How ROI is Calculated — Simple ROI, Annualized Returns, and Common Pitfalls

ROI — Return on Investment — is the simplest measure of investment performance. “I put in ₹1 lakh and got back ₹1.5 lakh” → 50% ROI. But comparing investments fairly requires understanding annualized returns.

Simple ROI formula

ROI = ((Amount Returned − Amount Invested) / Amount Invested) × 100

Example: Invested ₹2,00,000 in stocks, sold for ₹3,20,000:

ROI = (3,20,000 − 2,00,000) / 2,00,000 × 100 = 60%

The problem with simple ROI

A 60% return over 2 years is very different from 60% over 10 years. Simple ROI doesn’t account for time. That’s where annualized ROI comes in.

Annualized ROI (CAGR)

Annualized ROI = (Final/Initial)^(1/years) − 1

60% over 2 years:

= (1.60)^(1/2) − 1 = 0.2649 = 26.5% per year

60% over 10 years:

= (1.60)^(1/10) − 1 = 0.0481 = 4.8% per year

Same total ROI — vastly different annualized performance. The 2-year version massively outperforms.

Comparing investments fairly

Always use annualized ROI when comparing:

• Stocks held for different durations
• Real estate vs equity vs fixed deposits
• A 3-year mutual fund vs a 7-year PPF

Common ROI pitfalls

1. Ignoring costs — Brokerage, stamp duty, maintenance costs reduce real ROI
2. Ignoring inflation — 12% nominal ROI with 6% inflation = ~6% real return
3. Survivorship bias — Only counting winning investments in your “average ROI”
4. Comparing different time periods — Use annualized, never simple ROI for comparison

What is a “good” ROI?

Context-dependent benchmarks:

• Fixed deposits: 6–7% (low risk)
• Index funds: 10–12% annualized (moderate risk)
• Direct equity: 15–20% if you’re skilled (high risk)
• Real estate: 8–12% including rental yield
• Anything beating inflation (6–7%) is real wealth creation

Negative ROI

Yes, investments can lose money:

Invested ₹1,00,000, got back ₹80,000
ROI = (80,000 − 1,00,000) / 1,00,000 × 100 = −20%

A negative ROI doesn’t mean the investment was “wrong” — it means you should evaluate what happened and whether the thesis has changed.

Calculate your returns with the OurDailyCalc ROI calculator — it shows simple ROI, annualized return, and net profit.

TL;DR

• ROI = (returned − invested) / invested × 100
• Always annualize for fair comparison: (final/initial)^(1/years) − 1
• Account for costs, taxes, and inflation for “real” returns
• Anything beating 6–7% inflation is creating real wealth