How to calculate Real Rate of Return?

Did you know?
Most of you are happy with the returns that you earn on your investments. But is that Real Rate of Return? Have you actually earned that much Percentage (%) return?

What is Real Rate of Return?
Real Rate of Return is return, which you earn net of Inflation. We should always calculate real return on investment, because on one hand we are earning return on investment and on the other hand we have ever on the move Inflation. So, we should calculate what returns we earn on hand. If the real rate of return on investment is negative or zero then there is no point investing in such instrument.

How to calculate Real Rate of Return?
Real Rate of Return can be calculated with two formulas. But we will explain you basic formula, which does not require any kind of calculation.

Real Rate of Return = Return on Investment – Inflation Rate

Illustration:
Mr. Raj has invested in a Fixed Deposit @ 9.50% p.a. The current inflation rate is 8% p.a. What is the Real Rate of Return?

Solution:
Real Rate of Return = Return on Investment – Inflation Rate
                                   = 9.50% - 8.00%
                                   = 1.50%

So, the real return that you earned on you investment is 1.50% p.a. assuming inflation stands @ 8% p.a.