Everyone wants to increase their revenue or returns on money invested. That is why, we invest our hard-earned income to multiply its value. Whenever we receive a gain on our investments, we can say that we received Return on Investment (RoI).
To understand RoI, we need to delve into terms such as Income Elasticity of Demand and Systematic Investment Plans. Let us study these concepts and RoI.
Income Elasticity of Demand is an economic metric. It enables us to understand the sensitivity and responsiveness of quantity demanded for a particular good or service to the change in the real income of targeted customers.
We can calculate it by dividing the percentage change in quantity demand for goods or services by the percentage change in income. Typically, normal goods that have Income Elasticity of Demand between zero and one referred to necessity goods and services. These are products and services that customers will buy or avail irrespective of the change in their income levels. For example, goods and services such as tobacco products, grocery, salon services, water, electricity and household services, among others.
Businesses use these metrics to measure the impact of business cycles on their sales.
There are five types of Income Elasticity of Demand. These include;
As the name suggests, a Systematic Investment Plan (SIP) is a financial investment concept. Here, investors systematically invest money in smaller amounts at regular intervals to realise long-term advantages.
Under SIP, the investors make small and regular investments into mutual fund schemes and trading accounts to de-risk their investment. At the same time, they wish to realise long-term benefits with systematic investments.
SIPs work on the dollar-cost averaging principle; brokerages and mutual fund companies offer SIPs. Typically, SIPs require investors to make payments into plans consistently, i.e., weekly, monthly or quarterly.
Moreover, SIPs are passive investment options wherein once you invest the money in a fund, you continue reinvesting into the same. This strategy is irrespective of how the scheme or funds perform.
There are many benefits of a Systematic Investment Plan (SIP). These pros include the following:
There are also many disadvantages of the Systematic Investment Plan (SIP). These cons are as follows:
Return on Investment (RoI) is a performance indicator. We use it to evaluate the profitability or loss from an investment or number of investments.
It is represented as a percentage and has a wide range of applications to measure the efficiency or profitability of an investment.
We can calculate the Return on Investment (RoI) by first subtracting the initial investment cost from the final investment cost. Then we have to divide the computed number (net return) by the cost of investment. Finally, we multiply the result by 100.
We can calculate the RoI using various formulas. Let us see a few of them.
RoI = Net return of investment/Cost of investment * 100%
RoI = Final Value of Investment / Initial Value of Investment
RoI = Net Income / Cost of Investment
RoI = Investment Gain / Investment Base
Let us take an example to calculate RoI using the Investment Gain formula (Fourth Method). Assume a real estate broker purchases a property A valued at Rs. 5,00,000 and after two years, sells the property at Rs. 10,00,000.
RoI = Investment Gain / Investment Base = (10,00,000 – 5,00,000) / (5,00,000)RoI = 1 or 100%
Investors or businesses can use Return on Investment (RoI) for the following:
Using return on investment (RoI) has a slew of benefits.
Uncomplicated: Return on Investment (RoI) is not difficult and easy to understand. This feature of RoI is widely used as the universal metric to measure the efficiency and profitability of investments.
There are a couple of limitations in the measurement of RoI. These limitations include:
When it comes to Return on Investment (RoI), it is vital to understand the income elasticity of demand and SIP.
Income elasticity of demand is an economic metric. It helps businesses determine how the change in the targeted customer’s income affects the market for a good or service. In this article, we saw how to calculate this metric.
SIPs or systematic investment plans are investment schemes. Here, the investors regularly invest a small, fixed amount from their income in mutual funds and trading accounts. It helps diversify their portfolio, reduce risks, and achieve long-term monetary aims.
Investors invest weekly, monthly, or quarterly in a SIP fund. Thus, SIPs enable them to be consistent with their monetary goals.
Finally, Return on Investment (RoI) is a performance indicator. Investors can use RoI to assess their portfolio to identify trends of profit or loss. In this article, we studied four methods of calculating the Return on Investment with an example. We extensively studied its advantages, disadvantages, and applications.
