Return on Investment (What is profit)
- Return on Investment First We all understand, profit can happen to us in two ways – First – when we buy something at a lower price and sell it at a higher price range.
- And Second – when we save some goods at a higher price and buy at a lower price.
Investing is a process in itself
- When we buy such assets from our savings, from which we want to earn extra money i.e. profit, then the money spent in buying such property is “investment” i.e. Called investment.
Friends, now attention please –
- Investing means when we buy any property with the purpose of making profit, whether that property is real estate or paper asset, For example, buying and selling a plot, buying a house and renting it to earn profit, or making profit by buying and selling a house, apart from this, fixed deposits in the bank, buying mutual funds, buying stocks or shares,
- Investment is a long term process, and most of the investments do not give instant returns, we have to wait for the time after investing to increase the investment value or earn profit from the investment, so that the value of our purchased investment increases, and we get more Make a profit by selling it at the price.
- For example, if we make a fixed deposit in the bank, then we have to wait till the lock-in period of the fixed deposit, then we get the benefit from that fixed deposit, Similarly, when we buy a plot or house, we wait for its price to increase, and when the price increases; we earn profit by selling that plot or house.
- Whatever we invest, its main objective is to earn maximum profit on the investment of minimum capital, And to understand how much profit we are getting from which investment, it becomes very important to understand ROI i.e. RETURN ON INVESTMENT.
How ROI is calculated? And which ROI should we use
So in today’s article we will talk about ROI in detail – and know how ROI is calculated? And which ROI should we use when comparing the returns of the two investments,
Now I am telling ROI – The profit received from an investment is called Return on Investment (ROI) of that investment, and in short it is called ROI. From ROI we get to know that – in what ratio, that is, in which RATIO we are getting profit on the capital invested.
For example – suppose –SBI gives 6 % interest on fixed deposits, that is, the annual profit on the investment of SBI fixed deposits is – 6%, So in this way we can say that – Return on Investment i.e. ROI from investing in SBI Fixed Deposit is – 6%
Note – Return on investment is known as the percentage of profit made in the whole year, You should note once again – Return on Investment (ROI) is calculated as a percentage of the profit received from an investment throughout the year.
Benefits of ROI –
Friends, generally Return on Investment (ROI) is always expressed as a percentage, so that it can be easily found out on different investments that which investment is getting more profit and from which. Low, For example, suppose the ROI in SBI Fixed Deposit is -6%, and suppose the profit from SBI BLUE CHIP Mutual Fund is – 12%, So in this way, when the ROI of both these investments is in front of us, and in such a situation, we can understand very easily, that SBI Blue CHIP Mutual Fund has more ROI and we can get more profit from it.
Now You will see about ROI Calculation- Friends two types of ROI calculation (Absolute Return & Compound Annual Growth rate Return).
Absolute Return – is calculated as simple profit, in which time is not considered, only the return on investment is shown as a percentage, And the formula to calculate Absolute Return is = [Ending Period Value / Starting Period Value – 1]100
For example, suppose I bought a house for Rs. 10 lakh and sold it for Rs 12 lakh, Then what percentage did I make? To know this, if we calculate the Absolute Return, then the Absolute of this transaction will be = (12, 00,000/10, 00,000)-1)100 = (1.2-1)100 =.2100=20% According to Absolute, 20% profit on investment of 10 lakh rupees, which looks very handsome, because 20% profit is considered very good return.
Compound Annual Growth Rate (CAGR) –
CAGR, in relation to the return on an investment, gives us an idea of what percentage of an investment is growing every year, in a Compounding manner, The growth of average profit per year from an investment in CAGR is calculated as a percentage, note that – CAGR always denotes compounding growth, and the formula to calculate CAGR is – {(Ending Period Value / Starting Period Value)^(1/N)} – 1]100}
Here N means – Year, Number of Year – For example, remove the example mentioned in Absolute return in CAGR return and see, Let’s say, the house I sold for 12 lakhs, I bought that house 2 years ago for 10 lakhs, So in this way I got a profit of 2 lakhs in two years, So now if we remove this profit from the formula of CAGR, then the profit will be – ((12,00,000/10,00,000) ^1/2)-1)100 = [(1.2^.5)-1]100 = [1.09544512-1]100 =.0954*100=9.54%
So you see, according to Absolute Return we think we got 20% profit on this deal, which creates huge misunderstanding because as soon as we took out CAGR RETURN in this deal, we came to know the reality that –We are actually making profit of only 9.54% CAGR per annum.
From Our Team Desk
- So friends, whenever you compare the profit on different investments, keep in mind that while comparing the profit on two investments, always use CAGR only. So that you can get an idea about the annual compounding growth of the investment, the actual return.
- Friends, Hope you have understood well from this article that – how to calculate the return on different investments and how to compare the two. Friends, you must write your question or idea in the comment.
FAQ
What are the advantages and disadvantages of return on investment?
The biggest advantage is that it is an easy metric to calculate and easy to understand. It means that is often used to use profitability and is not misinterpreted because it has the same meaning in any context. One of the disadvantages to ROI is that it does not take into account the holding period of an investment.
Why are investment returns important?
Return on investment, better known as ROI, is a key performance indicator (KPI) that’s often used by businesses to determine profitability of an expenditure. It’s exceptionally useful for measuring success over time and taking the guesswork out of making future business decisions.
What does return on investment tell you?
Return on investment (ROI) is a measure of how much money an investor has earned or lost on an investment relative to the amount of money that was initially invested. It is a key performance indicator used to measure the efficiency and profitability of an investment.
What is return on investment also known as?
Return on investment, also known as ROI, is a ratio of either a financial profit or loss. The ratio is expressed in terms of an investment where the increase or decrease of value is shown as a percentage.
What are the types of return on investment?
Types of Investment Returns
Capital Gains- One of the most well-known types of investment returns is capital gains
Dividend Income- Another type of investment return is dividend income
Interest Income- Interest income is generated from investments such as bonds or savings accounts
Rental Income
And Royalties
