Thursday, November 12, 2009

fixed deposit or chit subscription -which gives best returns?

 There are many investment avenues like real estate, gold, stock market, fixed deposits, chit funds etc. People with a little extra money in this part of the world try to invest wisely to extract the best yield. Todays comparison is to analyse the best yield from an organised chit subscription for a period of 25 months and a fixed deposit in a nationalised bank for the same tenure.

I have evaluated a chit subscription of a company which is existing in Hyderabad for the past 15 years and it is a registed company to undertake this kind of business. The tenure is for 25 months and the chit subscription amount is Rs.2,000/- per month . There are 25 subscribers to this chit and that means the amount payable at the end of the term is Rs.50,000/- less the company's commission of 5% or Rs.2,500/- per subscriber. Though this is the amount a subscriber is liable to pay every month, the system of chit fund ensures certain amount of dividend every month whereby the subscriber pays a lesser amount after deducting the dividend.

In this particular chit which was started in the month of August,2007 and completed in the month of September,2009 one of the subscribers subscribed a total amount of Rs.40,844/- after deducting the dividend. Or in simple plain terms they have paid an amount of Rs.40,844/- in 25 months tenure. At the end of the tenure, they were paid an amount of Rs.47,500/-. The interest earned comes to Rs.6,656/- over a period of 25 months and if this is converted into Compound interest compounded annually it is coming to 7.2% per annum. Can you believe it, it is just a damn 7.2% per annum.

Now take the case of a nationalised bank like State Bank of India which is established 100 years ago. For a similar kind of recurring deposit for the same period between August,2007 and September, 2009 they were offering an interest of 6.75% per annum compounded annually. Currently, this interested is lowered to 6.50% per annum. This is turning out to be even worse than a chit.

Well, the advantage of a bank deposit is that on the day of the maturity you can go and collect the assured amount whereas a chit fund company takes atleast one extra month to pay you back. In case of a need, when you are not in a position to pay the recurring deposit, still you are entitled to the same rate of return on the money deposited in the bank. The same is not the case with  a chit subscription as you have to tell them in advance when you need the money and you would need to search for guarantors who are essentially Government employees.If you default in payment of a monthly subscription you may have to forego the dividend offered during that month and if you default payment for a couple of months you end up paying penal interest for the subscription amount overdue.

So much trouble to get back your hard earned money. My suggestion: never fall for higher interest rates of chit fund companies as who knows whether they would remain in business tomorrow.

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