Return on investment, the net income created by any sort of financial investment that seeks a return is referred to as profitability. But do you actually understand how to calculate the return on your investments? This formula is critical for determining which options are now the most lucrative.
Whatever investment choices you pick, you must get a preview of the potential return on investment, as stated below.
What are the investor profiles?
Before you can invest and calculate your return, you must first understand your investor profile. The market often classifies them into:
- conservative (very risk averse);
- moderate (willing to take little or medium risk);
- bold (takes high risks).
There are additional suggested investments for each profile. Government bonds are the most recommended investments for the most cautious investors. Bank Deposit Certificates (CDB), Real Estate Letters of Credit (LCI), and fixed income products are suitable for the moderate.
A brave investor, on the other hand, prioritises multimarket funds, which strive to increase investment diversity. Fixed income, currencies, equities, and commodities are all options, both in Brazil and outside.
How to calculate the return on investment?
An asset is defined as the ratio of net revenue earned (after taxes) to the amount invested. Simply put, you must consider how much you get in comparison to the entire amount spent.
It is important to understand how to measure an investment’s profitability for two reasons: to control the risks involved and to guarantee that the returns are sufficient in regard to the investment plan. Let’s look at an example to aid you.
R$ 1,000.00 was invested, yielding R$ 15.00 every month. As a result, the total value at the conclusion of the term is R$ 1,015.00. The account may be created immediately by dividing the revenue by the invested capital:
BRL 15.00 BRL 1,000.00 = 0.015 (or 1.5%) of total income
For those who like math, the following equation may be used to determine profitability:
Profitability = Net Income x 100 / Amount Invested
In this example, we would have:
15 X 100/ 1000 = 1.5%
In other words, customers who invest their money in our example investment get a monthly return of roughly 1.5 percent.
What is real profitability?
In order to achieve more realistic profitability, one incredibly significant and critical issue must be considered: inflation. As a consequence, real profitability is defined as the result obtained after discounting the inflation rate corresponding to the time in question.
That instance, if, in our example, inflation was 2% over the time, profitability would have been lost due to the price rise. This is not to say that there was no profit, but that the money invested lost buying power over time.
What is nominal profitability?
The nominal profitability is the result of directly computing the profitability. As a result, it disregards inflation. At the same time as it simplifies things, this method of calculating the return on an investment ignores the influence of inflation on the buying power of the money invested over time.
What is the difference between profitability and profitability?
Another phrase worth distinguishing is profitability, which is sometimes used interchangeably with profitability but is not. Profit on an investment is defined as money that falls into the investor’s account, becomes accessible for use, and fluctuates according to the amount invested.
In principle, the bigger the quantity invested, the greater the likelihood of profit. Profitability is expressed as a proportion of how much your equity has risen over time.
What variables affect profitability?
A variety of variables, including the aforementioned inflation, might make determining the profitability of an investment more difficult. As a result, these factors should be mentioned.
For example, it is typical for certain programmes to pay the investor interest in advance. Others provide more profitability over time. On the other hand, the fees paid for certain kinds of investments, as well as the taxes imposed on the earnings gained, must be considered.
How to choose the most profitable investments?
The investor must examine the risk of the investment in order to provide the best destination for their money. In general, fixed income funds hold 90 percent of their assets with fixed or floating yields. The return is assured in this setup, although it is smaller than the return produced by variable income assets.
In this view, it is typical to define that a solid fixed income investment must pay at least 100% of the CDI, a financial market rate that is virtually always related to the SELIC, the national economy’s fundamental interest rate. The larger the gain above this reference, the better the return on investment.
Aside from fixed income, there are moderate and high risk funds, for example, geared at resource allocations in currency rates and stock exchanges. They may have substantially larger returns, but this is accompanied by the danger of losses.
When there is significant inflation, it is critical to seek assets that are connected to inflation indicators such as the General Market Price Index (IGPM) and the Broad Consumer Price Index (BCPI) (IPCA). These options assist you in increasing your true profitability.
After reviewing the fund’s and the investor’s profiles, you must examine the profitability of the securities in which the fund invests. From there, just compare your profits over time to your specific earnings targets.
While previous performance does not guarantee future results, it is worthwhile to examine the fund’s history. At this stage, it is critical to do the profitability analysis using the formulas described above.
There are also quantitative funds that make choices based on a set of algorithms. In this scenario, the goal is to maximise the potential of Artificial Intelligence exploitation. As a result, it is an example of using technology to boost the likelihood of success in asset selection.
Another option to explore is to invest in consortia, which provide several financial benefits. It is possible to get what you want with the consortium without incurring financial losses, since there is confidence that you will be considered and will have access to the funds invested.
How to use interest to your advantage?
Compound interest can be the villains or heroes of your finances. For those who are in debt, they can be eternal enemies. In some cases, they make the debt grow very quickly, generating the famous snowball effect.
However, you may take advantage of them by investing in options that make interest on interest work in your favour. Look for assets that use this computation formula, such as:
- Direct Treasury Bonds;
- CDB (Bank Deposit Certificate);
- LCAs (Agribusiness Letters of Credit);
- LCIs (Mortgage Letters of Credit).
There is an addition here about the securities traded on the Stock Exchange. Based on the regular accumulation of compound interest, this sort of investing also produces excellent profits over lengthy periods of time.
It is important to note that the success associated with the exponential increase of profitability created by this sort of asset is dependent on two factors. The first is the amount of securities invested, since the natural trend is defined by dividend reinvestment. The second component is inextricably tied to the value of each share.
Interest is compounded, but the explanation is straightforward: for any investment to have the desired impact, equities must rise in value. Anyway, this explains some of the reasons why stock investment still gives a high return. However, it is critical to assess the hazards, which are substantial.
Never, ever give up on diversity (ie, distributing your money across different investments to “dilute” the risks). Another useful suggestion is to never use an application’s previous success as a promise of future results. When making investment choices, using what has occurred in the past as a parameter is beneficial, but such values should not be seen as an expectation for the future.
What does it take to start investing?
Finding the greatest strategy to make your money work is dependent on adjusting your personal finances. To summarise, you must depend on sound financial management methods. It makes no sense, for example, to make financial donations without ensuring for the payment of all obligations.
Another critical step is to establish extremely defined goals and objectives. Both must circle their realities, since aiming at extremely distant objectives is pointless. You may travel far, but first focus on gradually becoming out of position. Prepare a decent financial plan and, most importantly, make saving part of your habit.