7.40%How do you know whether the investment you made is profitable or not? Also, how can one decide which investment option to choose of the multiple available today.
A common profitability statistic used to assess how well an investment has done is return on investment (ROI). ROI can be used to rate investments in various projects or assets and create apples-to-apples comparisons.
What is Return on Investment (ROI)?
ROI or Return on Investment, is a metric used to evaluate the performance of the investment or profitability of the business. The ROI directly indicates how well the business or investment is doing. A higher ROI indicates that the return on the investments outweighs the costs, which means that your business is doing great. However, a lower ROI indicates that the investment cost is more than the returns. So, you are not getting an optimal return on the investment you have made, and you should make changes to the model or functioning to make maximum benefits. Comparing ROI yearly, and quarterly is a healthy practice, which can help in making better profits with greater ease.
ROI is calculated by dividing the benefit (or return) of an investment by the investment's cost. A percentage or ratio is used to represent the outcome.
How to Calculate Return on Investment (ROI)
Calculating the Return on Investment (ROI) is a crucial step before investing or while assessing how your investment is doing. There is a basic return on investment formula that you can look at while calculating the ROI.
ROI = Current value of investment – cost of investment / cost of investment
Using this formula, you can easily calculate the ROI.
Although ROI is a ratio, it is typically expressed as a percentage rather than as a ratio.
For example, let us say you invest Rs. 10,000 in a new marketing campaign that generates Rs. 15,000 in additional revenue. To calculate the ROI, you would subtract the cost of the investment from the gains from the investment to get Rs. 5,000. You would then divide the Rs. 5,000 by the cost of the investment (Rs. 10,000) to get an ROI of 50%.
ROI can be used to evaluate a variety of indicators, all of which contribute to a company's profitability. All returns and total costs should be measured in order to determine ROI as accurately as possible.
Why is ROI important in investment?
ROI, or return on investment, is a key metric used to evaluate the profitability of an investment. It measures the amount of return generated relative to the cost of the investment. ROI is a crucial metric because it helps investors assess the potential profitability of an investment and make informed decisions about whether to invest or not.
Here are some reasons why ROI is important in investment:
- Helps to assess investment performance: ROI provides an objective measure of investment performance, helping investors to compare and evaluate different investment opportunities. It helps investors determine which investments are generating the most return relative to their cost.
- Guides investment decision-making: ROI can be used as a guide to determine which investments to pursue and which to avoid. By comparing the ROI of different investment opportunities, investors can make informed decisions about where to allocate their capital.
- Evaluates investment risk: ROI can be used to evaluate the risk associated with a particular investment. A higher ROI generally indicates a lower level of risk, while a lower ROI may indicate higher risk. By evaluating the ROI of an investment, investors can determine the level of risk they are comfortable with.
- Helps with financial planning: ROI can also be used to help with financial planning. By projecting the potential ROI of an investment, investors can plan their financial goals and determine how much they need to invest to achieve those goals.
Overall, ROI is an important metric for investors as it provides an objective measure of investment performance, helps guide investment decision-making, evaluates investment risk, and aids in financial planning.
Return on investment in fixed deposit
Bajaj Finance Fixed Deposit provides investment to customers starting at just Rs. 15,000.
Bajaj Finance offers one of the highest FD rates in the market up to 8.85% p.a. for senior citizens and up to 8.60%, depending on the tenure of the deposit. This means that you can earn higher returns on your investment without taking on any additional risks.
Mentioned is an example where a customer below 60 years and a senior citizen invests Rs. 5,00,000 for different tenure. Here is how much they will receive at the end of their chosen tenure. (02 Jan, 2024)
Customers below 60 years
Before investing you can calculate the returns on your fixed deposit by using the FD calculator.
Return on investment in mutual funds
The return on investment in mutual funds can vary depending on the fund's performance and the length of time you hold the investment. Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
The return on investment in mutual funds can be calculated using the formula:
ROI = (current value of investment – initial investment) / initial investment
The return on investment can also be expressed as a percentage.
For example, if you invested Rs. 10,000 in a mutual fund and it is now worth Rs. 12,000, your ROI would be:
ROI = (Rs. 12,000 – Rs. 10,000) / Rs. 10,000 = 0.20 or 20%
It is important to note that mutual funds are subject to market risk, which means that their value can fluctuate based on changes in the stock market. Therefore, it is important to consider your investment goals and risk tolerance before investing in mutual funds.
Additionally, mutual funds often charge fees and expenses that can impact your overall return on investment. It is important to carefully review a fund's prospectus and consult with a financial advisor before making any investment decisions.
Limitations of ROI
ROI has several limitations as a measure of investment performance:
a. Timeframe: ROI only considers the gain or loss from an investment over a specific timeframe and does not consider the potential for future returns.
b. Cash flow: ROI only looks at the net gain or loss from an investment and does not consider cash-flow considerations. A positive ROI does not necessarily indicate that an investment generates positive cash flow.
c. Simplicity: ROI is a simple calculation that does not consider the complexity of an investment. It does not consider the risk involved, which can make it difficult to compare investments that have different levels of risk.
d. Difficulty in estimating: Estimating the initial cost of an investment, the future cash flows, and the time required to achieve these cash flows are all open to subjective interpretation and can be difficult to estimate accurately.
e. Focuses only on financial performance: ROI only measures financial performance, ignoring the social and environmental impact of an investment.
f. Distorted by accounting choices: ROI can be distorted by accounting choices such as how to depreciate assets and recognise revenues.
In summary, ROI is a useful measure of investment performance, but it has its limitations. It is important to use it with other financial metrics such as net present value, internal rate of return, and payback period for a more complete understanding of an investment's performance. And when making decisions, managers should also consider non-financial factors.
What is a good ROI in investments?
Making money is the main motivation for investing. What counts most is the return on an investment, whether we are discussing the stock market, real estate, or anything else that can be bought and sold (ROI). ROI, or return on investment, is a measure of the profitability of an investment. The term "good" ROI is relative and can vary depending on the type of investment and an individual's goals and risk tolerance. In general, a high ROI is usually considered to be above 10%, while a low ROI is usually considered to be below 5%. However, it is important to note that ROI should be considered in the context of the risk involved in the investment. A high-risk investment might have a lower ROI but still be considered good if the potential return is worth the risk.
A good return on investment, however, is what? The solution is not that easy. The type of asset and your investment objectives are the determining factors. Knowing how it operates can help you decide what constitutes a good return.
Calculate your expected investment returns with the help of our investment calculators