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Saving and investing wisely has been an intrinsic part of the Indian way of living. The past few generations spent their lives building up a ‘safety net’ of savings for their old age. And to say that it served them well would be an understatement. Post-retirement, it is these savings that enabled them to live in comfort and independence.

The savings culture is still as relevant for the youth as it was for older generations in India. All you have to do is find the best mode of investment for your savings to earn a good return on the money you save. Here’s a comparative look at three popular modes of saving – Chit Funds, recurring deposits, and mutual funds.

What is a Chit Fund and how does it work?

A Chit Fund is a community funding method wherein a group of individuals comes together and each person contributes a predefined amount every month. One person out of this group takes the lump sum, who this person would be is decided by the drawing lottery or in some cases, with an auction. This process is followed every month until each person has received the lump sum amount once. A commission needs to be paid to the Chit Fund Company by the person receiving the lump sum. As this is an instrument that is dependent on trust, it is not secure and is considered risky. Online chit fund platform that is 100% safe and secure.

What is a Mutual Fund and how does it work?

Mutual funds are a method of investment in which a trust collects money from numerous investors who all share a common goal for investment. The amount of investment, in this case, is not pre-defined and depends on the financial capacity of the investor. Then, the trust invests these funds in different financial instruments in the money market including equities, bonds, and other securities. As per the movements of the money market, you earn a return on your investment in mutual funds. This also involves a certain amount of risk.

What is a Recurring deposit and how does it work?

Recurring deposits, also known as term deposits are an investment mode offered by banks. People with a fixed income, such as salaried individuals may open a recurring deposit account with the bank. In this account, you are required to deposit a fixed amount every month and you earn an interest rate applicable to fixed deposits on the total amount in your account. When the deposit matures, a lump sum is paid to the investor.  This is a relatively secure method of saving, compared to other modes available.

Chit Funds. Mutual Funds vs. Recurring Deposit

Investment
Chit Fund- Investment and loan
Recurring Deposit- Investment
Mutual Fund- Investment

Security
Chit Fund- Risky
Recurring Deposit- Secure
Mutual Fund- Subject to market risks

Returns
Chit Fund- Varying returns depending on lotteries and auctions
Recurring Deposit- Fixed returns
Mutual Fund- Varying returns based on market performance

Government Regulation
Chit Fund- Regulated by the Chit Fund Act 1982
Recurring Deposit- Governed by Reserve Bank of India
Mutual Fund- Governed by SEBI

Taxable Income
Chit Fund- Non-taxable if declared
Recurring Deposit- No TDS, but the interest earned is taxable
Mutual Fund- Non-taxable

Product understanding
Chit Fund- Simple to understand
Recurring Deposit- Easy to understand
Mutual Fund- Need market knowledge to judge which mutual fund is the best for you

Generally, it is always safer to go with a bank or government-regulated instrument for savings. It guarantees the security of your principal amount and offers decent returns. Chit Funds are usually risky. There have been several instances of innocent people being scammed in the name of Chit Funds. When comparing Chit Funds vs. Recurring Deposits, the latter seems much more secure. Recurring deposits offer guaranteed returns and the safety of bank regulations. Mutual funds also offer good returns but are subject to market volatility. Those who know the money markets and understand the risks well can earn a good return on their money through mutual funds. It is important to educate yourself about the various avenues for investment available and check all the details carefully before investing.

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