For many people, chit fund schemes are synonymous with chit fund scams. The likes of the Rose valley chit fund scam and Saradha Ponzi scheme will be remembered as some of the most notorious financial fraud cases in India. Although the Chit fund act of 1982 lays out regulations and operational structures for chit fund companies, a lot of unorganized chit fund players turn a blind eye to the law.
Chit funds rely on mutual trust and the timely deposits of all the subscribed members. Even when a few subscribed members miss payments, the risk of the chit fund failing is high. Considering the risks, here is a list of tips to avoid chit fund scams.
1) Stay away from chit funds with little history
Large chit fund companies like Kapil Chits, Shriram Chits, and Margadarshi have been operational for decades with trust and success. Kerala Government runs a large chit fund under the Kerala State Financial Enterprises, and they have had a successful track record too. Some of the large chit fund companies like the ones mentioned above have time-tested procedures and checks in place to ensure all investors are morally and financially responsible.
There are thousands of new chit fund companies that open shop every year. These are less likely to have as rigorous procedures while accepting members. Some of them turn out to be fraudulent too. So it is always safer to stick with chit funds that have a long track record.
2) Is your chit fund registered?
There are hundreds of thousands of small unregistered chit funds across the country that do not come under the purview of the Chit Fund Act of 1982. Many of them have probably operated for many years on a trust basis in their local communities. However, there are equally as many fraudulent chit funds which promise exorbitant returns for their investors. Unregistered chit funds produce more chit fund scams given their informal setup. When you decide to invest in a chit fund, always ensure the paper documentation of the chit fund agency to ensure that they are properly registered. Here are some things that you can check to ensure the sanity of the chit fund you are about to invest in:
- Legal registration of the chit fund
- Check to ensure bank transactions are made in the name of the chit fund company and not in the name of private individual like the bank manager
- Verify the monthly auction process to ensure it is being done fairly
- Understand the manager’s fee
- If possible, get background info on other chit fund members in your group
3) Do your own due diligence
Chit funds are sometimes discovered through recommendations from family and friends. However, most people do not know how to verify the legitimacy of a chit fund. When you receive recommendations from friends and family, just know that they might not have done enough checks on the chit fund they have invested in. So, always check for yourself even when you receive recommendations.
4) Avoid cash payments
Many people make their monthly chit payments with cash. When you make bank payments directly with the chit fund bank account, there is very little room for error. You always have a receipt of your payment both with the bank and the chit fund. In case of cheating or fraud it will be easier to pursue legally with a record of the bank transactions.
5) Do not buy into chit fund manager’s alternate agenda
Sometimes, chit fund managers run other small businesses on the side offering customers attractive returns through real estate investments, lending schemes, and other business opportunities. Since these are usually unregulated and operate purely based on trust, you can never be sure of the outcomes.
6) Do not be a guarantor
Many chit funds take guarantors for their subscribers to ensure that there is no case of payment defaults or absconding after withdrawal. As a guarantor, you will be liable for all the dues if the original chit member defaults. It is great to support your family and friends, but just know that there are risks associated with it.