What is Real Rate of Return?
The Real Rate of Return tells you the actual growth of your money after accounting for inflation. While nominal returns show how much your investment grew on paper, the real rate shows how much your purchasing power increased.
Nominal vs Real Return
- Nominal Return: The return you see on your statement (e.g., 10%)
- Real Return: The inflation-adjusted return (e.g., 10% return in 6% inflation = 4% real return)
Inflation eats into the value of your money over time. That’s why looking at just nominal returns is not enough.
Why Real Return Matters
- Helps you understand actual wealth creation
- Better for long-term financial planning
- Useful for comparing different asset classes
How to Calculate Real Rate of Return
You can calculate the real return using this formula:
Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] - 1
Example: If your investment earned 10% and inflation was 6%:
Real Return = [(1 + 0.10) / (1 + 0.06)] - 1 = ~3.77%
This means even though your money grew by 10%, your real purchasing power only increased by 3.77%.
Asset Class Comparison: Nominal vs Real Returns
| Asset Class | Nominal Return | Inflation | Real Return |
|---|---|---|---|
| Equity Mutual Funds | 12% | 6% | ~5.66% |
| Fixed Deposit | 6.5% | 6% | ~0.47% |
| Gold | 9% | 6% | ~2.83% |
When to Use Real Return
- While planning for retirement goals
- Comparing long-term instruments (e.g., PPF vs NPS vs SIPs)
- Evaluating risk-adjusted performance
Looking only at nominal returns can mislead you into thinking you're earning more than you really are.
Real Return Calculator
Want to try it yourself? Use our Real Rate of Return Calculator to find how your investments stack up against inflation.
Final Thoughts
In the world of investing, what matters most is not what you earn — it’s what you keep after inflation.
“Inflation is taxation without legislation.” — Milton Friedman
Always compare real returns when making financial decisions. It’s the true measure of long-term wealth creation.