Return on Investment is an important metric that is used to measure the performance of a particular investment scheme, equity fund, or bond.
Explaining this with an example:
Rahul wants to invest in one investment scheme. However, there are two investment options, option A and option B, which he needs to decide between. Both investments cost him INR 50,000 and INR 65,000 respectively (both investments have minimal risk). While option A gives a return of INR 70,000, option B gives a return of INR 80,000.
Then, the Net Profit would be:
Investment Option A – Return – Cost of Investment
70,000 – 50,000 = 20,000
Investment Option B – Return – Cost of Investment
80,000 – 65000 = 15000
Return on Investment (option A) = (20,000 / 50,000) x 100
Return on Investment (option B) = (15,000/ 65,000) x 100
An investment option with a higher ROI is, without a doubt, the winner here. Ergo, Rahul should invest in investment options A. However, investment duration is a concern here, when you calculate ROI manually, using a formula.
Apart from this formula, another answer as to how to calculate Return on Investment is an ROI calculator. A Return on Investment Calculator takes investment duration into consideration while computing Return on Investment.