How it works
Your nominal return is the percentage your money grows by. Your real return is how much more you can actually buy, after prices in the shops have risen too.
Real return = (1 + nominal return) ÷ (1 + inflation) − 1
A common shortcut is to subtract inflation from the nominal return (7% − 6% = 1%). The exact formula gives a slightly smaller number, and the gap grows when both rates are high.
The calculator also shows purchasing power: what a future amount of money would buy in today's prices.
Today's value = future amount ÷ (1 + inflation)^years
Worked example
Worked example: A 7% return with 6% inflation
You invest ₹1,00,000 for 10 years at 7% a year. Inflation averages 6% a year.
| Real return: 1.07 ÷ 1.06 − 1 | 0.94% a year |
|---|---|
| Value after 10 years: ₹1,00,000 × 1.07¹⁰ | ₹1,96,715 |
| In today's money: ₹1,96,715 ÷ 1.06¹⁰ | ₹1,09,845 |
Your money nearly doubles in rupees, but it buys only about 10% more than it does today. Kept as cash earning nothing, the same ₹1,00,000 would buy only about ₹55,800 worth of today's goods after 10 years.
Limitations
- Inflation is not constant. It changes from year to year, and your own cost of living (school fees, rent, medical bills) may rise faster or slower than the official average.
- Taxes are ignored. Tax on returns reduces the real return further.
- The return is assumed steady. Real investments vary year to year.
Use the result to set honest goals: a plan that looks comfortable in rupees can be thin once inflation is taken into account. See setting investment goals.