, the person whose name comes in the lottery will not again get any money from the rest of the time period but will have to continue contribute his share of money for the rest of the time period. Its usually seen that the term period of the Chit fund is equal to the number of members in the Fund, so that each person has an equal chance of getting the money pooled. There is one person who organizes the Chit Funds every month and this person is also in-charge of conducting the lottery/auction.

So there is no surety of who will get the money at which month and there arises the main difference between Chit Funds and Ponzi Schemes.

Ponzi Schemes are basically structured in such a way that the money channeled from the investors go around and around in circles. This basically means that, the money collected from the investors are used to pay off the old investors. And the Ponzi Schemes basically function till the amount of money coming in from new investments is more than the money going out to pay the old investors. As long as this works the Ponzi Scheme can function and the day the chain is reversed is the day it goes bust.

Ponzi Schemes try to attract investors by offering very rate of returns, while Chit Funds don’t offer anything similar to this. Its basically a group of people contributing some amount of money each month and getting a lump sum amount in only one particular month.

Click here for government certification in Accounting, Banking & Finance