What is a real return?▾
The return after inflation — what your money can actually buy afterwards. The exact formula is Real = ((1 + nominal) ÷ (1 + inflation)) − 1. Subtracting inflation from the nominal rate is a close approximation at low rates and drifts as both rise.
Why does subtracting inflation give the wrong answer?▾
Because returns and inflation both compound, so they interact rather than simply offsetting. At 12% nominal and 6% inflation, subtraction gives 6% but the true real return is 5.66%. The gap widens as the numbers get larger.
Can a real return be negative while the nominal return is positive?▾
Yes, and it is common. A deposit paying 6% while inflation runs at 7% has a positive nominal return and a negative real one — the balance grows while its purchasing power shrinks.
Which inflation rate should I use?▾
For a general answer, headline CPI. For a specific goal, the inflation of that goal: education and healthcare have historically risen faster than headline inflation in India, so planning either against CPI understates what you will need.
Is a real return the same as XIRR or NPV?▾
No, they answer different questions. XIRR gives the annualised return of an irregular series of cash flows; NPV discounts future flows to today at a required rate. A real return adjusts a return you already have for inflation. You can and often should combine them — compute XIRR first, then adjust that figure for inflation here.
