As per Investopedia the real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors.
Real Rate of return is the Nominal Rate of return minus Inflation Rate.
The real rate of return is very important when selecting the financial instrument for saving your money.
Suppose your Fixed Deposit (FD) gives you 7 percent and you’re in the 30% tax bracket then your return is 4.9 percent after tax.
Now if inflation for that period is 4 percent, your real return of return is just .9 percent.
Hence you managed to almost beat inflation by investing in a 7 percent FD.
Direct Equity and Equity Mutual Funds tend to give 10-12 percent in the long run and have better taxation rules hence helps in beating inflation better than a FD. But your capital itself is linked to the market and hence is subjected to Market Risk.
Striking a balance while investing between these two Assets is important.
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