How Do I Calculate Return On Investment In 2020?

Before investing in any investment instrument, you might be concerned about the returns it will offer post maturity. To analyze whether it is worth investing in a particular instrument or not, you can calculate the returns.

Return on investment or ROI is a ratio that can be used to measure the gains provided by an investment with respect to its costs or expenses. ROI is usually denoted as a percentage. It gets better if your investment expenses are lower and net returns or profit is higher. 

The formula used to measure the ROI of different instruments can vary according to the different types of gains and costs associated with them. However, you can use this basic formula to calculate the returns provided by most of the instruments:

ROI = ((Net profit of an investment – Investment costs) / (Investment costs))* 100

Let us understand this formula better with the help of an example. For instance, let's say that an individual earned Rs. 300 by investing in an instrument called ‘A’ and the same individual earned Rs. 1000 by investing in an instrument called ‘B’. 

Now, you will think that instrument ‘B’ provided better returns to the person than ‘A’. However, it might not be completely true. Let us say that the person spent Rs. 100 on earning the profit from ‘A’ and he had to spend Rs. 800 on earning the gains from instrument ‘B’.

As a result, 

ROI for instrument ‘A’ = (300-100) / (100) = 2 or 200% 

ROI for instrument ‘B’ = (1000-500) / (500) = 1 or 100%

This means that the return on investment provided by ‘A’ is better than the return on investment provided by ‘B’. 

Limitations of the ROI formula

The effectiveness of an instrument can be measured with the help of the ROI formula. However, it has some basic limitations that make it incapable of including all the factors of financial evaluation. These limitations are:

Risks

ROI does not consider the risk factor associated with an investment option. Therefore, a higher ROI percentage sometimes means that risks are higher to earn the final gains. 

Time

ROI does not tell us the time required to earn the desired profit from a particular investment. You cannot compare two instruments merely on the basis of their ROI percentage as you would also like to choose the option that provides more returns in less time.

To avoid these uncertainties, investors can choose the instruments that are not associated with market risks or fluctuations. A fixed deposit is one such instrument that not only guarantees high returns but also provides fixed returns over a specific tenor. 

By investing in a corporate FD, you can earn better returns. For example, Bajaj Finance offers fixed deposit rates as high as 7.85%. You can also avail these additional benefits by investing in a good corporate FD: 

• FD calculator 

You do not have to calculate the returns on your FD investment manually as most banks and NBFCs offer an online fixed deposit interest calculator to give an exact estimate of the returns you can earn.  An FD interest rates calculator will display both, final maturity amount and interest earnings once you enter details like the investment amount, tenor, type of FD, etc. 

• Online application 

You no longer have to get out of your house or wait in long queues for opening an FD as an online application form is available for quick and easy processing.

• Ease of investment 

With the multi-deposit facility, you can use a single cheque to invest in multiple Bajaj Finance FDs spread over a period of time. By availing this facility, you can invest in FDs of different tenors and payment frequencies to meet your liquidity requirements. Also, you can ladder the investments to ensure smooth cash inflow. 

You can also auto-renew the FDs automatically by selecting the auto-renewal option while filling the FD form. Moreover, Bajaj Finance FD is highly safe and credit-worthy as it has been rated for its safety and stability by reputed organizations like ICRA and CRISIL. 

It is easy to calculate the return on investment by using the manual formula. However, the manual formula does not evaluate all the factors and risks that are associated with different investment instruments. Investors can always go for fixed income investments such as fixed deposits that are not linked directly to the market to be assured of guaranteed returns on their investment.