{"id":921,"date":"2019-10-04T23:56:29","date_gmt":"2019-10-04T18:26:29","guid":{"rendered":"http:\/\/blog.budwisefunds.com\/?p=921"},"modified":"2020-12-07T17:03:18","modified_gmt":"2020-12-07T17:03:18","slug":"difference-between-nominal-and-real-rate-of-return","status":"publish","type":"post","link":"https:\/\/budwisefunds.com\/blog\/difference-between-nominal-and-real-rate-of-return\/","title":{"rendered":"Nominal rate  Vs Real rate: Difference between nominal and real rate of return?"},"content":{"rendered":"\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Simply put, the nominal rate of return is the return which an investor earns on his\/her investments. While on the other hand real rate of return is the return which is adjusted for inflation.<\/span><\/p>\r\n<p><strong><span style=\"font-size: 24px;\">Further Reading: <a href=\"https:\/\/mutualfundsahihai.org\/\" target=\"_blank\" rel=\"noopener noreferrer\">Mutual Fund Sahi hai<\/a><\/span><\/strong><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">The real rate of return exhibits true picture to the investors simply because it accounts for inflation. <\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">The value of money descends over a period of time and hence inflation should be taken into consideration inevitably while planning for investments.<\/span><\/p>\r\n<p><script async=\"\" src=\"https:\/\/pagead2.googlesyndication.com\/pagead\/js\/adsbygoogle.js\"><\/script> <ins class=\"adsbygoogle\" style=\"display: block; text-align: center;\" data-ad-layout=\"in-article\" data-ad-format=\"fluid\" data-ad-client=\"ca-pub-6495755798120621\" data-ad-slot=\"6499025866\"><\/ins> <script>\r\n     (adsbygoogle = window.adsbygoogle || []).push({});\r\n<\/script><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\"><strong>WHY REAL RATE OF RETURN <\/strong><\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Consider a situation where you want to buy a car after 5 years costing \u20b910,00,000 in present terms and decided to invest based on that current price only. But after 5 years will the cost of that car will be the same? The answer is a big no (ignore exceptions that might arise due to slowing economy). <\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">The price of that car will be definitely on a higher side at any future date due to the inflation. Let\u2019s say for example, the return you are getting on your investments is 12% and the price of that car is expected to rise by 8% every year. <\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">So effectively you are earning only 4% (12%-8%) on your investments as most part of your return is getting set off by inflation. <\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">In other words, your purchasing power is only increasing by just 4%. Henceforth, instead of taking nominal return, one should consider the only the real rate of return to get a true picture.\u00a0<\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\"><strong>REAL RATE OF RETURN ON FD\u2019s<\/strong><\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Most of the investors look only for nominal returns that they are getting on their investments and not the real returns, which actually they should look for before making any investment. <\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Let us consider the example of the most popular financial instrument among investors of all ages i.e. fixed deposit (FD).<\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">If you will consider only nominal returns on your FDs then you will definitely find a rise in the absolute value of your investments, but is this increase in amount affects your future purchasing power? Probably not.<\/span><\/p>\r\n<p><img loading=\"lazy\" class=\"aligncenter wp-image-924 size-full\" src=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-1.png\" alt=\"\" width=\"823\" height=\"506\" srcset=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-1.png 823w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-1-300x184.png 300w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-1-768x472.png 768w\" sizes=\"(max-width: 823px) 100vw, 823px\" \/><\/p>\r\n<h2 class=\"entry-title\"><strong><span style=\"font-size: 24px;\">Also Read: <\/span><\/strong><a href=\"https:\/\/budwisefunds.com\/blog\/what-is-sovereign-gold-bond-scheme-a-complete-overview\/\" rel=\"bookmark\">Sovereign Gold Bond: What is it? A complete overview<\/a><\/h2>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Suppose you have invested \u20b91,00,000 in a 5 year FD which is yielding 7%. So after 5 years the investment value will rose to \u20b91,41,477. An increase of \u20b941,477 over 5 years, satisfied? Many of you would be, but it is only a mirage. Now let us look at a true picture of it.<\/span><\/p>\r\n<p><img loading=\"lazy\" class=\"aligncenter wp-image-925 size-full\" src=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-2.png\" alt=\"\" width=\"822\" height=\"507\" srcset=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-2.png 822w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-2-300x185.png 300w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/11\/difference-2-768x474.png 768w\" sizes=\"(max-width: 822px) 100vw, 822px\" \/><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Now consider inflation @6% and take real rate of return {<strong>1.11%<\/strong> (1.0718\/1.06)-1} then the value of your investments would only be \u20b91,05,720 after 5 years, which in turn means a rise of only\u00a0 \u20b95,720.<\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\"> Well this time most of you would not be satisfied with the returns but it is the real purchasing value of your overall investments.<\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\"><strong>NOTE: &#8211; FD returns are compounded on a quarterly basis hence for calculation we have converted nominal returns into effective returns. The effective return is nothing but the annual returns achieved after considering multiple compounding.<\/strong><\/span><\/p>\r\n<p><script async=\"\" src=\"https:\/\/pagead2.googlesyndication.com\/pagead\/js\/adsbygoogle.js\"><\/script> <ins class=\"adsbygoogle\" style=\"display: block; text-align: center;\" data-ad-layout=\"in-article\" data-ad-format=\"fluid\" data-ad-client=\"ca-pub-6495755798120621\" data-ad-slot=\"6499025866\"><\/ins> <script>\r\n     (adsbygoogle = window.adsbygoogle || []).push({});\r\n<\/script><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\"><strong>CONCLUSION<\/strong><\/span><\/p>\r\n<p style=\"text-align: justify;\"><span style=\"font-size: 20px; color: #000000;\">Nominal return is always on a greater side than the real rate of return and hence, we get a higher future value of our investments. But in order to get a fair reflection of your investment value, the investor should always ponder upon real return as it offers a better measure of investment performance. Inflation is not only the sole factor for this but our lifestyles and demand also keeps on changing or rather increases with the increase in the income which necessitates the use of real return. The real return will only help the investors in identifying the real value of their money which is adjusted for inflation.<\/span><\/p>\r\n<p><strong><span style=\"font-size: 24px;\">Further Reading: <a href=\"https:\/\/www.mutualfundssahihai.com\/en\/what-kind-returns-should-one-expect-mutual-funds\" target=\"_blank\" rel=\"noopener noreferrer\">Mutual Fund Sahi Hai<\/a><\/span><\/strong><\/p>\r\n<p><img loading=\"lazy\" id=\"dbnarror\" class=\"size-medium wp-image-562 aligncenter\" src=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-300x88.png\" alt=\"\" width=\"300\" height=\"88\" srcset=\"https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-300x88.png 300w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-1024x299.png 1024w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-768x224.png 768w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-1536x449.png 1536w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-2048x598.png 2048w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-1200x350.png 1200w, https:\/\/budwisefunds.com\/blog\/wp-content\/uploads\/2019\/08\/download-pdf-button-1-1980x578.png 1980w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>Simply put, the nominal rate of return is the return which an investor earns on his\/her investments. While on the other hand real rate of return is the return which&hellip; <\/p>\n","protected":false},"author":1,"featured_media":2073,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[10],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v19.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Nominal rate Vs Real rate: Difference between nominal and real rate..<\/title>\n<meta name=\"description\" content=\"the nominal rate of return is the return which an investor earns on his\/her investments. 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