What Is Return On Investment?

Planning Life Goals has become an important aspect for every investor today. It is important for one to realise their life goals and plan for them accordingly. However, investing in the right type of insurance policy doesn’t end your job. Since a majority of investment products are market-linked, monitoring their performance is an important part of an investment. To ensure its effectiveness, returns on investment play a major role.

ROIs can effectively monitor your investments. However, a majority of people are still unaware of its functionality. Whether you want to measure the losses or gains, go through the following guide on ROIs mentioned below. But first, let’s begin by understanding the basics about ROI:

What is the return on investment?

The sole purpose for investment is the expectation of obtaining gains in return. To measure these returns on investment, one must calculate Returns on Investment (ROI). ROIs allow the investor to directly measure the amount of returns on any particular investment. Moreover, it lets you understand the returns on investment and optimizes your financial portfolio. Typically, it is majorly used for fixed income investments.

ROI is mathematically represented as (Net Profit – Investment Cost) / Investment Cost. To simplify this formula, let’s understand with the help of an example. Let’s say you’ve made a lump-sum investment of Rs. 50,000 in an equity fund. On maturity period of, let’s say 3 years, you redeem your scheme and the amount credited to you is of Rs. 75,000. Now to calculate your ROI, follow the formula given above: ROI= (75,000-50,000)/ 50,000 = 50%.

How to calculate the ROI accurately?

ROI is most commonly used as a profitability ratio. However, one can easily manipulate the calculation of ROI. If someone controls the calculations in the wrong way, the end results may vary. Therefore, utilize the same inputs to obtain an accurate comparison. The actual ROI calculation does take a lot of time.

A majority of investors prefer ROI calculation due to its effectiveness. Besides, the benefits of calculating returns on investment attract a vast number of people as well. Therefore, take a look at these benefits mentioned below:

What are the 3 benefits of calculating the return on investment?

1. Universal concept

ROI is the most popular tool to measure investment performance. Therefore, the formula to calculate ROI is globally used by all investors. Since it can be interpreted easily, it does not take a lot to make people understand the same.

2. Customer-friendly

ROI can be single-handedly calculated by anyone and everyone. You neither have to be a mathematician or an expert help to calculate ROIs. All you have to do is know the cost of your investment and the profits earned from your investment.

3. Adaptive nature

The given formula to calculate ROI is versatile. An investor can use it in multiple ways as per his needs. While it can be used as a rudimentary gauge of an investment’s profitability, it can also be put in use to make a comparative analysis amongst others.

The basic ROI calculation indicates the overall investment yields. Therefore, it must be done with the right information as well as with keen interest. Lately, the use of this formula has majorly increased. Therefore, put your skills to test and calculate your ROI wisely.