What is real return?
Real return is the annual return on an investment after adjusting for the eroding effect of inflation. It measures the true increase in purchasing power — the only metric that matters for long-term financial health. A fixed deposit earning 7% when inflation is 6% delivers a real return of approximately 0.94%, meaning the investor’s purchasing power is barely growing.
In India, where inflation has averaged 5–6% over the past two decades, distinguishing nominal from real returns is essential. An equity mutual fund quoting 12% nominal CAGR may appear attractive, but its real return of 5–7% paints a more realistic picture of wealth creation.
The real return formula
This calculator uses the Fisher equation, the globally accepted method for computing real returns: