Every investor does investments with the sole purpose of earning higher returns and maximizing their wealth. The returns generated on the investment vary based on various factors like the type of investment, its volatility, the degree of risk involved, the demand of the investment product, its liquidity, etc. While starting an investment, we always hear about the approximate or exact percentage of returns it can generate over a period of time. However, what it means in actual terms is what matters to the investors ultimately. For this, investors have to understand the meaning of the term return on investment and its formula at the same time the use of calculators to effectively calculate the same.
What is the return on investment?
Return on investment is a financial ratio or a metric used to measure the returns generated by investment and its value. It can also be used as an effective tool to compare an investment in terms of returns with other investments to choose between two or more competing investment options. This is quite helpful in situations where the cost of the investment may be similar and the returns can determine which is a better investment option for the investors. ROI can be used effectively to measure returns generated by fixed-income investments or investments that may not provide consistent returns.
What is the formula to calculate return on investment?
ROI is the measurement or the ratio between the net profits or returns from an investment and the total initial investment or the cost of investment. ROI can be measured in the following ways
The formula to calculate ROI based on annualized returns is,
ROI = [(End value of investment/ Initial value of investment) ^ (1/n)] – 1.
This is a better way of comparing investment as it accounts for the time factor or the period of investment which is crucial for evaluating the overall performance of an investment.
Net profit or net income method
The net income method is the basic computation of ROI where the net value generated at the end of the investment is compared to the cost of investment and represented in the form of a percentage. According to this method,
ROI = (Net income or gains from investment/ Cost of investment) * 100
Capital gains method
This is an elaborate version of the net income method to calculate ROI. The formula to calculate ROI as per the capital gains method is mentioned below.
ROI = [Final value of investment – Initial value of investment)/Cost of investment]*100
What is the return on investment calculator?
The above formula may seem difficult for a few investors to understand and compute. In order to ease this process, the investors can use the ROI calculators. ROI calculators are a tool available on many websites and it helps in calculating the return that is generated on any investment. To use this tool, the investors simply need to provide the necessary input and the exact ROI on the investment is computed within seconds of providing such inputs. This tool can help the investors know the returns in absolute terms as well as provide the CAGR of the investment.
How to use the Fisdom ROI calculator?
The Fisdom website also provides the ROI calculator which can be found under the tab ‘Resources’ on the homepage of the website. The inputs needed for calculating the ROI using the Fisdom ROI calculator are,
- Invested Amount – The amount invested in any investment
- Amount Returned – The amount returned at the end of the investment tenure
- Investment Period – The period of investment
After providing the above inputs, the Fisdom ROI calculator will immediately display the return on investment along with other key details like the absolute return on the investment as well as the CAGR of the investment.
What are the benefits of the return on investment calculator?
The benefits of using an ROI calculator are highlighted below.
Ease of access and calculation
The Fisdom ROI calculator is an online tool hence it can be used any time and anywhere by simply visiting the website and selecting the tool. This calculator helps in reducing the time and efforts of the users in calculating the returns on any investment thereby speeding the decision-making process.
Evaluation of the profitability of the investment
Thie ROI calculator helps in evaluating the profitability or the viability of an investment option that may seem lucrative on paper but needs a thorough analysis. This tool is especially helpful for novice investors and helps them in creating a pr0ofitable investment portfolio.
The Fisdom ROI calculator can be used multiple times without any restrictions and can be used by altering different paramaters as well. This will help the investors in deciding the optimum cost of investment and their target returns in a better manner.
Comparison between two or more potential investments
The Fisdom ROI calculator is an excellent tool for evaluating or comparing two or more investment options. This tool will not only help the investors get the returns on investment in absolute terms but also the CAGR (Compounded Annual Growth Rate). This helps in the decision-making process and ultimately choosing the investment that can yield better returns thereby meeting the ultimate goal of maximizing the returns of the investor.
ROI calculator is a very important tool for the evaluation of an investment in terms of the returns generated by investing in it over a specific period of time. This tool can ease the ROI calculation process and provide 100% accurate and prompt results within seconds.
Yes, ROI calculator can be used multiple times also by altering the inputs to compare between two or more investment options.
The results generated by the FInity ROI calculator includes the,
The annualized returns formula accounts for the period of investment thereby providing the actual returns after accounting for the time value. Hence, they are a better mode of comparison even in the case of investment options having a varied period of investment.