Calculating ROI - How It Affects Your Choice of Investments?

Return on Investment is a performance measure used by people to determine the profitability of an investment or compare performance of different investments over a given time period. As evident, ROI is a value metric used to calculate an investment's success or to compare the productivity of different investments in delivering a return on Investment. To evaluate ROI, you can simply divide the end of period value of your investment with the initial cost of the investment.

Return on Investment aims to measure the level of a single investment with returns explicitly, relative to its cost. In other words, the ROI formula comprises the splitting of an investment’s profits by its costs. The Return on Investment formula is illustrated below:

ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment

Here, the "Current Value of Investment” means the proceeds gained from the sale of the Investment of interest. Since the return on investment is calculated as a percentage, the ROI can be easily compared with other investments of returns, allowing one to compare a range of different investment options available.

You can also use an ROI calculator available online to estimate the Return on Investment for an instrument.

In case you are unsure about how to calculate Return on Investment, it is easier than you think. To calculate Return on Investment or ROI of any investment you need only two numbers: the investment cost, and the current value of that instrument & use the following formula to calculate ROI easily.

ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment

But within each, there are inputs. It is where the easy gets complicated for others. Yet it doesn’t have to be?

Below are 8 remarkably easy measures for calculating the Return on Investment (ROI):

• Start with a Baseline
• Decide if the ROI is Revenue or Profit
• Determine the Time Frame
• Decide the Inputs for the Returns
• Identify the Investments
• Calculate the ROI of Investment with Returns
• Guide with KPIs
• Align with Desired Goals

Let’s understand all these measures for calculating ROI in detail below:

There are specific thumb rules which promote the implementation of the time in Return on Investment [1]. These simple rules assume that the average return rate remains constant, and the Return on Investment is compounded once a year. Out of all the rules, Rule of 72 is the most important one.

The first thing you should do is take out inflation regarding any investment that promises to provide a substantial Return on Investment. The reality is that investors are interested in increasing their Real Rate of Return on their Investment when they put their money into an instrument.

Because of its versatility, Return on Investment or ROI is one of the most-used productivity measures. On the other side, one of the downsides of the Return on Investment formula is that it can be misleading to show different outcomes for different users. Thus, it is essential that you use the same inputs when considering Return on Investment to compare different investment opportunities.

It is also essential to consider that the simple estimation of Return on Investment does not take time into account. Earning a return of 15% for a year is more attractive than earning 15% cumulative for 2 years when we talk about instruments with a Return on Investment. One should look at annual ROI numbers while comparing multiple investment options.

If you hold these bonds till maturity, then you will get a fixed return on your invested money. But if you sell the bond prematurely, its price will depend on market conditions prevailing at that time. If your sale price is higher than your purchase price, your return will also be higher accordingly and vice versa.

However, the bond market is less liquid than the equity market, meaning you may not get the best price if you want to sell it before maturity.

In recent times, many investors and enterprises are looking at a new way of calculating Return on Investment – it is called Social Return on Investment or SROI. Along with capital and profit, this SROI also considers socio-environmental factors. This ensures even more accuracy as they use additional financial value.

One such Investment is Unit Linked Insurance Plans or ULIPS. ULIPs are among the top-ranked financial products offering a substantial Return on Investment over the investment period. Moreover, ULIPs are one of the investment opportunities that provide a significant Return on Investment while providing additional protection of life cover to the policyholders. ULIPs invest a portion of the amount invested into equity shares, debt instruments, and bonds, while the remaining amount is invested towards providing the life insurance cover.

Also Read: Benefits of ULIP Plans

Earlier, the lock-in period of a ULIP was 3 years. However, it has been increased from three years to five years to reflect the long-term protection function of this Investment with a substantial Return on Investment.