Gross Rate of Return
Candlefocus EditorThe most common way to calculate the gross return on an investment is to divide the total return by the initial investment, expressed as a percentage. This calculation is known as the return on investment (ROI) and as such, is often referred to as the gross rate of return. For example, if the total return on an investment is $200 for an initial investment of $1000, then the gross rate of return would be 20%.
When comparing investment options, the gross rate of return is useful to understand the return before deduction of costs, such as taxes, inflation, or other fees. Investors can also use the Global Investment Performance Standards to compare different funds on the basis of return characteristics. It is important to note, however, that the final decision should be made by comparing the fund’s net return rather than its gross return. To calculate the net return, the gross return has to be adjusted to account for these other costs.
The key incorporation of the gross rate of return in deciding an investment is that it helps investors to understand the individual components of the return. This includes the interest, dividends, and capital appreciation, which all make up the total return. The goal of any successful investor is to find an investment that will outperform the market, and the gross rate of return is a useful tool to compare different investment opportunities.
It is important to remember that the return generated after all deductions is the best indicator of the fund’s performance. The net rate of return shows the full picture, including the cost of different investments, taxation, inflation, and other items. Although sometimes more difficult to calculate, this is the true measure of the fund’s return and the overall performance.