When it comes to small investments or savings, this is the most common question in the minds of general public. Out of the many options we have in this space, we are most prone towards the three options of chit funds, mutual funds and recurring deposits. We make an effort to analyse them and try to conclude in a simple way.
For the benefit of common audience, we will define all three of them in simple sentences:
Chit: Chit is a sort of community funding where a group of individuals come together, contribute a predefined amount every month (period) and one person among the group will take the lump sum. This process will continue till all the group members get the amount.
Mutual Fund: It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities.
Recurring Deposits: A recurring deposit is a special kind of term deposit offered by banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed deposits.
Now let’s see the different parameters that step in while considering to make a decision and compare all three of them:
Ease of Selection:
Selection for chits is easy as they are conducted by companies that register the chit with the government, selection of recurring deposits should also be easy if you have some basic knowledge of banking. However, selection of mutual fund for common audience is not an easy task as you need to analyse the performance of the fund organizer in last few years or months which need a lot of expertise and also it’s a herculean task to choose from 20000 MF schemes that fit you. From a common audience perspective, we rank the ease of selection this way. Chit funds are the easiest to select of all.
Again this is pretty straight forward both in case of chits and recurring deposits. As explained above mutual funds are good, but need more expertise to understand it.
Return & Risk:
There is a general myth that higher the risk, higher the returns. When it comes to savings, you must choose an option with No Risk and highest returns possible. Taking the averages, Chits has a low risk (registered chits) and gives returns between 12% to 14%. Recurring deposits also absolutely no risk, but the returns are low at about 5 to 7%. Mutual Funds are subjected to market, so risks are high and the returns are between 5 to 15%. We prefer chits over others when we consider Risk and Return factors
Ability to Borrow:
This option is only available with chit funds at a lower interest rate than the market.
Principal is guaranteed in the case chits and recurring deposits. In mutual funds, there is a risk of losing the principal amount.
At any given point of time, chits give you more money than you have invested. Recurring deposits come to you with a nominal rate of interest. Mutual Funds may give more money, but the risk also is equally high.
All three of them are regulated by government agencies, hence are safe options. Chits must be registered with registrar of chits. SEBI regulates mutual funds and RBI regulates banks that allow recurring deposits. Taking into consideration, if you are looking for low risk and better returns, chits are the best option, however, take care to invest with registered chits only. For more information, you can visit us at www.ibgechits.com or call us at +91 9010 820 002.