What is Return on Investment?

Return on Investment

You must have heard the term Return on investment many times, which means - the amount of profit on an investment, eg - if Kaushik made a fixed deposit of 1 lakh, on which he gets 1 lakh 60 thousand after 5 years, So in such a case, Kaushik has the benefit of that fixed deposit investment.

Total profit = 1,60,000 - 1,00,000 = 60,000 / -

60% if we extract profit in percentage without taking time into consideration.

But if the annual growth rate of profit is calculated keeping in mind the time, then we get to see two things.

Absolute Annual Growth Rate - 12%
Compound Annual Growth Rate - 86%
That is, how much profit we are actually making from an investment, what is the annual growth rate of profit, we know all this by calculating the return on investment.'

How is Return on Investment calculated?

Return on investment is usually calculated according to the annual growth rate and thus the profit on an investment can be calculated in many different ways.

Taking Return on investment is the two most popular ways to calculate.

Absolute Annual Growth Rate 

By Absolute Annual Growth Rate we mean, when calculating the profit as a percentage, time is not taken into account like - in the above example 5 years total profit is 60% and 60% if 12% every year, divided by five years .

The formula for extracting Absolute Return is -

[(END VALUE/BASE VALUE) -1]*100

If we talk about the above Example -

160000/100000=1.6=1.60-1=.60*100=60%

Therefore, proper calculation of the return on your investment is very important.

Compound Annual Growth Rate

Return on investment is the second and most commonly used technique for calculating the rate of compound annual growth - CAGR

CAGR Extract Formula is -

[{(END VALUE/BASE VALUE^ (1/No. Of Years)}-1*100]

160000/100000=1.6^(1/5)=1.09856-1=.09856*100=9.856%

How to use Return on Investment Calculator?

You have seen that if we calculate the same investment differently, then we also get to see the return on investment differently,

Therefore, you will have to look carefully about the return on investment, which type of investment has been calculated, and then you can do comparative calculation to understand whether such investment is appropriate for you-

Also, keep in mind that whenever you calculate the return on investment for more than a year, you should use CAGR (Compound Annual Growth Rate).

And you should use CAGR (Compound Annual Growth Rate) to calculate the profit in the stock market.

Return on Investment – Summary

If we sum up our point, by return on investment, we mean knowing what exactly we are getting from any investment.




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