What is Return on Investment?
ROI which is also referred as Return on Investment is a financial ratio that helps calculate gain or loss from an investment plan. This formula helps calculate profit that an investor may receive from investing into a plan.
There is a simple formula used to calculate return on investment :
Net profits / Total cost of the investment
Using this mathematical formula, it is possible to calculate how much one will gain in relation to the cost of an investment. Expressed in the form of percentage, this formula helps compare different investment options easily. This helps evaluate returns from different investment plans.
When one needs to calculate return from investment, it is important to define return on investment.
Benefits of Return on Investment
This is a simple formula that makes calculation quite easy, it has its own set of benefits:
- Easy measurement of profitability – It helps calculate profitability on a particular investment plan.
- Comparison of various investment plans – Just by this formula one can compare different investment plans.
- User friendly formula – With the help of this formula it is easy to calculate returns of an investment plan.
- Globally accepted financial metric – This is a common formula used and accepted across the world.
- Helps choose best plan – It helps analyse the best plan that can incur highest return in terms of the investment costs.
Example of Return on Investment
While comparing an ROI, it is important to know what is investment? For an example, an individual spends Rs. 50,000/- on an equity fund in the year 2005. After three years, at the time of maturity in 2008, he received a credit of Rs. 75,000 in his bank account. So, the ROI calculate with the help of the formula will be :
ROI = (75,000 – 50,000) / 50,000 = ½ or 50%
How to Improve Return on Investment?
While investing into any investing plan, calculating return on investment is helpful. Ways are using which one can improve the ROI. These are :
- Plan the return on investment – Know what to measure, how to measure and when to measure.
- Evaluate the expectations again – Make sure to evaluate which investment plans can return better benefits.
Choosing the best plan with Return on Investment
While choosing the best plans for investment, it is important to analyse the performance of an investment plan. Comparing a set of investment options is essential before choosing the most suitable plan. With the help of return on investment, this analysis becomes easy.
When an individual understands the meaning of return on investment, it is easy for him to determine which is the most preferred investment opportunity. One must follow just a small step to choose the best investment plan.
- Create a List of Suitable Investment Plans: Identify a range of investment plans that align with your financial goals and risk tolerance.
- Compare Plans Using ROI: Utilize the ROI metric to compare the potential returns of each investment plan. This analysis will unveil which plan offers the most favorable returns relative to the investment cost.
- Select the Optimal Plan: Based on the calculated ROI, choose the investment plan that aligns with your financial objectives and promises the highest returns.
