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Return on Investment (ROI): How to Calculate It and What It Means?

Return on Investment (ROI) is a simple financial metric used to determine the profitability of investments by comparing returns to costs. As long as the ROI is positive, the investment option is considered profitable. You can choose to go ahead with that option depending on your industry benchmark, personal goals, and risk tolerance. You can also use ROI to compare different options. While ROI is versatile and easy to use, it should be considered alongside other financial metrics for comprehensive decision-making.

  • 8,617 Views | Updated on: May 14, 2025

What is Return on Investment (ROI)?

Return on Investment, or ROI, is a simple way to measure the return or profit you have earned on an investment. It is relative to the initial cost of that investment. It is a tool to determine if you are making money or losing money on a particular investment.

Why Does ROI Matter?

ROI meaning matters because it helps you assess the success of your investments. Whether you put your money into stocks, real estate, a business, or even education, you want to know whether it is a good or bad deal. ROI gives you a clear picture of whether your investment is paying off or if it is time to rethink your strategy.
The answer to ‘What is ROI?’ has established that it helps determine if an investment is worth it. Essentially, it tells you how much you earn compared to what you spend. For example, imagine you spend ₹10,000 on a marketing campaign, and it brings in ₹15,000 in sales. By calculating ROI, you can see that you made 50% more than you spent. This gives you a clear idea of whether the campaign was a good use of your money.

Why Is ROI a Useful Measurement?

The answer to ‘What is ROI?’ has established that it helps determine if an investment is worth it. Essentially, it tells you how much you earn compared to what you spend. For example, imagine you spend ₹10,000 on a marketing campaign, and it brings in ₹15,000 in sales. By calculating ROI, you can see that you made 50% more than you spent. This gives you a clear idea of whether the campaign was a good use of your money.

The same applies to investors: if you buy stocks or property, ROI helps you see if the returns you are getting are worth the money you put in. It is also used in businesses to check if new projects or purchases, like buying new software or equipment, are paying off in terms of time saved or extra profits.

Another popular use of ROI is to compare two investment options. For example, imagine you invest ₹50,000 in Stock A and earn ₹7,500 in returns, giving you an ROI of 15%. Meanwhile, you invest ₹30,000 in Stock B and earn ₹6,000, which results in an ROI of 20%.

Stock

Invested Amount

Returns

ROI

A

₹50,000

₹7,500

15%

B

₹30,000

₹6,000

20%

In this case, Stock B offers a higher ROI, meaning it delivers better returns relative to the money invested. Even though Stock A might seem more appealing because of the higher total returns, Stock B is the smarter choice as it generates more profit per rupee invested. ROI helps make such decisions clearer and ensures your money is invested in the most efficient option. What further makes ROI so useful is how simple it is. You do not need complicated formulas to figure it out, and it gives you a direct, easy-to-understand answer.

How to Calculate ROI?

Return on Investment= (Net Profit / Cost of Investment) x 100
  • Net Profit is the income you have earned from the investment minus any associated expenses or costs
  • Cost of Investment is the initial amount of money you put into the investment.
Return on Investment = (2,000 / 10,000) x 100 = 20%

Parameters for Measuring ROI

Understanding what your ROI percentage means is crucial. It helps you know if your investment is yielding a profitable outcome or not. It can be determined by comparing the ROI percentage with zero; let us take a quick look at the following:

Positive ROI (Greater Than 0%)

Positive ROI means you have made a profit. The higher the ROI, the better your investment has performed.

Negative ROI (Less Than 0%)

A negative ROI suggests you have incurred a loss. If your ROI is negative, you have lost money on your investment.

Zero ROI (0%)

Zero ROI implies that you have neither gained nor lost money. Your investment has broken even.

What Are the Advantages of ROI?

  • Easy to Understand: The formula is easy to calculate, making it accessible even for those without advanced financial knowledge. By dividing the net profit by the investment cost and multiplying by 100, you get a percentage that clearly indicates the return.
  • Universal Applicability: ROI is a versatile measurement that can be applied to any type of investment, such as stocks, real estate, a business venture, or marketing campaigns. You can use ROI to compare different investments and asset classes.
  • Measures Profitability Clearly: As it is expressed as a percentage, ROI offers a clear and objective measure of whether an investment is yielding positive returns. A high ROI indicates that the investment is profitable, while a low or negative ROI highlights areas of concern.
  • Encourages Accountability: Since ROI clearly shows the returns generated by an investment relative to its cost, it encourages accountability. Businesses and individuals can see exactly where their money is going and how effectively it is being used. They can allocate resources more efficiently to ensure higher returns.

What Is a Good ROI?

  • Industry Standards: It is important to understand the average returns in your specific industry. For instance, in real estate, a good ROI might be in the range of 8-12%, whereas in the stock market, investors often expect a higher return in the range of 15-20%. If your ROI exceeds or meets industry standards, it can be considered a good return.
  • Personal Investment Goals: Short-term investors generally seek higher returns to capitalize on quick market movements, while long-term investors may be more concerned with steady returns, even if they are lower. Additionally, your risk tolerance defines what’s considered a good ROI. Investors with a higher risk appetite will look for higher ROI to offset the risk they are taking.
  • Inflation-Adjusted ROI: Inflation can erode the purchasing power of your returns. You should thus consider inflation-adjusted ROI, also known as the real rate of return. For instance, if an investment returns 10%, but inflation is at 3%, the real return is only 7%. A good ROI should account for inflation to reflect the true value of the investment in terms of purchasing power.
  • Consistency Over Time: While high returns are attractive, a good ROI is characterized by consistency over time. You should check whether the investment delivers reliable returns year after year rather than an occasional spike in returns followed by losses. Investments that offer consistent ROI over the long term, even if it’s moderate, can be more valuable.

Considerations for Indian Investors

The Indian market is one of the growing profitable markets in the global economy. Let us take a look at various considerations of Return on Investment for the Indian market:

Inflation

India has seen its fair share of inflation. When calculating ROI, consider the impact of inflation on your returns. What matters is the actual return (adjusted for inflation).

Taxes

Positive ROI means you have made a profit. The higher the ROI, the better your investment has performed.

Diversification

Indian investors often prefer to diversify their portfolios to manage risk. Diversification can affect your overall Return on Investment, as different investments yield different returns.

Bottom Line

Return on Investment is an invaluable tool for assessing the performance of your investments in the market. It is a simple yet effective way to gauge whether your money is working for you or sitting idle. Just remember, it is not the only metric to consider. It is also essential to consider factors like inflation, taxes, and your long-term goals when making financial decisions. Be sure to assess your risk tolerance, time horizon, and overall financial objectives before making any investment decisions in the diverse and dynamic market.

FAQs on Return on Investment (ROI)

1

What is the formula for calculating ROI?

The formula for ROI is:

Return on Investment = (Net Profit or Gain from Investment / Cost of Investment) ×100

It expresses the profitability of an investment as a percentage, making it easy to compare across opportunities.

2

What does a positive ROI indicate?

A positive ROI indicates that the investment has generated a profit. The higher the ROI, the better the return, signaling a financially successful venture.

3

How does a negative ROI impact investment decisions?

A negative ROI means the investment has resulted in a loss. It highlights the need to reassess the investment strategy or avoid similar opportunities in the future.

4

What are the primary factors influencing ROI?

Key factors include the initial cost of investment, revenue or returns generated, operational expenses, and market conditions. External factors like economic trends and inflation can also impact ROI.

5

How can Indian investors factor inflation into ROI calculations?

Indian investors can adjust Return on Investment by using the real rate of return formula:

Real ROI = Nominal ROI −Inflation Rate

This ensures that profitability reflects the true purchasing power of returns in an inflationary economy.

Suggested Readings

1. Know How to Invest at Every Age for Larger Returns

2.What are the Best Investment Options for Young Adults?

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.

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