InvestorQ : How many types of returns are there in finance?

# How many types of returns are there in finance?

1 year ago
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Return in general means any money that is gained or lost on one’s investment over a particular period. A positive return represents gain, while a negative return means a loss on investment. Generally, returns are annualized for better comparison.

So, returns are classified as:

Real return: Under this return, all adjustments regarding changes in prices due to inflation or external are made. It expresses nominal return in real terms due to which the purchasing power of a given level of capital remains constant. It is crucial to know the real rate of return before making any investment, as that is the actual return one gets after adjusting all factors.

Nominal Return: This is the net profit or loss of an investment that is generally expressed in nominal terms. It is not as complicated as a real return and can find out just by figuring the change in investment value over a period of time, adding any distributions, and deducting any cash outflows.
Distributions can be in the form of dividends, interest, rent, rights, benefits, or any other cash inflows to the investor.
Besides the two types of returns, there are also return ratios which are a subset of financial ratios that measure how effectively an investment is being managed. These are:

Return on Investment (ROI): This is a return expressed in percentage and is the return per rupee invested. You can measure it by dividing the return in rupees by the initial investment. Say, initial investment = Rs 5000, Return = Rs 250.
So, ROI = 250/5000*100 = 5%

Return on Equity (ROE): This ratio denotes profitability on average net shareholder’s equity. So, it calculates how much income is generated per equity invested. Say, if the net income generated is Rs 10,000 and investment in equity (capital) is Rs 1,00,000, ROE turns out to be 10%.

Return on Assets (ROA): This ratio is calculated by dividing the net income by the average total assets so that we can find out how much income is generated per rupee of asset invested.
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