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Recurring Deposit Vs. Chit Fund

Saving money is an important aspect of life. Investing money is a desire of many. In India, many people are not yet involved in the organised financial sector. Many people of the lower income bracket opt to invest in chit funds because they do not qualify or have documentation for a bank account. Chit funds are not necessarily a bad investment. It has a bad reputation because it has been misused in the past to scam naive investors. There are Government-run and registered chit funds that are safe to invest in. On the other hand, recurring deposit are a much safer investment. The returns are fixed and guaranteed at the end of the tenure. But both investments have their pros and cons. Let’s take a look into the differences between the two options.


Rs. 1,000


12 months

Interest earned

Rs. 530

Total savings

(1,000 x 12) + 530 = Rs. 12,530

Recurring Deposit VS Chit Funds

Recurring Deposits

A safe investment wherein a depositor invests a fixed sum every month with the bank. The sum accumulates gathering more interest over the tenure. When the deposit matures, the lump sum is paid out to the investor. There are options to reinvest the money in an FD or start a fresh recurring deposit. 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.

Chit Fund

A savings-cum-loan scheme in which a number of contributors come together to invest a fixed sum every month. The money is collected from the chit group and is put up for auction every month. The investor who bids the lowest for the total sum will win the lot. A commission has to be paid to the Chit Fund Company. The surplus is distributed to all other investors. The winner of the bid cannot bid the next month. In this case, the amount you win becomes a loan that you will repay through the rest of the tenure. On the other hand, if you do not bid, then it becomes like a recurring deposit and you will receive your investment at the end of the chit fund. Your returns depends on the distributable surplus every month. With chit funds, there is no fixed return on investment.

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% 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.

Comparison Between RD and Chit Fund

Particulars Recurring Deposit Chit Fund


Only investment

Serves as investment and loan

Type of Investment



Type of returns

Fixed returns

Returns depend on bidding, lotteries and distributable surplus


Guaranteed profit

Profit or loss

Interest rate

Higher rate of interest

Relatively lower rate of interest


No processing charges

5% of the chit fund must be paid as commission fees to the organiser every month

Government regulation

Governed by terms and conditions of the bank

Governed by The Chit Funds Act 1982

Taxable income

No TDS, but the interest earned is taxable.

Generally non-taxable but must be declared.


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 nationalised banks are taking measures to bring the rural and lower income groups into the organised financial sector. This will enable these segments to have access to banking facilities and safe investments.

RD Vs Chit Fund Frequently Asked Questions

  1. Is investing in chit fund a good idea?

    If the promoters follow the strict rules that have been laid down for them, you can go ahead and invest in it.

  2. Does chit fund offer guaranteed returns like recurring deposits?

    No, investing in chit funds doesn’t guarantee fixed returns like in the case of recurring deposits.

  3. Which among recurring deposits (RDs) and chit funds offer a high interest rate?

    Recurring deposits offer a high interest rate for investing in it.

  4. Under which regulation are chit funds governed?

    Chit funds are governed under the Chit funds Act 1982.

  5. Do I need to pay any processing fees when opening an RD account?

    No, you do not need to pay any processing fee when opening a RD account with a bank.

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