According to media reports, chit funds companies in Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and New Delhi are diversifying into financial product distribution like mutual funds and insurance to increase revenues.
Some of the major chit fund companies like The Balussery Benefit Chit Fund, Shriram Group and Margadarsi Group, along with many small companies have entered into financial product distribution.
According to the Chit Fund Act of 1982, all these companies have created a separate business vertical to launch their distribution venture. These companies have requested for an amendment to the Chit Fund Act, which will allow them to run the distribution business within their core chit funds business. However, chit funds have to impart training on financial products to their agents.
Amit Sethi, owner, Amvi Financials, says, “Chit fund companies need to include this business under the Chit Fund Act. It’s a good idea to sell financial products through chit fund companies because they have deep penetration in rural areas which are yet to be explored by investment institutions.”
Mr Sethi elaborates, “Selling of financial products is a very big source of employment in itself. It should not be focused for mere increasing the sell but the main idea should be to increase the financial inclusion through chit fund companies. Once they step into the business, product knowledge will also start building up amongst the agents with training programs under the concerned financial institutions such as AMFI, LIC, etc.”
Speaking about sufficient training to chit fund agents, Pankaaj Maalde, head-financial planning, ApnaPaisa.com, says, “The quality of advice which is available to investor in India is very poor because most agents/advisors do not have proper knowledge and expertise to understand the complexity of products and risk attached to that. This leads to mis-selling.”
Mr Maalde elaborates, “Most products are pushed to earn higher commission and without understanding the need of the customer. Individual agents are quitting mutual fund distribution because of the lower revenue and insurance agents are also finding it difficult to survive because of the competition and awareness spreading for term insurance in the market.”
According to Mr Maalde, corporate entities will definitely try to enter the distribution system, but I don’t think chit fund agents will add any value to the investors. Investors have to take informed decision while buying any investment product or better they should make financial plan before buying any product.
A chit fund house launches chit schemes with pre-determined value and duration. Each scheme includes a specific number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the ‘pot’. The 'pot' is then auctioned out every month.
The person bidding the lowest sum gets the bid amount. When there are multiple bidders, the person bidding the lowest amount (than the pot value) gets the money. Even if an investor bids for the pot at a discount, he has to continue paying his subscription fees till the period of the scheme. The additional sum of money the investor pays will be shared equally by other members of the group.