What is Return on Investment?
Return on investment is also known as ROI. It is a way to measure or evaluate the efficiency of an investment. It directly measures the amount of an investment as compared to the investment cost. Theoretically, it can be calculated by dividing the benefit of an investment by the cost of an investment. The result after division will be under a ratio or a percentage.
Simply, it is a measure to calculate the probability of gaining profit on a particular investment. It gives an insight into the amount of return as compared to its investment.
How to calculate ROI?
It is not confined to any one investment. One can calculate the return on investment from a few to many investments. The formula for its calculation is as follow:
ROI = (Net Return on Investment) / (Cost of Investment) x (100)
According to the formula, you will divide the total amount of return on investment by the total cost of investment. Then you will simply multiply the answer by 100. This will give you a yearly insight into your ROI.
Importance of Return on Investment:
Return on investment is one of the best ways to have a significant amount in one’s wealth. For example: if someone has some money and he wants to save it for his future, then it will be better to invest it in some project that gives a return on investment. This will not only save his money but also results in an increase in the initial capital.
Investing money in real estate is also profitable in the sense that the population is increasing and the earth is shrinking. Investing in it will save money plus, it will also give capital appreciation. Commercial investments are very similar to this logic.
It gives an insight into a famous quotation of Mark Twain, according to which:
“Buy land, they are not making it anymore.”
Saving some money in the bank accounts is also a good option but instead of some addition, it will take money away through taxes. Then, why not use the same amount of money in a project that will add something valuable to it? This will also increase the value of money after a specific time frame. Commodities like gold and land are a limited resource. Hence with overtime, these assets will always appreciate in value. Given this money in the bank losses value by depreciating and due to banks charges & governments taxations. 10,000 rupees 10 years ago would not have the same value today as it would in the next 10 years. So, invest in assets that appreciate the value and are limited to easily beat inflation and get better returns on your investment.