The Rate of Return (ROR) can be described as the measure of profit. It is the percentage of profit gained over a sum of money that was invested. This percentage of profit will include both security gain and capital gains. It is also termed as Return on Investment (ROI).
How is it calculated?
The Rate of Return for every investment can be calculated using a common measure called the Compounded Annual Growth Rate (CAGR). For a specific period of time the growth rate of an investment can be calculated as:
Where:
EV - The Ending Value of the investment.
BV - The Beginning value of the investment.
n - Number of Years
For example assume that you invest a sum of Rs.1000 in a Company’s mutual fund. Over an invest period of 5 years, the CAGR can be calculated as:
Year Ending Value
- 500
- 1000
- 2500
- 3000
- 4000
From this table we can understand the beginning and ending value of the investment.
Here 51.57% is the rate of return for your investment.
Why ROR is important?
This value is not always a solid return on investment. Other factors like inflation, tax deductions, other capital investments in the firm, etc may influence the value of the ROR. Hence before making an investment it is very important to calculate your Rate of Return.
Note:
The safer your investment, the lower will be your expected rate of return. This is because the amount of risk involved in the venture will decide your rate of return.
