A Chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises a chit scheme—as defined in Section of the Chit Funds Act, 1982.
“Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”

CHIT provides a good source of finance for different type of people viz., small investors, businessmen, small scale industrialists etc.
A Chit is the Only Financial Product that allows you to Save and Borrow. The non prized subscriber who is a saving member up to the last installments gets dividend which is comparatively higher than the interest that are accrued by way of Recurring Deposit Schemes.
The purpose of drawing the prized amount need not be disclosed. It can be used for any need by the member

The basic necessity of conducting a ‘Chitty’ is a group needy people called subscribers. The foreman—the company or person conducting the chitty—brings these people together and conducts the chitty. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of gross chitty amount) monthly for his efforts. Other than that, the foreman has no specific privileges, he is just a chitty subscriber., A simple formula depicts the pattern of the chitty:

Monthly Premium x Duration in Months = Gross Amount

E.g., 5000 * 20 = 1,00,000/- Where 5000 is the maximum monthly contribution needed from a subscriber, 20 is the duration of the chitty in months and 1,00,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month.
The chitty starts on an announced date, every subscriber come together for the auction/lot. When there are more than one person willing to take this minimum sum, lot are conducted and the ‘Lucky subscriber’ get the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 1,00,000 >> 90,000 >> 75,000, and so on. The person bidding lowest sum get bid amount.
In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example if the auction is settled on a sum of 75,000, then the auction discount of 25,000 (1,00,000 – 75,000) is divided by 20 (the total number of subscribers) and every one gets a discount of 1000. The same practice is repeated every month and every subscriber gets a chance of receiving some money.