# Dealing With Complex Cash Flows -I: Chit Fund Returns Calculator

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.

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!

Use this calculator to

• 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!

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## 33 thoughts on “Dealing With Complex Cash Flows -I: Chit Fund Returns Calculator”

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

1. 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.

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

1. 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.

3. 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

1. 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.

4. 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

1. 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.

5. 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?

1. Thanks. I have responded via email.

1. Gobi says:

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

1. 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.

6. 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?

1. Thanks. I have responded via email.

1. Gobi says:

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

1. 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.

7. 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.

1. pattu says:

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

8. 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.

1. pattu says:

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

9. Anonymous says:

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.

1. pattu says:

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.

10. Anonymous says:

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.

1. pattu says:

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.

11. Abid says:

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

1. Abid says:

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

12. Abid says:

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

1. Abid says:

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

13. msr says:

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

14. msr says:

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

15. sathishrao says:

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

16. sasha19867 says:

Hi Team,

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

17. Satya Srinivas S says:

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.