Everything You Need To Know About Return On Investment (ROI)

• ROI measures how much profit you earn compared to the cost of your investment.

• A good ROI varies, but typical benchmarks are 7-10% (after adjusting for inflation) for stocks, 10-15% and more for real estate.

• ROI is simple and versatile, useful across stocks, real estate, and other investment avenues 

• It has limitations, so pair it with other metrics  that predict better terms 

Return on Investment (ROI) is a common metric used to evaluate the profitability of an investment. It measures how much you financially gain relative to the cost of your investment. ROI helps you understand if your funds are being used efficiently and if an investment in stocks, real estate, a business, or marketing is worthwhile.

Measuring the performance of your investments is crucial for making smart financial decisions. Understanding ROI helps you assess profitability, compare options, and maximise your returns.

Return on Investment (ROI) is a metric that compares the profit earned from an investment to the amount spent, usually expressed as a percentage.

• A positive ROI means your returns exceed your costs.

• Negative ROI signals a loss on the investment.

ROI helps evaluate multiple options to determine which investment is most profitable. It also considers factors like risk, liquidity, and time horizon for smarter decision-making.

A stock yielding 15% ROI may seem attractive to some investors. However, a real estate investment offering 20% ROI could be a better choice depending on your priorities and financial goals.

ROI is useful for budgeting and monitoring the performance of your investments. It ensures that every rupee spent contributes effectively to growth and financial planning.

The calculation of ROI is simple:

• ROI = (Net Profit / Investment Cost) × 100

Here, net profit refers to the income earned from an investment minus all associated costs. The investment cost includes the initial outlay plus any extra expenses such as maintenance, fees, or marketing.

You buy shares worth ₹50,000 and sell them later for ₹60,000. If you spent ₹2,000 on brokerage and other fees, your net profit is:

• Net Profit = 60,000 − 50,000 − 2,000 = ₹8,000

• ROI = (8,000 / 50,000) × 100 = 16%

Suppose you purchase a property for ₹1 Lakh and incur an additional ₹5,000 in costs. After renting it out and deducting annual expenses of ₹10,000, you sell it for ₹1.20 Lakhs. The net income is:

• Net Income = (Rental Income − Expenses − Property Cost) = 15,000

• ROI = (15,000 / 105,000) × 100 = 14.29%

These examples illustrate how ROI can be applied to different investment types, giving you a clear picture of your returns.

A good ROI varies by industry, investment type, and risk profile. Typical benchmarks include:

Tip: Compare your ROI against industry benchmarks and inflation to ensure your returns are satisfactory.

Maximising ROI means generating the highest possible return from each investment while managing risks effectively. Here are some strategies to help you boost returns:

• Minimise unnecessary expenses such as brokerage, intermediary investment charges, and more

• Cutting costs directly improves ROI by increasing net profit relative to investment.

• Invest in high-return opportunities and diversify intelligently.

• Avoid overextending resources to maintain balanced growth and reduce risk.

• Track ROI and other key metrics consistently.

• Regular monitoring allows timely adjustments to improve performance.

ROI is simple and widely used, but it also has drawbacks:

• Time Ignored: Standard ROI does not account for the time it takes for an investment to yield returns.

• Risk Overlooked: ROI does not reflect the risk associated with an investment.

• Past-Focused: It considers historical performance and may not indicate future performance.

• Calculation Challenges: Complex investments may involve hidden or indirect costs that make ROI calculation less accurate.

Due to these limitations, it is advisable to use ROI alongside other financial metrics. Metrics like Internal Rate of Return (IRR), Net Present Value (NPV), and Payback Period may provide a more comprehensive evaluation.

ROI is an essential tool for evaluating the profitability of any investment. It is simple, versatile, and widely understood, helping investors make informed decisions. 

By knowing how to calculate and interpret ROI, monitor investments, and implement strategies, you can make your money work harder and smarter. Always consider risk, time, and other financial metrics to gain a full understanding of your investment’s potential.

ROI (Return on Investment) measures how much profit you earn from an investment compared to its cost. It helps assess whether your money is being used effectively across stocks, real estate, business projects, or marketing campaigns.

A 20% ROI means you earn ₹20 for every ₹100 invested. For instance, investing ₹50,000 in a stock or mutual fund and earning a ₹10,000 profit yields a 20% return on your investment.

A good ROI varies by investment type and risk. Generally, 7–10% is healthy for stocks, 10–15% or higher for real estate, and a marketing ROI of 5:1 or more is considered strong. Always compare returns with benchmarks and inflation to assess real growth.

Yes, an 80% ROI is very high, indicating a highly profitable investment. However, it often comes with a higher risk, so consider factors like liquidity, market conditions, and sustainability before assuming it is safe.

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