Chit Funds and Savings Bank Accounts: Myths, Facts, and Insights

Saving money is one of the best ways to ensure a brighter, more secure future. It provides financial security, helps you prepare for emergencies, and allows you to achieve personal goals. Having a solid savings plan can be a game changer in handling major life events and reducing stress from unexpected expenses.

When it comes to managing finances, the term savings often brings one thing to mind: a savings bank account. This traditional and trusted option is considered the go-to method for most individuals to keep their money safe and earn some interest along the way. But is a savings bank account the only reliable way to save?

While savings bank accounts are a reliable option, they often come with limitations like low-interest rates. This can significantly impact your long-term savings goals. Alternative savings methods, like chit funds, can offer a more lucrative and flexible approach to saving.

Both serve the purpose of helping you save, but they work in fundamentally different ways. Both financial tools aim to help you save, but they differ significantly, especially in terms of the potential for higher returns. Let’s explore the world of chit funds and savings bank accounts, dispel some common myths, and uncover the untapped potential of chit funds in achieving your savings goals.

Myth 1: Chit funds are only for the poor.

Many believe that chit funds are designed exclusively for individuals with limited financial means and are unsuitable for those with higher incomes or established savings.

Fact 1: Chit funds are for everyone!

Yes! You read that right! The misconception arises from the traditional perception of chit funds as informal savings tools. However, modern chit funds are far more sophisticated and structured, catering to diverse financial goals and needs. Let’s explore why chit funds are a smart financial tool for people across all income levels:

1. Wide Accessibility:

Chit funds are designed to be flexible, with contribution options that suit both small and large budgets. Whether you’re just starting your savings journey or already have a thriving savings bank account, there’s a chit fund group for you.

2. Flexible Savings Mechanism:

With chit funds, you can adjust your monthly contributions based on your needs. That kind of flexibility isn’t something you’ll often find with a typical savings bank account.

3. Emergency Financial Support:

If you need quick cash for an emergency, a chit fund can provide instant liquidity. It’s like having a financial safety net when you need it most.

4. Attractive Returns:

Chit funds often deliver better returns than traditional saving methods like fixed deposits.

5. Rooted in Trust:

Chit funds rely on a foundation of mutual trust. You’re not dealing with a faceless system; you’re part of a group working together for mutual benefit. This sense of community can offer a layer of reliability that goes beyond what a standard savings bank offers.

Insight 1

Chit funds are designed for anyone who wants a smarter way to manage their finances. Whether you’re a salaried professional, a small business owner, or someone with long-term goals, chit funds offer flexibility that savings bank accounts just can’t match.

Myth 2: A savings bank account is the ultimate way to grow your money

Many people believe that just by putting money into a savings bank account, they’re securing their financial future.

Fact 2: A savings bank account is not the best tool for wealth creation! 

A savings bank account is ideal for short-term savings and liquidity, but it’s not designed to build wealth over time due to low interest rates that often lag behind inflation. The interest rates are simply too low to help your money grow at a significant rate, especially when compared to inflation. Your savings are protected, but they’re not multiplying. Let’s dive deeper into why your savings bank account isn’t the secret to long-term wealth growth.

1. Low Interest Rates:

While a savings bank account gives you interest on your savings, the rates are often so low that they barely keep up with inflation. So, while you’re keeping your savings safe in your savings bank account, it’s not really growing as you might hope.

2. Limited Growth Potential:

The whole point of having a savings bank account is to keep your money safe and access it anytime. But that comes at a cost! The growth potential of your savings in a savings bank account is limited. Your money is sitting there, earning a small amount of interest, but it’s not taking advantage of the higher returns you could get with other investment opportunities. If you’re serious about growing your wealth, your savings bank account just isn’t the tool for the job.

3. Opportunity Cost:

Every time you leave your money in a savings bank account, you’re potentially missing out on better opportunities. By keeping your savings solely in a savings bank account, you’re not making the most of your money’s potential.

Insight 2

Here’s the truth—savings accounts are great for quick access, but they’re not ideal for growing your money. Chit funds, on the other hand, can give you better returns while helping you stick to a disciplined saving habit. So, why let your money sit idle in a savings bank account when it can grow smarter with a chit fund?

Myth 3: Your money in a savings account is completely risk-free

When you hear the term “savings account,” you might picture it as a safe haven for your money, where it sits securely, accumulating interest. But the truth is they’re not entirely free from risk.

Fact 3: Savings accounts aren’t entirely risk-free!

While savings accounts are considered secure, they come with certain limitations and risks that are often overlooked. It’s important to understand these drawbacks to ensure your money is working efficiently for you.

1. Inflation:

One of the biggest risks to your savings in a savings bank account is inflation. Your money is still growing in your savings account, but not as much as you’d like, and it might buy you less in the future due to inflation.

2. Bank Failures & Deposit Insurance:

If your savings bank runs into trouble, you could risk losing access to your funds. Though your deposits are insured up to a certain amount [up to a maximum of ₹5 lakh per depositor for both principal and interest] not all of your savings may be covered if they exceed the insured limit.

3. Low Interest Rates:

Interest rates on savings accounts are often quite low, and they can fluctuate depending on the economy. Sometimes, the interest rate you earn in your savings bank account won’t keep up with the cost of living or changes in the economy.

Insight 3

Chit funds, regulated by the Chit Funds Act, can be a safer and more effective option for growing your wealth while ensuring your money works as hard as you do.

Myth 4: Chit funds are not regulated and are inherently risky

There’s often a common misconception that chit funds are unregulated and inherently risky. This belief usually comes from the association of chit funds with informal lending or savings schemes that have sometimes gone wrong in the past.

Fact 4: Chit funds are regulated and can be a safe way to save and invest!

Professional management and a structured framework make modern chit funds secure and reliable. Participants benefit from documented agreements, safeguards against fraud, and regulatory oversight that protects their interests.

1. Regulated by Law:

Chit funds in India are regulated. They are governed by the Chit Fund Act of 1982, which outlines strict rules and guidelines to ensure the proper functioning of these schemes. This law mandates that all chit funds must be registered with the Registrar of Chits and must adhere to a set of legal and financial requirements. The regulatory framework ensures that the interests of the participants are protected and that the chit funds operate in a transparent manner.

2. Professional Management:

Many chit funds are run by well-established companies or financial institutions, and they often have experienced professionals managing them. These companies are licensed by the government and must maintain transparency in their operations. The regulated ones are required to follow specific standards, ensuring that savings are protected and funds are managed responsibly.

3. Security for Participants:

Regulated chit funds provide security for their participants. When you join a chit fund, the fund organizer is required to provide documentation and a legal agreement. In case of default of contribution, the chit fund organizer has to ensure the repayments are made according to the terms.

4. Higher Returns:

Chit funds offer a chance for higher returns because of the auction system or interest paid on the pooled amount. This makes them an attractive option for people looking to grow their savings over time, especially in comparison to the low-interest rates offered by traditional savings bank accounts.

5. Flexible Savings Option:

Chit funds allow you to contribute a fixed amount periodically and also provides you with the option to borrow from the fund, in case you need money in an emergency.

6. Risk Mitigation:

The legal framework provides safeguards against fraud, and participants can approach the regulatory authorities if they face any issues with the fund.

7. Growth Potential:

While savings accounts at banks offer a low-risk place to store your money, they also come with relatively low returns. Chit funds, on the other hand, can serve as an alternative savings tool where participants pool their money to receive better returns, especially if they need a lump sum amount for a specific goal. This makes chit funds particularly useful for people who are looking to grow their savings faster than they would in a traditional savings bank account.

Insight 4

In India, chit funds are regulated by the Chit Funds Act of 1982, ensuring transparency and providing protection for your investments. Just like a savings bank account operates under RBI regulations, chit funds have strict rules to protect participants. The key is to choose a chit fund managed by a reputable company registered under this act.

Myth 5: A Savings Bank Account is the Best Place for an Emergency Fund

When it comes to financial planning, many people believe that a savings bank account is the ultimate solution for building an emergency fund. However, while a savings bank account does serve as a convenient option, it may not always be the most effective way to grow or manage your emergency fund in the long run.

Fact 5: Relying solely on a savings bank account for your emergency fund may not be ideal!

It’s important to keep a portion of savings for immediate access. Also consider diversifying your savings into other investment options that offer better returns on investment, like chit funds, to ensure your fund grows while staying accessible in emergencies.

1. Limited Growth Potential:

Savings bank accounts typically offer low-interest rates, which means your money grows at a slow pace. With inflation eroding the value of money over time, the purchasing power of funds kept in a savings account can decrease.

2. Accessibility:

Savings bank accounts do shine when it comes to accessibility. You can withdraw funds anytime without penalties. However, they may encourage frequent withdrawals for non-emergencies, which could deplete your emergency fund.

Insight 5

Keep some funds in your savings account for immediate access, but let the rest grow in a chit fund. It’s a balance between liquidity and better returns—because emergencies deserve more than just a savings account.

Myth 6: A savings account is sufficient for retirement.

This belief is common in India, where many people prioritize security over growth for their money. While they are indeed safe, they’re not designed to meet the financial demands of retirement, especially with rising costs of living and increasing life expectancy.

Fact 6: A savings bank account is not enough for long-term retirement planning!

While savings bank accounts play a role in your financial plan, they shouldn’t be the backbone of your retirement strategy.  Let’s see the reasons:

1. Low Interest Rates:

Most Indian savings bank accounts offer interest rates of around 3-4% per annum. On the other hand, India’s inflation rate averages 6-7% or higher. This means that while your money sits in a savings bank account, its purchasing power is steadily decreasing.

2. Limited Growth:

Retirement is a long phase of life—often spanning 20-30 years or more. The modest returns from a savings account aren’t enough to grow your wealth significantly over this period.

3. Lack of Compounding Benefits:

While savings accounts offer safety and liquidity, they don’t provide the compounding growth that retirement-focused investments do.

4. No Tax Advantages:

Indian savings bank accounts have limited tax benefits. Interest earned above ₹10,000 in a financial year is taxable under the Income Tax Act.

5. Higher Lifestyle Costs in Retirement:

Healthcare costs in India are rising rapidly, and retirement often comes with increased medical expenses. A savings bank account may not grow enough to cover these unforeseen costs.

6. Longevity Risk:

With better healthcare, Indians are living longer. While this is great news, it also means you need your retirement corpus to last longer. A savings account alone might run out too soon, leaving you financially insecure in your later years.

Insight 6

Let’s face it—a savings account just isn’t enough for retirement planning. While a savings bank account offers safety, chit funds provide the growth and flexibility needed to build a solid retirement corpus. Begin planning today to ensure a financially secure future in your retirement.

Myth 7: You can rely on a savings account to cover all life events.

While a savings account is a great place for short-term funds and day-to-day expenses, it’s not built to handle significant life events that often demand careful planning and larger financial resources.

Fact 7: Savings accounts might not generate enough growth to cover life’s major milestones!

Relying solely on a savings bank account to manage major life events can leave you financially unprepared. Let’s explore why:

1. Low Growth Potential:

Savings bank accounts in India generally offer interest rates of 3-4%. It’s not nearly enough to grow your money significantly. For instance, buying a house or starting a business typically requires lakhs—or even crores—of rupees. The slow growth of a savings bank account won’t help you accumulate enough wealth for such major goals.

2. Inflation:

Inflation is a silent killer of wealth. As prices rise, the real value of your money decreases. For example, if you save ₹10 lakhs in a savings account today, it might not hold the same purchasing power in 10-15 years due to inflation. Major life events, like your child’s education or a dream wedding, will likely cost much more in the future than they do today.

3. Lack of Tax Benefits:

Interest earned on savings bank accounts is taxable beyond ₹10,000 per financial year.

Insight 7

Life’s big moments—buying a home, starting a business—need more than the low growth of a savings bank account. Chit funds can help you build a financial cushion faster, giving you the resources to meet major milestones without relying solely on your savings bank account.

Conclusion

When it comes to managing finances, both chit funds and savings bank accounts have their unique roles. Savings bank accounts are excellent for short-term liquidity, safety, and day-to-day financial needs. However, their low-interest rates and limited growth potential make them less suitable for long-term financial goals, wealth creation, or tackling inflation.

Chit funds, on the other hand, offer a flexible and regulated alternative with higher growth potential. They provide a disciplined savings mechanism, emergency liquidity, and better returns, making them an attractive option for achieving significant life milestones, planning for retirement, or building a financial safety net.

The key is to understand the strengths and limitations of each tool to make informed decisions, ensuring that your savings not only grow but also align with your financial aspirations. Put your money to work in a smarter way, not just a harder way.