What is the Return on Investment and How to Calculate its Growth?

Being one of the fastest-growing economies in the world, India’s GDP for the second quarter of the fiscal year 2019-2020 stood at Rs.33.16 lakh crore with a 4.3% growth rate from the previous year in the corresponding quarter. The report released by IBEF further shows –

  • Equity inflows in India between the periods of April to September 2019 stood at $5.3 billion, contributing to a total of $436.5 billion equity inflows in 2000-2019.
  • Towards the end of 2019, estimation for mutual funds asset base pegged at Rs.27.05 lakh crore.
  • With $6.2 billion investment in real estate, this industry has seen a surge of 8.7% in 2019.
  • The total deposits in financial institutions were Rs.117 lakh crore in March 2018, among which contribution of fixed deposits was 58.2%.

With India attracting more investments as a result of such growth opportunities, the returns on investment is a crucial factor that investors look for before making the final decision. In such ventures, investment growth formula comes handy to help individuals decide upon the return they can expect out of an investment plan.

What is the return on investment?

Return on investment, often termed as ROI is the return an investor receives from their investments against the invested amount. The return is expressed in the form of a percentage to simplify its assessment.

Further, other features and facts about ROI are mentioned as follows –

  • The returns from an investment plan can be negative or positive and impact ROI. An investment portfolio reflects an investor’s risk appetite and financial objective. For example, customers prefer choosing safe investment options for retirement as they cannot afford to make risky investments at such a juncture.
  • It helps investors easily understand the growth as ROI is expressed in percentage.
  • Even though it gives clarity on the growth aspect, it doesn’t consider the time factor in consideration. The effect of time is significant in gauging true profitability of an investment.

How to calculate ROI?

In simple terms, it is the ratio between return and investment.

ROI = {(Return/ Total investment) * 100}

For example, an individual invests an amount of Rs.8,000 in an investment scheme, and the amount they get back at the end of the tenor is supposedly Rs.10,000. Then return will be the difference between the invested amount and received amount (10,000 – 8,000), i.e. Rs.2,000.

The ROI expressed in percentage will be ((2,000/ 8,000) *100), i.e. 25%.

One must note that the numerator term is net return and not net profit as high-risk investment plans may result in negative returns. Further, the investment growth formula may alter a little depending upon the investment instrument one chooses.

ROI for various investment options

Various investment options and significant factors related to ROI are mentioned as follows.

  • Fixed deposit

It is one of the secure most investment options present because of the assured returns it offers to customers investing in it. Along with assured returns, customers who invest in Fixed Deposit instruments offered by Bajaj Finance can avail returns up to 8.35%.

The return on investment can be calculated from the interest payout computed using the interest calculator offered by financial companies.

ROI = {(Interest payout / initial investment) *100}

For example, an investor deposits an amount of Rs.20 lakh, for which rate of interest is set by the finance company at 8.1%. In this case, the interest payout will be Rs.5,26,429. The ROI can be computed using the investment growth formula mentioned above to get a value of 26.3%.

  • Senior Citizen Savings scheme

SCSS is similar to fixed deposit scheme except for the fact that there is a lock-in period of 5 years, which can be extended to 3 more years. Senior citizens can get improved returns as the applicable interest rate is higher, and the ROI can be calculated similarly as for FDs.

  • Mutual funds

When deliberating over FD vs mutual funds, one must consider that the returns are subjected to market risk for mutual fund investments. Further, returns depend on whether it is a lump sum investment or a systematic investment plan. In the case of SIP, frequency of SIP, invested amount, expected rate, etc. are considered. The returns so calculated are then used to compute ROI.

Subsequently, individuals can learn the concept of ROI and its calculation methods to estimate growth and decide the best ways to strengthen their finances. This will contribute positively to the decision making.

News Reporter

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