What is an Inflation-Adjusted Return?
Inflation-adjusted return represents the real growth of your investment after accounting for inflation.
While nominal return shows raw percentage gains, real return shows your actual increase in purchasing power.
Why Calculate Real Returns?
- Understand the true growth of your investments
- Compare different investment options accurately
- Plan for long-term financial goals that account for rising prices
- Make informed decisions about risk and return trade-offs
How It's Calculated
The formula used to calculate real return is:
Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] - 1
For example, with a 12% nominal return and 6% inflation:
Real Return = [(1 + 0.12) / (1 + 0.06)] - 1 = 0.0566 or 5.66%
Understanding Your Results
- Positive real return: Your investment is growing faster than inflation
- Negative real return: Your investment is losing purchasing power
- Zero real return: Your investment is just keeping pace with inflation
Frequently Asked Questions
What is an inflation-adjusted return?
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It is the real growth of your investment after removing the effect of inflation, showing your actual increase in purchasing power rather than just the nominal percentage gain.
How is real rate of return calculated?
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Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] - 1, expressed as a percentage.
Why does my FD show a negative real return?
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If your fixed deposit's interest rate is lower than the inflation rate, your money grows in number but loses purchasing power, resulting in a negative real return.
