Chit funds cheat the economy (Update)

It has become a trend of late to witness “chit fund frauds” but people still keep getting duped in voracity of high returns.

Similar to what eFundsPlus discussed in the post on risk involved with chit funds on 12th April, 2013 a new development has arrived on the scene in West Bengal.

Recently, SEBI Chairman UK Sinha too raised the same issue about the mushrooming business of chit funds and nidhi companies across the country.Chit funds cheat the economy

He stated that the total amount of such unauthorized collective investment schemes (CIS) is more than Rs 10,000 crore.

Apart from duping people of their money such investment schemes have led to decline in household savings and hence the total household savings in India have dwindled considerably over the years.

Although chit funds and nidhi companies have been around in the market for many years but majority of the such funds are out of the regulatory ambit of SEBI.

Along with cooperatives these chit funds and nidhi companies have been kept out of the regulatory effect of all powerful SEBI.

Interestingly, there working model is too simple and hassle free for the common investor to get trapped into. Such funds mostly work in localities where people recommend such schemes to each other in close circles and this is how chit funds receive marketing. The point of attraction is the increased rate of interest that they offer against the regular bank deposits (FD).

Despite people getting swindled over and again the easy attraction towards interest rates in the range of 18% to 20% plays the trick to effect.

The other important reason for their success is the ease of withdrawing from the scheme at any point of time and the level of liquidity that they offer. These are the features unavailable in majority of the investment schemes at present.

However, chit funds are registered with the government and central governments and therefore only those chit funds should be selected which are regulated by the government.

However, if you still find chit funds and other such schemes attractive enough and share rich experience with them in the past then at least make it a point from now onwards to only invest in them if you need funds in short period of time.

Nonetheless, it is very difficult to calculate returns that such funds offer as they only depend on level of emergency of participating members in the group and this is highly variant.

Therefore those chit funds that mention particular interest rate against their name should not be taken too seriously……..

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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