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- The amount of a said scheme is called the chit value.
- The duration of the scheme is known as term period.
- The people who are interested in investing in the scheme are called subscribers.
- The amount to be saved every month by the subscriber is known as subscription.
- The person or company operating the chit fund is known as the foreman.
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Once the chit group is active, the foreman registers the chit with the registrar of chits. He has to pay 100% of the chit value as security. This aids in protecting the interests of the subscriber.
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| Let us assume the chit value is 1,00,000. And it is for the duration of 20 months. The foreman gathers 20 subscribers who are interested in investing in this chit group. The monthly subscription of every member is chit value/number of subscribers ie; 1,00,000 / 20 = 5,000. |
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On a predetermined date, the foreman calls for an auction and the highest bidder gets the prize money. The maximum bid permitted is 40%. So, let's assume a subscriber has bid 35% of the chit value. 35% of 1,00,000 is 35,000. This amount is known as chit discount.
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So the subscriber wins prize money of chit value - chit discount i.e. 1,00,000 - 35,000 = 65,000.
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The foreman charges 5% of the chit value as commission. So 5% of 1,00,000 is 5000. This commission of 5,000 is deducted from the chit discount of 35,000.The remaining amount of 30,000 is saved in the company.
Similarly, this scenario of auction repeats for the next few months until the chit discount of all the previous months together almost reaches Rs 1,00,000. So the foreman holds two auctions in that particular month where one from regular monthly subscription and another from chit discount almost reached Rs.1,00,000. Subsequently, in another few months, two more auctions are held and based on this two or three months of subscriptions is waived off. This will be the subscribers' dividend or profit.
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