What is the difference between chit fund and collective investment scheme?

Many investors confuse between chit fund and collective investment scheme. Few think both has same concept. But, both differs a lot. Let us know each in detail.

Collective investment fund (CIF)

Collective investment fund also known as a collective investment trust is a pooled accounts that are held by either a bank or a trust company. The institution of collective investment fund groups down the assets from individuals and organisations to develop a single larger and diversified portfolio.

The two types of collective investment fund has been given below,

• A1 funds
• A2 funds

A1 funds or grouped assets are contributed for investment or reinvestment

A2 funds are grouped assets that are contributed for retirement, profit sharing, stock bonus, and other entries that are exempt from federal income tax. Collective investment funds are available for the individuals via employer-sponsored retirement plans. Other names for collective investment funds include common funds, collective trusts, and commingled trusts.

How collective investment fund works?

As known clearly, CIFs are not regulated under the Securities Exchange Commission (SEC) or the Investment Act of 1940. Instead, it operates under the regulatory authority of the Office of the Comptroller of the Currency (OCC).

The primary objective of the collective investment fund is to bring back the costs down with the combination of profit-sharing funds. In order to manage the portfolio of CIFs, many financial institutions have been using investment companies or mutual fund companies as sub-advisors.

How does chit fund works?

Unlike CIFs, chit fund is a saving cum borrowing scheme where the members of the chit contribute equal share monthly. At the same time, the auction ought to occur in the presence of the foreman (A member selected from the group). If anybody is in need of money, they can avail for it. From the total money they get, the foreman will get 5% of the total money.

This is how CIFs and chit fund differs in their working mechanism.

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