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.
| Investment | Rs. 1,000 |
| Tenure | 12 months |
| Interest earned | Rs. 530 |
| Total savings | (1,000 x 12) + 530 = Rs. 12,530 |
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 |
| Purpose | Only investment | Serves as investment and loan |
| Type of Investment | Safe | Risky |
| Type of returns | Fixed returns | Returns depend on bidding, lotteries and distributable surplus |
| Guarantee | Guaranteed profit | Profit or loss |
| Interest rate | Higher rate of interest | Relatively lower rate of interest |
| Fees | 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. |
