Return on Investment (ROI)

What is ROI? How to Calculate Return on Investment

Understand ROI and its calculation to make smarter investment decisions that maximise profitability and support long-term financial goals.

Written by : Knowledge Centre Team

2025-09-01

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10 minutes read

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You can save the money so that you can fulfil your present needs and achieve larger financial goals in future. But saving money is not enough; you need to invest it and earn a good Return on Investment (ROI) on it. The full form of ROI is the Return on Investment. It refers to the profit you earn in return for your invested money. 

If you are not investing regularly, It can be difficult to achieve long-term goals. Investing allows your money to grow over time with the power of compounding. A good Return on Investment allows you to beat inflation and build wealth so that you can replace your income during the retirement period.

Key Takeaways

  • ROI helps measure how much profit you earn relative to your initial investment.

  • You can use ROI to compare different investment options over the same time frame.

  • Its simple and widely accepted formula makes Return on Investment easy to apply across industries.

  • ROI analysis helps allocate funds toward high-performing investments more efficiently.

  • Metrics like NPV, IRR, and Payback Period offer deeper insights into long-term investment returns.

What is Return on Investment (ROI)?

ROI, or Return on Investment, is a measure of the growth of your invested money. It is a popular indicator which estimates the ratio of money received from an investment over the money invested. Returns gained on two different investments estimated over the same period are comparable. Thus, you can also use ROI to compare different investments.

For example, if you invest ₹100 and one year later receive ₹110, your money has grown 10% in one year. In other words, your ROI of ₹ 100 has been 10% per year.

ROI also measures the performance of the investment options. For example, if you have two different options you can invest your savings in, ROI will help you identify the profitable option between them. Look at the ROI of both investments for the same period, and you can invest for a higher rate of growth.

Thus, in the investment world, ROI is one of the methods to ascertain the profitability of an investment. Other popular methods similar to this concept are Net Present Value (NPV) and Internal Rate of Return (IRR). You can use these metrics as well to compare investment options and choose a better one. Return on investment for a fixed-income investment will tell you the return you can expect from the investment.

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Benefits of Return on Investment

ROI is a powerful metric used across industries to assess the profitability of investments.

Here are its key benefits explained concisely:

  • Easy Measurement of Profitability: ROI helps you quickly calculate the profit gained from an investment compared to its cost. This makes it simple for you to evaluate how well your money is working.
  • Comparison of Various Investment Plans: By applying the ROI formula to multiple options, you can easily compare which investment offers better returns. It enables side-by-side analysis, helping investors pick the most rewarding plan based on factual data rather than assumptions.
  • User-Friendly Formula: The ROI formula is straightforward to use. Even without advanced financial knowledge, anyone can calculate and interpret it. This user-friendliness makes it popular among small investors, entrepreneurs, and large businesses alike.
  • Globally Accepted Financial Metric: ROI is a standard financial measure recognised worldwide. It is commonly used in business reporting, investment evaluation, and strategic planning. It is a trusted tool for global investors and decision-makers.
  • Helps in  Choosing the Best Plan: By highlighting the return percentage on different investments, ROI helps identify which option yields the highest gain. This insight supports better financial planning and ensures your resources are directed toward the most profitable opportunities.

Formula to Calculate Return on Investments

Return on Investment helps you compare the income received from the investment that you have made with the cost of the investment.

Below are the formulas for ROI calculation:

Formula 1: ROI = (Investment Value at Maturity - Invested Value) / Invested Value x 100

Formula 2: ROI = Net Gains / Invested Value x 100

Where,

Net Gains = Final Value of Investment – Invested Value

ROI can be positive, negative, or zero
ROI is always denoted as a percentage
 

Example of ROI Calculation

Suppose you invest ₹ 2 lakhs in a savings plan for 10 years and receive ₹ 4 lakh at the end of it and ₹15,000 every 5 years, the ROI from the savings plan will be:

ROI = ([(4 lakhs – 2 lakhs) + 15,000 x 2] / 2 lakhs) x 100

= 115%

Although 115% looks huge, keep in mind that this is an absolute return of 10 years. This ROI will not be comparable to a bank FD giving 8% p.a. or any other annual ROI figure.

When converted into an annual compounded return, the ROI of the savings plan will be 7.96% p.a., which is comparable to the ROI of a bank FD.

Steps to Calculate ROI

Now that you know the meaning of ROI, you must be wondering how to calculate it. You can estimate ROI in two easy steps:

  1. Estimate the Net Gains: Calculate total income, including maturity proceeds and any intermediate payments like bonuses or dividends. Deduct your initial investment amount from this.

  2. Estimate the Ratio (ROI): Divide the amount in step one by the initial investment amount and multiply by 100%. This is your percentage ROI. 

How to Compare Different Investments?

Different approaches may be considered when it comes to comparing the ROI of different investment options. You may use the following methods to compare two investments:

PayBack Period:

It is the simplest way to compare two investments. It helps you determine how much time your investment will be recovered.

  • It can be calculated as Payback Period Total Investment/Cash flow per year

  • The lower the payback period, the better the investment.

  • It is calculated in years. For example, you have invested ₹ 1,00,000 and the return per year is ₹ 10,000, then PBP will be 1,00,000/10,000 = 10 years.

Time Value of Money (TVM):

The money that you have today may not be worth as much a year later. The value of money today will be worth more than tomorrow. This is the time value of money.

Future Value= Present Value x (1+R)N

Learn more about Time Value of Money

Net Present Value (NPV):

This is the extension of the concept of the time value of money. It expresses the present value of all the future cash flows that you will receive from your investment.

  • To calculate NPV, a ‘discounting rate’ is used.

  • A positive NPV indicates that the investment can be considered

  • NPV uses the concept of the time value

  •  NPV= ΣRt / (1+ i)t
    Where Rt is the value of cash flow at time ‘t’ and ‘i’ is the discount rate.
    This method allows you to evaluate multiple cash flows, coming in or going out, at different points in time.

Learn more about Net Present Value (NPV). 

Internal Rate of Return (IRR):

It is a method in which the return is calculated excluding all the external factors, such as the inflation rate, bank rate, etc.

Under this, the NPV is considered to be 0.
IRR = Ct / (1+ r)t- Co

Learn more about the Internal Rate of Return.

Using these ROI estimation methods, you can now evaluate different investment options before investing. However, do keep in mind that most of these investments are bound to the market scenarios as well. Thus, looking only at ROI is akin to looking only at one side of the coin. Better have a look at the market conditions as well before concluding.

Conclusion 

Return on Investment is a powerful tool to evaluate how efficiently your money is being used. It shows how much profit your investment generates compared to the amount invested. You can use simple ROI percentages or advanced methods like NPV and IRR to understand value across different timeframes. However, ROI alone cannot capture every financial factor or risk. To make smarter choices, review all aspects of the investment and ensure they match your financial goals. Well-informed decisions today can lead to stronger and more reliable growth in the future.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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