Understanding How Return On Investment Calculators Work

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As the name suggests, return on investment or ROI shows you how much return you have earned on your investments. It allows you to choose the best long term and short term investment plans across various options. You can use the calculator to assess the investments based on your tolerance for risk and financial goals. You can also evaluate the cost of your investments and look at hidden charges that can deplete your returns. For example, a ULIP calculator will tell you the exact charges applicable to take a ULIP policy. It will help you make an informed investment decision when choosing investment options for your financial portfolio.

An ROI calculator will help you do that. Let us see how.

What is an ROI Calculator?

The return on investment calculator is an online tool that helps you calculate the percentage. In simple words, the return on investment is a ratio that shows you how much profits you will make from your investments. For instance, if you invest your money in mutual funds, the return on investment calculator will tell you how much you will gain from the scheme throughout the investment period and end up losing money. If the ROI percentage is positive, you are earning money, and if the figure is negative, you are losing money. Therefore, you must use the return on investment calculator to choose an instrument that will earn you money in the long run.

How does it work?

Before you use the calculator, you know the contrast between absolute and annualized return on investment. Let us understand it with an example. If you have invested Rs. 20,000 that has grown to Rs. 25,000, the absolute return will be calculated as 25,000 – 20,000 / 20,000 = 25%. Absolute returns evaluate the stock market performance for periods less than a year. But if you want to assess the performance of an instrument over different periods, then you need to look at the annualized return on investment.

Annualized return, for example, can be calculated with the help of the following illustration. Let us say you bought a house for Rs. 20 lakh in March 2009 and sold it for Rs. 45 lakh in March 2021. Therefore, your initial investment value will be Rs. 20 lakhs, and the final investment value is Rs. 45 lakhs. You have held the investment for 12 years. Hence the holding period will be 12 years. The annualized return will be calculated as follows:

Annualised Return = 45,00,000 – 20,00,000 / 20,00,000 * 100 * (1/12) Annualised Return = 10.41%.

Based on these calculations, you can say that you received an annualized return of 10.41% on investments.

Benefits of an ROI Calculator

– Absolute and annualized return

When you use the return of investment calculator, you can see an absolute and annualized return on your investment. You can use this calculator to assess your return across various holding periods.

– Helps you pick the right investment

The calculator will give you an objective look at investments that give you positive returns. Therefore, it proves to be a handy tool for profitable instruments to add to your investment portfolio. The calculator will help you pick the right investments as per your risk appetite and financial goals in the future.

– Choose the best mutual funds

The ROI calculator can also help you select the most profitable mutual funds based on their performance across different periods.

– Measure profitability of your investment

Most importantly, a ROI calculator will help you see which of your investments have yielded positive returns against the cost of your investments. This is one of the most practical ways to judge the performance of your financial instruments and plan your investment strategy in the future.

Many insurance providers these days offer robust returns on investment calculators for free on their websites. You can simply enter the requested details and let the online tool do all the calculations for you. You need to enter your age, investment amount, investment frequency, and expected return on your investments.

Other than showing how much you will earn at the end of your investment duration, the calculator will also show you what will happen to your savings if you delay it for a decade or more. The calculator will work both scenarios for you to compare them in real-time to make the right investment decision. You can also use individual tools like the ULIP calculator to know how much a specific instrument will deliver in terms of ROI.

Assess your investment capacity and future goals before working with an ROI calculator. It will help you keep your and your family’s finances secure.

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