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

Goal-based Investing

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

 chit

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!

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!

Subscribe and join the freefincal Youtube community!

 Don't like ads but want to support the site? Subscribe to the ad-free newsletter! 
You will get the full post-ad-free delivered to your inbox for Rs. 3000 a year. Follow this link to read the terms and sign up! 
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Do check out my books

You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first 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 customg solutions for your lifestye!Get it now.  It is also available in Kindle format.

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

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want My second 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 youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template

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)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. 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.
Updated: September 21, 2016 — 3:09 pm

The Author

M. Pattabiraman

This article is authored by M. Pattabiraman. He is the co-author of two books: You can be rich too with goal based investing and Gamechanger. He is a patron and co-founder of "Fee-only India" an organisation to promote unbiased, commission-free investment advice “Pattu” as he is popularly known, publishes research, analysis and holistic money management advice at freefincal.com which serves more than one million readers a year. Frefincal.com has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners.

33 Comments

  1. jagannarayan

    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

    1. pattu

      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.

  2. jagannarayan

    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

    1. pattu

      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. sivaprasadr

    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. pattu

      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. sivaprasadr

    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. pattu

      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. tbells

    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. pattu

      Thanks. I have responded via email.

      1. Gobi

        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. pattu

          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. tbells

    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. pattu

      Thanks. I have responded via email.

      1. Gobi

        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. pattu

          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. Unknown

    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

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

  8. Unknown

    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

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

  9. Anonymous

    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

      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

    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

      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

    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

      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

    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

      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

    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

    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

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

  16. sasha19867

    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

    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.

Comments are closed.