InvestmentFinancial Glossary
Real Rate of Return
Definition
The investment return after adjusting for inflation, representing the actual increase in purchasing power. Calculated approximately as Nominal Return minus Inflation Rate. A 10% FD return during 6% inflation gives a real return of only 4%. If taxes consume another 3% (for the 30% slab), the post-tax real return is just 1%.
Why It Matters
Real returns reveal whether your money is actually growing in purchasing power terms. Many Indians invest primarily in FDs and PPF, which offer 7-8% nominal returns. After 6% inflation and 30% tax on interest income, the real post-tax return is often near zero or negative. This invisible erosion is why equity allocation is essential for long-term wealth creation.