Investment Ratio Calculation — A First Look
Imagine you and a friend decide to start a small business together. You put in ₹50,000, and your friend puts in ₹30,000. At the end of the year, you make a profit of ₹16,000. How should you split it?
The fair answer is not "half each" — you put in more money, so you should get a larger share. That's the entire intuition behind investment ratios: profit is shared in the same proportion as the money invested.
The Core Idea
An investment ratio is simply a comparison of the amounts different people (or groups) put into a venture. If you invest ₹50,000 and your friend invests ₹30,000, the ratio of your investment to theirs is:
50,000:30,000
Like any ratio, you simplify it by dividing both sides by their common factor (here, 10,000):
That's your investment ratio. It tells you that for every ₹5 you put in, your friend put in ₹3.
From Ratio to Profit Share
Now, how does this ratio translate into actual money? The total investment is ₹80,000. Your share of the total is:
80,00050,000=85
Your friend's share is:
80,00030,000=83
So the profit of ₹16,000 is split as:
- You: 85×16,000=₹10,000
- Friend: 83×16,000=₹6,000
Notice that 10,000:6,000 simplifies to 5:3 — the same as the investment ratio. Profit is always divided in the ratio of investment.
Share of profit=Total investmentIndividual investment×Total profit
When Investments Are for Different Durations
Here's where it gets slightly more interesting. What if you invested ₹50,000 for the full year, but your friend invested ₹30,000 only for the last 6 months? Is it still fair to split profit 5:3?
No — because your money was at work for twice as long. The solution is to convert each investment into an equivalent "money × time" unit, called the product.
- Your product: 50,000×12=6,00,000 (rupee-months)
- Friend's product: 30,000×6=1,80,000 (rupee-months)
Now compare these products:
6,00,000:1,80,000=20:6=10:3
That's the effective investment ratio. Profit is now split in the ratio 10 : 3, not 5 : 3.
Never ignore time when investments are made at different points. The ratio of amounts alone is only valid when everyone invests for the same duration.
The Precise Statement …