Last Updated on

This calculator returns the CAGR value based on Chit fund cash flows using Excel’s XIRR and IRR functions. Even if you have no interest in chit funds (good for you!), if you are someone who uses Excel to calculate returns (of any financial instrument), I strongly urge you play with this calculator as it highlights the limitations of estimating returns for complex cash flows.

**Credits:**

Reader R. Siva Prasad, requested that I make this calculator to try and make sense of chit fund returns. Earlier, reader Hari sent a video link which pointed out the limitations of XIRR and IRR when he saw my **Investment Returns (XIRR) Calculator**

**Motivation: **I am not a fan of chit funds. I did this for two reasons: Siva Prasad requested it and I saw it as a perfect example for illustrating the limitations of calculating returns for complex cash flows and therefore of the XIRR and IRR functions! No fault of Excels. That is just the way the cookie crumbles.

**Chit fund Primer**: The way a chit fund operates amazes me. A group of people get together and decide to pay an equal sum of money for a few months. Each month the group members bid on the total amount collected. The person with the lowest bid receives the amount after deducting commission or operating charges and can no longer take part in the bidding. The remaining amount is distributed equally to all the members.

**lectures on goal-based portfolio management**and join our exclusive Facebook Community

**How the calculator works functions:**

*CAGR using Excels IRR:*If you wish to assume the payment and receipts each month are made on the same date then you need not enter the dates of payment and receipts. However,I strongly suggest that you do.*CAGR using Excels XIRR:*In this case the dates of payments and receipts should be entered (along with amounts of course!).- Observe the results!

**Download the Chit Funds Returns Calculator**

Use this calculator to

- advice your friends or clients not to use chit funds.
- think about the limitation of XIRR and IRR!

**Bottom line: ** Do not enter into chit fund schemes looking for returns. It is one thing to get poor returns, quite another when you cannot even calculate them!

**ad-free newsletter**and get beautifully formatted full articles delivered to your inbox!

**About the Author**

M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include

*World Bank*, RBI,

*BHEL*, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association.

**For speaking engagements write to pattu [at] freefincal [dot] com**

**About freefincal & its ****content policy**

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on **Google News**

Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data.

**Contact information:**letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

**Connect with us on social media**

**Twitter @freefincal****Facebook**- Subscribe to our
**Youtube Videos** - Posts feed via:
**Feedburner** **Pinterest**

**Our Publications**

**You Can Be Rich Too with Goal-Based Investing**

**This book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle!**

**Get it now**. It is also available in Kindle format.

**Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want**

**This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost!**

**Get it or gift it to a young**

**earner**

**Your Ultimate Guide to Travel **

**Get the pdf for Rs 199 (instant download)**

**Free Apps for your Android Phone**

**All calculators from our book, “You can be Rich Too” are now available on Google Play!****Install Financial Freedom App! (Google Play Store)****Install Freefincal Retirement Planner App! (Google Play Store)****Find out if you have enough to say "FU" to your employer (Google Play Store)**

**Comment Policy**

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.**Please do not include hyperlinks or email ids in the comment body**. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Thanks Pattu for choosing to write about this topic.

I would like to know your views on whether chit funds are a good place to borrow.

Also there is a concept called vacancy chit so does it make sense to get into the chit that way. I.e. enter in the 15 th month of a 40 month chit and exit in the 30 th month.

regards Jagan

The trouble with chit fund is, for most cases the net cash flow will be negative. So you cannot determine returns! So why enter into such a scheme. Even a SB account offers more. Chits funds are a kind of personal loan for emergency needs that is all. You can try out the vacancy chit scenario with the calculator.

Thanks Pattu for choosing to write about this topic.

I would like to know your views on whether chit funds are a good place to borrow.

Also there is a concept called vacancy chit so does it make sense to get into the chit that way. I.e. enter in the 15 th month of a 40 month chit and exit in the 30 th month.

regards Jagan

The trouble with chit fund is, for most cases the net cash flow will be negative. So you cannot determine returns! So why enter into such a scheme. Even a SB account offers more. Chits funds are a kind of personal loan for emergency needs that is all. You can try out the vacancy chit scenario with the calculator.

Pattu Sir,

Normally we get minimum of 12% return and some times may get upto 20% return in chits. I got 18% return on my chit (net cashflow is +ve). Problem is when net cashflow is -ve. Just because we can not calculate returns, how can we conclude that chits are not profitable. Of course risk is there. I am talking about returns only.

Sir, Please correct me if I am wrong.

Thank You

Trouble there seems to be quite a high chance for getting negative cash flow. When this happens returns are negative. Just that there will be multiple negative solutions that we cannot find out which is the correct one. So I will personally stay away from chits.

Pattu Sir,

Normally we get minimum of 12% return and some times may get upto 20% return in chits. I got 18% return on my chit (net cashflow is +ve). Problem is when net cashflow is -ve. Just because we can not calculate returns, how can we conclude that chits are not profitable. Of course risk is there. I am talking about returns only.

Sir, Please correct me if I am wrong.

Thank You

Trouble there seems to be quite a high chance for getting negative cash flow. When this happens returns are negative. Just that there will be multiple negative solutions that we cannot find out which is the correct one. So I will personally stay away from chits.

Dear Sir,

Great Calculator. I use chits regularly and this will help monitor returns. One doubt though – typically, we take the chit amount and reinvest it – either in equity or fd…how can those returns be incorporated in this calculator? Do I jus add them in the positive cash flow section?

Thanks. I have responded via email.

Sir, Had the same question. Please email the calculator that takes into account, the chit fund amount reinvested in equity/fd. Thanks in advance.

You can just add two more entries in the same calculator and find the net return. If you need help on how to do this, let me know.

Dear Sir,

Great Calculator. I use chits regularly and this will help monitor returns. One doubt though – typically, we take the chit amount and reinvest it – either in equity or fd…how can those returns be incorporated in this calculator? Do I jus add them in the positive cash flow section?

Thanks. I have responded via email.

Sir, Had the same question. Please email the calculator that takes into account, the chit fund amount reinvested in equity/fd. Thanks in advance.

You can just add two more entries in the same calculator and find the net return. If you need help on how to do this, let me know.

You are right, I have been advising all my close relatives not to get into Chit funds, I see someone above has posted that they can get return of about 20% or so, but the problem is the time duration is not accounted, we have to understand for one year period what is that we get, it will be much lower. In chit funds, except to the person running the show no one gets benefitted.

Thanks for your views. It feels good when someone reinforces your convictions. Keep visiting and sharing your thoughts.

You are right, I have been advising all my close relatives not to get into Chit funds, I see someone above has posted that they can get return of about 20% or so, but the problem is the time duration is not accounted, we have to understand for one year period what is that we get, it will be much lower. In chit funds, except to the person running the show no one gets benefitted.

Thanks for your views. It feels good when someone reinforces your convictions. Keep visiting and sharing your thoughts.

I bet you are just a techie guy and not a finance guy. I challenge i can make you accept that chit fund does benefit the general publit/subscriber.

Well I am neither a techie nor a finance guy and I am not interested in your challenge. If you think chits funds are good. So be it. I don’t care.

I bet you are just a techie guy and not a finance guy. I challenge i can make you accept that chit fund does benefit the general publit/subscriber.

Well I am neither a techie nor a finance guy and I am not interested in your challenge. If you think chits funds are good. So be it. I don’t care.

Hey Pattu,

Nice job with the calc.

I agree with your point – returns cannot be calculated. However, that is not reason enough to discard these scheme. That is because

i) Clearly, a bank acts as an intermediary to do lending borrowing right now. They charge an NIM. Theoretically, a chit fund charging a low NIM (translate that to lower commissions for the middleman, means higher return for savers, or lower interest for borrowers, or both

ii) the former point holds true even with the rate of discount at which the loan is bidded. basically higher the discount, higher the return for others

There is a much bigger literature out there on the subject under ROSCA. Rotating savings and credit association. Interesting stuff

Disclaimer: I have nothing to do with chit funds. I don’t run one, neither am I related to one in any way. Landed here on academic interest

Hey Pattu,

Nice job with the calc.

I agree with your point – returns cannot be calculated. However, that is not reason enough to discard these scheme. That is because

i) Clearly, a bank acts as an intermediary to do lending borrowing right now. They charge an NIM. Theoretically, a chit fund charging a low NIM could give you a high ROI (translate that to lower commissions for the middleman, means higher return for savers, or lower interest for borrowers, or both)

ii) the former point holds true even with the rate of discount at which the loan is bidded. basically higher the discount, higher the return for others

There is a much bigger literature out there on the subject under ROSCA. Rotating savings and credit association. Interesting stuff

Disclaimer: I have nothing to do with chit funds. I don’t run one, neither am I related to one in any way. Landed here on academic interest

Hey Pattu,

Nice job with the calc.

I agree with your point – returns cannot be calculated. However, that is not reason enough to discard these scheme. That is because

i) Clearly, a bank acts as an intermediary to do lending borrowing right now. They charge an NIM. Theoretically, a chit fund charging a low NIM (translate that to lower commissions for the middleman, means higher return for savers, or lower interest for borrowers, or both

ii) the former point holds true even with the rate of discount at which the loan is bidded. basically higher the discount, higher the return for others

There is a much bigger literature out there on the subject under ROSCA. Rotating savings and credit association. Interesting stuff

Disclaimer: I have nothing to do with chit funds. I don’t run one, neither am I related to one in any way. Landed here on academic interest

Hey Pattu,

Nice job with the calc.

i) Clearly, a bank acts as an intermediary to do lending borrowing right now. They charge an NIM. Theoretically, a chit fund charging a low NIM could give you a high ROI (translate that to lower commissions for the middleman, means higher return for savers, or lower interest for borrowers, or both)

Hi, now a days, I see an improvised version of chits, which is famous among white collar guys, fixed no. of months and fixed amount. For ex: Rs 4000/- PM and per 25 months you will get 1,21,000 at end of the 25 months. Also, they give table to show how the amount varies if you lift at 1st, 2nd, 3rd…etc.

If calculate this way, i will get 20% do you think this is better than FD and other…if you ignore other risks.

Thanks

Hi, now a days, I see an improvised version of chits, which is famous among white collar guys, fixed no. of months and fixed amount. For ex: Rs 4000/- PM and per 25 months you will get 1,21,000 at end of the 25 months. Also, they give table to show how the amount varies if you lift at 1st, 2nd, 3rd…etc.

If calculate this way, i will get 20% do you think this is better than FD and other…if you ignore other risks.

Thanks

Respected sir,

I want to start chits.which one is best and how much interest I will get after 50 months.

Hi Team,

I just noticed that the Chit Fund calculator excel file link is broken, please share the correct file link.

Chits are similar to recurring deposits with varied deposit values every month. Yes you can only able to arrive at the rate of return at the end your chit fund period. It is not complex but incomplete because we are not sure of future monthly payment amounts (as amount varies every month). We know for sure minimum monthly payment and maximum monthly payment and we know final chit amount that you get. Instead of a vague statement, consider three cases of average monthly payment, highest monthly payment (if bidding rate is poor) and lowest monthly payment (if bidding is high) and conclude the XIRR returns for a fair idea. That benefits users. To my understanding returns are fairly higher than the bank deposits.

Sir, sorry if my question seems a bit stupid to you. I couldn’t understand what figures are to be input in the columns in the excel sheet in green.

After the date, the first column is “enter payment”. Is this the nominal full contribution? Just to clear my mind, I will give you my actual example. We are 20 people, making a nominal contribution of Rs 25,000 each month. First month, I actually paid only Rs 17,700, i.e. a net profit of 7700. Second month is full, as the organizer takes it. Third month I actually paid 17950, or a profit of 7050.

So please tell me which figure goes into which column, taking these first 3 months figures.

many thanks,

Hi Sir,

I am a regular investor, and does SIPs in mutual funds, and at times try to track, bot for obvious reasons not able to remain on top of it to monitor. And the last time I handed my Account to a financial advisor, I lost track of my investments, and the end results were not satisfactory (maybe bcos of lack of my knowledge as well !).

So, currently I invest based on some advise and from self-research.

Coming to chit funds, as it was being run by one of my close and trusted friend, I invested there.

The investment was 8000/- per month for 25 months, i.e. 2 lacs and received 2,40,000/- on 25th month, and based on the xirr the returns shows as 19.29%

I wanted to understand, if this is correct, and wise to invest further, (assuming there’s no risk of the amount invested).

Appreciate your kind response, in educating us.

Thank You !