What is Return on Investment (ROI)?
Return on Investment (ROI) is the most popular metric used to evaluate the profitability of an investment. It answers a simple question: "For every Rupee I put in, how much did I get back?" ROI is widely used in business, stock market analysis, and real estate to compare the efficiency of different assets.
The Two Types of ROI
- Absolute ROI: The total percentage growth. If you invest ₹1 Lakh and get back ₹1.5 Lakhs, your Absolute ROI is 50%. It ignores time.
- Annualized ROI (CAGR): This accounts for time. A 50% return over 1 year is amazing. A 50% return over 10 years is poor (only ~4% per year). This calculator provides both metrics.
How to Calculate ROI?
ROI = (Net Profit / Cost of Investment) × 100
Where Net Profit = Final Value - Initial Investment
What is a Good ROI?
A "good" ROI depends entirely on the risk and asset class:
- FD/Bonds: 6% to 8% (Low Risk, Guaranteed).
- Stock Market (Nifty): 11% to 13% (Medium-High Risk, Long Term).
- Real Estate: 8% to 10% (High Transaction Cost, Illiquid).
- Startups: 20% to 100% (Extreme Risk, High Failure Rate).
Limitations of ROI
ROI does not account for risk. An investment that doubles your money in 1 day via gambling has a high ROI but infinite risk. It also doesn't account for ongoing costs (maintenance, taxes) unless you manually subtract them from the "Amount Returned". For more complex cash flows over time, use the IRR (Internal Rate of Return) calculator.
Real ROI Calculation
Most investors only calculate Nominal ROI. However, inflation eats into your purchasing power. To find the Real ROI:
Real ROI ≈ Nominal ROI - Inflation Rate
Example: If your Stock Portfolio gave 12% return but inflation is 6%, your actual wealth grew by only 6%.
ROI in Real Estate
In Real Estate, ROI calculation is complex because of leverage (loans). If you buy a ₹50L house with ₹10L down payment and sell it for ₹60L:
- Without Loan: ₹10L profit on ₹50L = 20% ROI.
- With Loan: ₹10L profit on ₹10L down payment = 100% ROI (ignoring interest). Leverage magnifies ROI.
FAQs
- Is ROI the same as Profi Margin?
- No. Profit Margin is (Profit / Revenue). ROI is (Profit / Investment Cost). They measure different things.
- What is a CAGR?
- CAGR (Compound Annual Growth Rate) smoothes out the volatility of returns over a period. Annualized ROI in this calculator is effectively the CAGR.
- Does this calculator include inflation?
- No, this calculates Nominal ROI. To find Real ROI, you must subtract the inflation rate (approx 6%) from the Annualized ROI.