Saving and investing wisely has been an intrinsic part of the Indian way of living. The past few
generations spent their lives building up a ‘safety-net’ of savings for their old age. And to say
that it served them well would be an understatement. Post-retirement, it is these savings that
enabled them to live in comfort and independence.
The savings culture is still as relevant for the youth as it was for older generations in India. All
you have to do is find the best mode of investment for your savings to earn a good return on
the money you save.Here’s a comparative look at three popular modes of saving – Chit Funds,
recurring deposits, and mutual funds.
What is a Chit Fund and how does it work?
A Chit Fund is a community funding method wherein a group of individuals comes together and
each person contributes a predefined amount every month. One person out of this group takes
the lump sum, who this person would be is decided by the drawing lottery or in some cases,
with an auction. This process is followed every month until each person has received the lump
sum amount once. A commission needs to be paid to the Chit FundCompany by the person
receiving the lump sum. As this is an instrument that is dependent on trust, it is not secure and
is considered risky.
What is a Mutual Fund and how does it work?
Mutual funds are a method of investment in which a trust collects money from numerous
investors who all share a common goal for investment. The amount of investment in this case is
not pre-defined and depends on the financial capacity of the investor. Then, the trust invests
these funds in different financial instruments in the money market including equities, bonds,
and other securities. As per the movements of the money market, you earn a return on your
investment in mutual funds. This also involves a certain amount of risk.
What is a Recurring deposit and how does it work?
Recurring deposits, also known as term deposits are an investment mode offered by banks.
People with a fixed income, such as salaried individuals may open a recurring deposit account
with the bank. In this account, you are required to deposit a fixed amount every month and you
earn an interest rate applicable to fixed deposits on the total amount in your account. When
the deposit matures, a lump sum is paid to the investor. This is a relatively secure method of
saving, compared to other modes available.
Chit Fundvs. Mutual Fundsvs. Recurring Deposit
Chit Fund Recurring Deposit Mutual Fund
Purpose Investment and loan Investment Investment
Security Risky Secure Subject to market risks
Returns
Varying returns
depending on lotteries
and auctions
Fixed returns
Varying returns based
on market
performance
Government
Regulation
Regulated by the Chit
Fund Act 1982
Governed by Reserve
Bank of India Governed by SEBI
Taxable
Income Non-taxable if declared No TDS, but the interest
earned is taxable Non-taxable
Product
understanding Simple to understand Easy to understand
Need market
knowledge to judge
which mutual fund is
the best for you
Generally, it is always safer to go with a bank or government-regulated instrument for savings.
It guarantees the security of your principal amount and offers decent returns. Chit Funds are
usually risky. There have been several instances of innocent people being scammed in the name
of Chit Funds. When comparing Chit Funds vs. Recurring Deposits, the latter seems much more
secure. Recurring deposits offer guaranteed returns and the safety of bank regulations. Mutual
funds also offer good returns but are subject to market volatility. Those who know the money
markets and understand the risks well can earn a good return on their money through mutual
funds. It is important to educate yourself about the various avenues for investment available
and check all the details carefully before investing.
Author Bio:
Aatish Khanna works with the Content Marketing team at Money Club – digital chit fund
platform that makes saving, borrowing, and investing your money more efficient. He writes on
topics to help his readers understand processes so they can make better financial decisions.
He's the go-to person that his family, friends, and colleagues turn to for all their money
matters. He loves to play board games and aspires to one day build his one finance-related
board game and app.
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