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 What is Return on Investment, Benefits & Examples

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While investing in any investment plan, the first thing that comes to any investor’s mind is the profit they will be earning from a particular plan. Sometimes it is not possible to calculate the exact profit, but an approximate ratio can help analyse which plan to invest in. This can be calculated by ROI.

ROI means ‘return on investment’. As the full form of ROI suggests it is a financial metric that helps calculate probability of gaining from a particular investment plan. It is calculated based on a general formula. Before one could judge an investment plan using the ROI formula, it is important to know what is ROI?

What is ROI?

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 ROI

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 ROI

While comparing an ROI, it is important to know what is return on 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 ROI?

While investing into any investing plan, calculating return on investment is helpful. There are ways 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 best plan with ROI

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.

Select some suitable investment plans and make a list. Now compare each plan with the help of ROI metric, choose the best and the most suitable one depending on the calculated ROI.

Disclaimer:

*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
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