Chit funds, a conventional and prevalent financial mechanism in India, remain crucial in facilitating access to savings and credit, particularly for low-income people and in areas with inadequate formal banking infrastructure. Despite being governed by the Chit Funds Act of 1982, there is no single pan-Indian regulatory authority, and implementation and monitoring are still dispersed throughout the states. The growth of unregistered and informal chit funds, many of which function without accountability or transparency, has been made possible by this decentralisation. Driven by persuasive agents and trust-based networks, social engineering frequently persuades people to engage in chit schemes without fully comprehending the hazards, especially in rural and semi-urban settings. The interest rates in chit funds, especially for early bidders, are often not economically feasible in the long term, resembling high-cost borrowing rather than profitable investments. Moreover, the returns are variable and contingent upon bidding dynamics and member defaults, exposing participants to systemic risks. Despite their popularity, financial literacy surrounding chit funds remains low at the grassroots level, leading to poor decision-making and increased vulnerability to fraud. This paper explores how the interplay of weak regulation, social trust networks, and limited financial awareness perpetuates the risks within the chit fund ecosystem, emphasising the urgent need for stronger national oversight and grassroots-level financial education.