Date: 2026-07-04, Saturday, 01:29 PM
Tags: Learn new financial topics
This is basically the topic I used to talk with friends and colleagues. It’s a topic that’s tossed around, but I never really actually sat down and did the numbers.
Nominal return: it is the amount of cash that I get after a return from the investment.
1 Lakh at 10% return from share market after a year gives me 1,10,000.
On paper, I have Rs. 1,10,000 on hand, but the value of money has decreased due to inflation. The same Rs. 1,10,000 has greater value today than the same amount a year after. Eg: tomatoes may cost Rs. 50 per kg today, but may cost Rs. 60 per kg next year. Today, 1,10,000 can get me 2200 kg of tomatoes, after a year 1,10,000 can get me just 1833.33 kg of tomatoes.
It means the amount is same, but the value decreases due to inflation.
Every time I calculate return, I need to check the real return instead of nominal return.
Rough formula:
Actual formula:
Say, the nominal (the one I thought was the return) is 10% from share market and inflation rate is 6%.
Using rough formula,
Using actual formula, Real = = =
So my real return is not 10%, it’s 3.77% (or roughly 4%).
The important realisation should be that if my money is earning just 3% return on savings account while the inflation rate is 6%, my money is actually losing its value every year by roughly 3%. Holding cash can give you a sense of relief—The Psychology of Money says that we are reasonable beings not rational, though spreadsheet says I’m losing 3% each year, my reasonable brain says that it’s okay cause at least I have an emergency fund—but keeping all the money in bank is just losing the value of money.