# Rate of Return (RoR)

Rate of Return (RoR) is the gain (or loss) compared to the cost of an initial investment, typically expressed in the form of a percentage.
Rate of Return (RoR)
3 min
04-July-2024<br><br>

The rate of return is a measure of an investment's performance, expressed as a percentage of the initial investment. It represents the gain or loss an investor experiences over a specific period.

This article discusses the rate of return and how investors can assess the risk-reward profile of their investments and adjust their portfolios to align with their financial goals and risk tolerance.

## What is Rate of Return (RoR)?

The rate of return helps you measure the extent of profit or loss you have made on your investment over a certain period of time. It is expressed as a percentage of the initial cost of your investment. The meaning of the rate of return is that it determines the change in value of your investment from the instant you first invested to the time of redemption or the time frame for which you want to calculate.

## How does the rate of return work?

The rate of return is a measure of an investment's gain or loss, expressed as a percentage of its initial value over a given period. It is calculated by comparing the difference between current and initial values of an investment and expressing it as a percentage.

## Formula for rate of return

You can calculate the rate of return with the following formula:

Rate of Return = [(Current Value−Initial Value)/Initial Value​] × 100

The rate of return formula can be written as 100 multiplied by the value you get from the difference between the final value and initial value of your investment, divided by the initial value.

## Understanding RoR with an example

The rate of return of your investment is a measure that helps you understand the percentage change in your investment in a specified time period. The value of your investment may fetch you a profit or loss. RoR helps you know the extent of profit or loss you made from your investment. You can also explain it as the extent of change or percentage change of your investment’s value from your initial investment. If the value of your RoR is negative, you are making a loss from your investment. If the RoR value is positive, you will make a profit.

## How do you calculate the rate of return?

Suppose you have invested Rs. 50,000 as lumpsum in an equity fund. Let us also suppose that this equity fund matures in 3 years. Once it matures, you redeem all units of your investment. The total amount credited to your bank account after the redemption of all units is Rs. 75,000. This means you made a profit of Rs. 25,000 in these three years as the value of your investment increased from Rs. 50,000 to Rs. 75,000.

But what is the rate of return in this scenario? Let us calculate it with the help of the rate of return formula.

Rate of return

= [(Rs. 75,000 - Rs. 50,000)/Rs. 50,000] x 100

= (25,000 / 50,000) x 100

= (0.5) x 100

= 50%

## Benefits of calculating the rate of return

Calculating the rate of return is a crucial step in evaluating the performance of an investment. It provides a clear and concise measure of the investment's gain or loss over a specific period, expressed as a percentage of the initial investment. The benefits of calculating the rate of return include:

### Comparability

RoR allows for easy comparison of different investments, making it easier to determine which investments are performing better.

### Risk assessment

By calculating the rate of return, investors can assess the risk associated with an investment and make informed decisions about their portfolio.

### Performance evaluation

RoR helps evaluate the performance of an investment over time, enabling investors to track changes in the investment's value and make adjustments as needed.

### Goal setting

Setting a desired rate of return helps investors establish clear goals for their investments and track progress towards those goals.

### Portfolio optimisation

Calculating the rate of return for each investment in a portfolio helps optimise the portfolio by identifying underperforming investments and making adjustments to improve overall performance.

To compare investments using the rate of return, follow these steps:

• Calculate the rate of return: Use the formula: [(Current Value−Initial Value)/Initial Value​] × 100
• Consistent holding period: Ensure the holding period is consistent for all investments to accurately compare performance.
• Compare the rates: Compare the rates of return for each investment to determine which one performed better.
• Consider additional factors: Consider additional factors such as risk, liquidity, and fees when making a final decision.

## Rate of return on mutual funds

The rate of return on mutual funds is a measure of the overall performance of the fund over a specific period. It takes into account the change in the fund's net asset value (NAV), as well as any distributions, such as dividends or capital gains. Mutual fund returns can be calculated on a daily, monthly, quarterly, or annual basis and is typically expressed as a percentage.

The rate of return on mutual funds can vary significantly depending on the fund's investment strategy, asset allocation, and market conditions. Equity funds, for example, tend to have higher returns but also higher volatility, while fixed-income funds generally have lower returns but lower risk. Investors should consider the fund's risk profile and their own investment objectives when evaluating the rate of return.

## High-return mutual fund categories for smart investing

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## Rate of return on stocks and dividends

The rate of return on stocks is the total return an investor receives from owning a stock, including both capital appreciation and dividends. The capital appreciation component is the change in the stock's price, while the dividend component is the income received from the company's dividend payments. The total rate of return is calculated by adding the capital appreciation and dividend yield, and expressing it as a percentage of the initial investment.

Dividend-paying stocks can provide investors with a steady stream of income and the potential for capital appreciation. The dividend yield, which is the annual dividend per share divided by the stock price, is an important factor in calculating the overall rate of return. Investors should consider both capital appreciation and dividend yield when evaluating a stock investment's performance.

## Rate of return on bonds and interest

The rate of return on bonds is primarily driven by the interest payments received by the bond holder. The bond's coupon rate, which is the annual interest payment as a percentage of the bond's face value, is a key factor in determining the rate of return. Additionally, the bond's price fluctuations in the secondary market can also impact the overall rate of return.

Investors in bonds can earn a fixed rate of return through the regular interest payments, as well as potential capital gains or losses if the bond is sold before maturity. The yield to maturity, which takes into account the bond's coupon rate, price, and time to maturity, is a commonly used metric to evaluate the rate of return on a bond investment.

## What is a good rate of return?

A "good" rate of return on an investment can vary depending on the investor's risk tolerance, investment horizon, and financial goals. Generally, a rate of return between 6% and 10% per year is considered a reasonable target for long-term investments, such as stocks and mutual funds. However, higher-risk investments may have the potential for higher returns, while lower-risk investments may have lower returns.

## Limitations of rate of return calculations

While the rate of return is a useful metric for evaluating investment performance, it has some limitations. The calculations can be influenced by factors such as the timing of the investment, the reinvestment of dividends or distributions, and the impact of fees and expenses. Additionally, past performance is not a guarantee of future results, and the rate of return may not accurately reflect the true risk-adjusted performance of an investment.

## Summary

Rate of return has many benefits including its simplicity of calculation, ease of comparability, and versatility. You can use RoR to calculate the extent of your investment’s profit or loss. Whether you are investing in stocks, bonds, mutual funds, ETFs, real estate, or any other financial instrument, you can calculate RoR for all of them to assess the extent of success of your investment.

You can calculate the rate of return of your investment in mutual funds too. You may visit a mutual fund platform such as Bajaj Finserv Mutual Fund Platform, which has listed 1000+ mutual fund schemes for you to compare and choose from.

## Essential tools for mutual fund investors

What is the rate of return example?

To explain the rate of return (RoR), let us consider an example. Suppose, you have invested Rs. 50,000 as a lumpsum investment 3 years back. Currently, your investment’s value has increased to Rs. 75,000. Your investment has grown by Rs. 25,000, which means your rate of return is 50%.

How do I calculate the rate of return?

You can calculate the rate of return (RoR) by subtracting the initial value from the final value and then dividing the substracted value by the initial value. Once you get the value, you have to multiply it by 100. The rate of return formula is written as Rate of Return (RoR) = [(Current value−Initial value)/Initial value] x 100.

What is the difference between RoR and ROI?

RoR stands for Rate Of Return and ROI stands for Return On Investment. Though both of them measure the performance of your investment, there is a slight variation in which they are used. While RoR measures the annualised return on your investment, ROI measures the total growth of your investment. Let us explain it with the help of examples. Suppose you have invested Rs. 1 lakh as lumpsum in an equity-based mutual fund scheme in India. After one year, your investment grows to Rs. 1.15 lakh. This means, your investment has grown at the rate of 15% in a year. Therefore, your RoI is 15%. Let us now consider the same example but with a twist. Suppose you have invested Rs. 1 lakh as a lumpsum investment and it grows to Rs. 1.15 lakh in 2 years span. This means, your annualised rate of return (RoR) is 7.32%.

What is the full form of ROE?

The full form of ROE is Return on Equity.

Which is better, IRR or ROI?

IRR stands for Internal Rate of Return and ROI stands for Return on Investment. Both of these measures are useful to calculate the performance of your investment. However, these measures are used for different purposes and in different contexts. ROI is a very simple calculation to measure the total growth of your investment during a certain period of time. If you want a quick snapshot of your investment’s performance, ROI is one of the best measures. IRR, on the other hand, helps in calculating the annual growth rate of your cash flow’s net present value (both positive and negative) from a project or investment equal to zero. You can’t say one measure is better than the other because each of them has its own uses and significance as per specific circumstances. You should choose between IRR or ROI based on your investment’s nature, financial goals, and available information.

What are some alternatives to the Rate of Return?

There are various alternative calculations to the Rate of Return (RoR) such as Return on Investment (ROI), Internal Rate of Return (IRR), Compound Annual Growth Rate (CAGR), Return on Equity (ROE), Return on Assets (ROA), Price Cap Regulation, and Return on Invested Capital (ROIC).

What are some drawbacks of RoR?

The calculation of the Rate of Return (RoR) has many limitations. It ignores money’s time value, future costs, and cash value timing. Every investment has a risk element. But RoR does not take this into account. RoR does not give you the entire picture of your investment’s performance. Suppose, you are trying to measure the performance of your investment over a period of 10 years. Your investment could perform excellently in two years but overall it performed poorly. If you consider RoR measurement, RoR could be very high because of these two good years. But the overall performance of your investment could be poor.

what is considered a good return on an investment?

Whether you can consider an investment as a good return on an investment depends on your personal financial goals, prevailing market conditions, and investment type. If you are investing in mutual funds in India, a 12-15% annual return is considered a good return on your investment. In the case of fixed deposits, 5-7.5% is considered a good return. If you are investing in the Indian stock market, a 12–15% return is considered a good return. According to the statistics available from the Global Financial Development Database, 21.5% is the average stock market return in 2021 for Indian indices.

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