Chit Fund is the most unorganized and unregulated savings scheme followed in our country. Read this wiki link for more technical details on chit funds in India. There are some professionally run chit funds like Margadarsi chits, Sri Ram, Kapil chits etc, who keep spamming our television channels with their ads pursuading people to invest with them
Chit funds were always something esoteric for me and I had never ventured into nor was intrigued to know more details about it till the last month. Thanks to my mother. One fine sunday my mother came to me, while we were casually chatting she started flaunting about her new chit investment. She was excited that she was going to start investing her second chit fund, which is run by her friend. She was more excited that she was doing this without my dad's knowledge ;)
She showed me the commision chart and was of an opinion that she was saving a lot by that and was all praises for her friend. The latter part was something I couldnt digest not that I am being a prick but I believe no one will do anything so generously. So that is when I got onto the job of chit fund analysis.
I had keyed in all of the numbers into excel and put in all my MBA concepts to calculate the actual savings. After I showed my calculation to my mother on how her friend has been so generously making money at the cost of all her friends..my MOM was shocked and grumbled few swear words on her not so nicer friend..and took back her decision to take up the second chit fund.
For the benefit of all my readers.. the below is a pictorial illustration on how chit funds work.
You can download the excel analysis I did to evaluate the chit fund. This excel model is a very generic one and can be used to analyse any type of chit fund. I have made it dynamic with the following input variables
Total Chit Amount
Commission Type (Linear or Dynamic)
Initial Commission (For Linear Type of Commission)
For Dynamic type, the person can enter the commission values directly next to the payment schedule
Interest Rate (Bank saving interest rate)
Chit Call Time (The month when you bid)
The output values are the Net-present value, Internal rate of return, Total Sum and Total Worth (considering investing of the bid amount @ Bank interest rate)
Please read the "Read More" sheet in the excel for more details. You may please comment back in this post if there are any mistakes in the excel model and also suggest any improvements. Thanks in advance :)