Recurring Deposit vs Chit Fund: Which Investment is best for you?

We all know that saving and investing a part of your income is good. But for most of us, finding the best investment option is a confusing exercise like the topic recurring deposit vs chit fund. We have put together an all-you-need-to-know article to help you understand two of the most popular short-term investment instruments. This article talks about recurring deposit vs chit fund and how you can decide which one is most suited to your money-saving plan.

RECURRING DEPOSITS

Recurring deposits are fixed monthly investments with a bank for a pre-defined tenure. The accumulated sum generates interest which is paid to the investor with the lump sum saving. Recurring deposits are considered a transparent and risk-free investment instrument that suits people looking for small investment avenues. Recurring deposits are available with all the banks and you can open one with your savings bank account.

1. How Does a Recurring Deposit Work?

In recurring deposits, you are required to deposit a small fixed amount every month until the deposit matures. Some important things to keep in mind are –

• The recurring deposit interest rates are lower than other investment instruments, usually around 7 to 8%.
• On early withdrawal, a penalty of 0.5% is charged.
• TDS applies to your interest income. The bank deducts a 10% tax on withdrawal if the interest earned exceeds ₹10,000/-

2. Benefits of a Recurring Deposit

Recurring deposits offer a trustworthy avenue of investment. There are several benefits of investing in recurring deposits –

• Starting a recurring deposit with a bank is quick and easy.
• You can invest in small installments.
• It motivates you to achieve your savings goal every month.
• It is reliable, safe, and secure.
• You can avail of a loan against the recurring deposit.

CHIT FUNDS Chit funds are a community funding scheme wherein the members create a pool of money every month. Every month, one member gets the lump sum until all the members have received the lump sum at least once in the chit fund tenure.

1. How Does a Chit Fund Work?

Every month once the pool amount has been collected, the community members bid on the pool money, and the highest bidder takes the amount home. The bidding decides who can pay the highest interest on the pool amount to all the other members. The interest amount is distributed equally among the group members. Some chit funds also work on lucky draws or lotteries. The lucky draw decides the winner of the pool amount, and they pay a fixed interest rate.

2. Types of Chit Fund Schemes
   1. State Government Chit Fund – Some chit funds are run by the state government.
   2. Private Registered Chit Fund – Private chit funds are run by big business houses or cooperative societies.
   3. Unregistered Chit Fund – Friends, families, colleagues and neighbors can group to start small chit funds schemes that are not registered or legal.
   4. Online Chit Fund – Online chit funds operate through intelligent software. Members can invest, bid, and apply for loans through the app or website.

3. Benefits of Chit Fund

Chit funds are a boon to those who can only afford to save small amounts each month. The best chit funds offer an opportunity to save and earn money simultaneously. Here are some essential benefits of chit funds –

• Chit funds help members with emergency funds without any paperwork
• Members only need to invest a small amount every month
• In cases of high bidding, all members benefit by receiving a higher rate of interest
• At the beginning of the community tenure, whoever receives the loan can afford a big purchase or invest in bigger avenues

RECURRING DEPOSIT vs CHIT FUND

A comparison between recurring deposit vs chit fund is given below. Please make investments based on your income and monthly savings. Here are the key points of difference between the two –

1. Purpose of Investment – In a recurring deposit, the purpose of investment is only investment. In a chit fund, the members can invest the money and avail a loan whenever needed.
2. Risk Factor – There is a risk factor involved in a chit fund. It is advisable to opt only for state-run or registered chit funds. In recurring deposits, there is no risk factor.
3. Return on Investment – In a recurring deposit, the interest rate is fixed and investors know beforehand how much they can expect to get. Depending on the bidding, the returns are low or extremely high in a chit fund.
4. Profit – In chit funds, a profit on the investment is not guaranteed. However, in a recurring deposit the profit on investment is guaranteed. At the end of the community tenure, you may or may not be in a profit.
5. Fees – There are no extra charges for opening a recurring deposit account. In a chit fund, you are expected to pay a small commission fee to the moderator.
6. Tax – Any income from the recurring deposit is taxable. If you earn an interest of more than Rs. 10,000/- on your recurring deposit, the bank deducts some TDS. In a chit fund, the income through interest is non-taxable.

Both the investment instruments offer investors the opportunity to earn amazing returns. On the other hand, both investments have some element of risk. Hope this article helped you to easily understand the difference between recurring deposit vs chit fund. But always identify your needs and invest accordingly to get the best returns.