It is a mechanism that combines borrowing and savings in a single scheme. In a chit fund scheme, a group of individuals come together for a predetermined time period and contribute to a common pool at regular intervals. Every month, up until the end of the tenure of the scheme, the collected pool of money is loaned out internally through a bidding mechanism to the most deserving member. This way, people who are in need of funds and those who want to save are able to meet their requirements.
Chit fund is equivalent of the Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world. ROSCAs are a means to “SAVE AND BORROW” simultaneously. It is considered one of the best instruments to cater to the needs of a customer. It enables people to convert their small savings into lump sums.