Understanding ROI (Return on Investment)
ROI stands for Return on Investment. It's the most fundamental metric in finance that measures how much profit or loss you've made on an investment relative to the amount you invested.
ROI is expressed as a percentage and tells you whether your investment was profitable. A positive ROI means you made money, while a negative ROI means you lost money. It's the universal language of investment performance.
The ROI Formula
This simple formula works for any investment - stocks, real estate, business, or even education.
ROI in Action: Real Examples
Example 1: Stock Investment
Calculation:
- Profit: ₹1,50,000 - ₹1,00,000 = ₹50,000
- ROI: (₹50,000 ÷ ₹1,00,000) × 100 = 50%
Result: You earned 50% return on your investment over 2 years.
ROI vs CAGR vs IRR: When to Use What?
ROI
Best for: Simple, one-time investments
Shows total return but doesn't account for time. Perfect for quick comparisons.
CAGR
Best for: Long-term investments
Shows annualized return, accounting for compounding. Better for multi-year investments.
IRR
Best for: Multiple cash flows
Handles complex investments with multiple deposits/withdrawals like SIPs.
Common ROI Mistakes to Avoid
Ignoring Time Factor
50% ROI looks great, but if it took 10 years to achieve, the annual return is actually quite low.
Forgetting Hidden Costs
Gross ROI can be misleading. Brokerage, taxes, and maintenance costs reduce your actual take-home profit.
No Relative Comparison
An 8% ROI might seem positive, but it's poor if risk-free options like FDs are offering 7.5%.
Calculate Your ROI
Use our advanced ROI calculator to analyze your investment performance.