Inflation-Adjusted Returns: The Only Return That Actually Matters

A 7% return sounds good — until inflation quietly takes it away. Real wealth is created only when returns beat inflation.

Quick takeaway
Nominal returns lie. Inflation-adjusted (real) returns show whether your money is actually growing in purchasing power.

What Are Inflation-Adjusted (Real) Returns?

Inflation-adjusted return, also called real return, measures how much your wealth grows after accounting for rising prices.

Scenario What it means
Nominal return Return shown by bank, fund or app
Inflation Increase in cost of living
Real return Your true purchasing-power growth
⚠️ If your investment return is equal to inflation, you are not growing richer — you are standing still.

Why Real Returns Matter More Than Nominal Returns

Most Indians track only the interest rate printed on FDs, mutual funds or portfolio dashboards.

Nominal returns ignore:

❌ An investment that feels “safe” can still slowly destroy your wealth.

How to Calculate Real Return

The correct formula is:

Real Return (1 + Nominal Return) ÷ (1 + Inflation) − 1

Example: If your investment earns 12% and inflation is 6%:

✅ Real return ≈ 5.6%

Inflation in India: The Reality

India’s retail inflation (CPI) has historically averaged around 5–7%.

⚠️ Any investment earning below ~6% before tax is likely delivering a negative real return.

Which Assets Beat Inflation in India?

Asset Real return potential
Equity mutual funds High (long term)
Direct equities High (volatile)
Real estate Mixed, location-dependent
Gold Inflation hedge, not growth
Bank FDs Usually negative after tax

A Simple Inflation Example

You invest ₹1,00,000 and earn 12% in one year. Inflation during the same period is 7%.

⚠️ Your money becomes ₹1,12,000 nominally, but its purchasing power is only ~₹1,05,600.

How to Evaluate Investments Properly

Always compare investments using:

🎯 Once you start thinking in real returns, investment decisions become clearer and calmer.

Inflation is silent but relentless.
Real return is the only metric that tells the truth.