Learn how to calculate return on invested capital, basic and simple explanations on how to know the rate of return on your investments.
There are numbers of legitimate investment opportunities in your country, whether in the bank or other financial institutions are offering investments. The only things you should consider are the rate of return and the risks involved.
When you decide to invest your money in different investment vehicle, have you asked yourself, how much does these investments will cost you per month or per year? Or have you ever asked yourself, when is the possible time period (date) to get the return on your investments.
Let us assume you are investing in different investment vehicles such as stocks, mutual funds, trust account in the banks, time deposits, forex exchanges, gold investments, real estate and business enterprises.
Calculate Return on Invested Capital
You have 5 companies in your stocks portfolio, and you decide to invest money amounting to $2,500 for company stock A, $3,000 for company stock B, $2,500 for company stock C, $7,500 for stock D and $12,000 for stock E. How much is your invested capital in the stock market? Your total investment capital in the stock market is $27,500.
You also have a mutual fund investment amounting to $3,000 for mutual fund dollar bond fund and $8,000 for equity types of mutual fund. You have a total capital investment of $11,000 for mutual fund investment.
You have invested money amounting to $12,000 in the unit investment trust funds in the bank and another $10,000 for time deposits. Your total investment capital in the bank is amounting to $22,000.
You decide to invest in forex exchange amounting to $50,000 and expecting a rate of return of 8% per year. Aside from forex exchange, you bought an expensive gold worth $100,000 and expect it to sell $107,000 after a year.
You bought a real estate properties, in Hawaii you have 1 beach resort amounting to $1,700,000 and in Manhattan New York, you have 1 apartment amounting to $750,000. Your total capital investment in real estate is $2.45 Million
You also decide to invest in business, you started your food manufacturing company with a total capital investment amounting to $300,000. Can you calculate now how much is your total investment capital?
- Stock Market: $27,500
- Mutual Fund: $11,000
- Unit Investment Trust Funds: $12,000
- Time Deposits: $10,000
- Forex Exchange: $50,000
- Gold Investment: $100,000
- Real Estate A (Hawaii): $1,700,000
- Real Estate B (Manhattan): $750,000
- Business Capital: $300,000
- Total Investment Capital: $2,960,500
Now, the question is, if in these different investment vehicles, you are earning an annual return of specific rates, how would you calculate the average rate of return on your investments?
Stock Market: 12% annually
Mutual Fund: 13% annually
Unit Investment Trust Funds: 9% annually
Time Deposits: 2% annually
Forex Exchange: 8% annually
Gold Investment: 7% annually
Real Estate: 7% annually
Business Capital: 12% annually
Average Rate of Return: 8.75%
Formula: Add each rate of return and divide by number of investment vehicles.
Now let us calculate return on invested capital. This simply means, knowing how much money you gained or profited. I have to write the total investment capital in each investment vehicle and the rate of return, then, compute the total amount gained.
- Investment-Total Investment Capital-Rate of Return-Amount Gained
- Stock Market: $27,500 X 12% = $3,300
- Mutual Fund: $11,000 X 13% = $1,430
- Unit Investment Trust Funds: $12,000 X 9% = $1,080
- Time Deposits: $10,000 X 2% = $200
- Forex Exchange: $50,000 X 8% = $4,000
- Gold Investment: $100,000 7% = $7,000
- Real Estate Investments: $2,450,000 X 7% = $171,500
- Business Capital: $300,000 X 12% = $36,000
- Total Investment Capital: $2,960,500 X 8.75% = $259,043.75
The average gain is 8.75%, the total investment capital is $2,960,500, therefore, the total amount (money) gained is $259,043.75. The highest rate of return is mutual fund (13%) but the highest amount gained is real estate ($171,500). This means, when investing, you decide which investment vehicles that suit your needs and help you achieve your financial goal. You don’t need to take high risk as long as you know which investment instrument will really help you in achieving financial freedom, and make sure you invest based on your capability in taking risk.
Note: Taxes are not included in this basic computation, do your own research and investigation and ask the financial experts before making any investment decisions. To make things easy, you can use financial calculators online on the other financial websites.
I hope this example will help you find out how to calculate return on invested capital. If you find this guide useful, consider subscribing to InvestmentTotal newsletter to receive daily updates via eMail. Thank you.