Recurring Deposit Vs. Chit Fund 2025

Recurring Deposits (RD)

Recurring deposit is one of the most preferred investment tools among the Indian citizens. These investment options enable depositors to deposit at a fixed amount every month and make the investment procedure transparent and risk-free. The interest remains fixed throughout the tenure and does not go as high as the chit fund. 

For example, an RD is opened with Rs. 1,000 per month at 8% interest for a tenure of 1 year. Upon maturity the sum payable is 12,530. Rs. 530 is the interest earned over a period of 1 year.

How Does Recurring Deposit Work? 

Here are the details how recurring deposits works: 

1. Recurring deposit account can be opened at any of your preferred bank 
2. Application form need to be filled and submitted to the bank either offline or online 

1. Fixed amount of deposit can be done every month till maturity 
2. The maturity amount is paid along with the interest at the end of the deposit tenure 
3. Withdrawal is allowed prematurely after paying a penalty of 0.50% 
4. Tax Deducted at Source (TDS) is applicable in case interest earned more than Rs.10,000 

Benefits of Recurring Deposit 

The following are the significant benefits of recurring deposit: 

1. Making investment is easy to perform 
2. Investments can be done in small amount 
3. Saving can be done depending upon your future goals 
4. Depositors can avail themselves of loan against recurring deposit 

1. The investment option is safe 

Chit Fund

Groups of people come together every month to create a pool of money through community funding known as chit fund. The winner of the bid takes home the lump sum amount and hence, during the community tenure each member gets the pool money. 

For example, 20 contributors invest in a chit fund for 12 months paying Rs. 1,000 each. In the first month, the fund is at Rs. 20,000, and the lowest bid goes at Rs. 17,000. 5.00% of the chit fund, or Rs. 1,000 in this case, has to be paid to the organiser. The remaining Rs. 2,000 will be distributed among 19 investors amounting to Rs. 105 approximately. So for the first month, the 19 investors actually contributed only Rs. 895 to the chit fund. This process repeats through the tenure of the chit fund.

How Does a Chit Fund Work? 

Here are the details on how the chit funds work: 

1. Bid is done each month by the community members 
2. The money is taken by the highest bidder 
3. The winner will pay the bid amount which is the interest rate on the pool money 

1. The bid amount is distributed among the community members 
2. Investment is done on the basis of lucky draw 
3. The lucky draw decides who gets the pool money every month 
4. The interest rate is fixed for the lottery chit funds 

Types of Chit Funds

The following is the list of various types of Chit Funds: 

1. Private Registered Chit Fund: Private chit funds are supported by prominent financial institutes or business houses and are registered under the Chit Funds Act of 1982. These funds are managed by leading private sector companies or institutes but are not as safe as the State Government chit funds. 
2. State Government Chit Fund: These chit funds are managed and regulated by state governments and funds run by PSUs (public sector undertakings) also come under this category. These are safe and chances of loss is less compared to other types of chit funds. 
3. Unregistered Chit Fund: These chit funds are unregistered which are not legal and includes neighbours, colleagues, friends, etc. The investment to these chit funds depends upon the risk appetite of the investors and must be avoided as there is risk of dispute which is subject to the integrity and honesty of the members. 

Benefits of Chit Funds 

The following are the benefits of Chit Fund: 

1. Investment can be done in small amount 
2. Enables investors to access emergency fund 
3. No paperwork required 
4. Saving and credits can be availed together when required 

1. No collateral or any other form of asset while investing in chit fund 
2. Offers high interest rate 
3. At the beginning of the community tenure, investor can avail loan for a big purchase

Comparison Between Recurring Deposit and Chit Fund

Conclusion

It is safer to invest with a bank which ensures your money is safe and guarantees you a fixed return. In the case of chit funds, you must have knowledge about how it functions. Some chit funds turn out to be scams and you can lose your money. Choose your fund wisely by checking if it is run by the state government or if it is registered under The Chit Funds Act. In some cases, some investors who have already won the bid, fail to invest further which leads to the chit fund failing. However, this has been regulated by compulsory collateral or another investor's guarantee.

Investing in a chit fund may result in a profit, but can also result in a loss. If you win a bid and end up investing more than what you got, then the chit fund becomes a loan. The loss can be considered interest payable on the loan. The Government in association with nationalized banks are taking measures to bring the rural and lower income groups into the organized financial sector. This will enable these segments to have access to banking facilities and safe investments.

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