Real Vs Nominal Returns

A friend showed me a projection on his phone this morning, properly pleased with himself. Rs 10 lakh growing into Rs 1.7 crore. A clean 17x. Sensible 12 percent assumption, 25 year horizon, nothing fishy in the maths. I didn't want to ruin his coffee. But I had to tell him that 1.7 crore is not really 1.7 crore.

Here is the part the projection screen leaves out. Inflation is running in the background the entire time, quietly resetting what a rupee buys. At a steady 6 percent, prices roughly quadruple over 25 years. So the 1.7 crore he is picturing has the spending power of about 40 lakh in today's money. On the statement, a 17x. In money that actually buys groceries and school fees, closer to a 4x.

The second surprise is how the real return is calculated. Most people do 12 minus 6 and call it 6 percent. It is a ratio, not a subtraction. 1.12 divided by 1.06, minus 1, is 5.66 percent. Looks like a rounding error. Compounded across 25 years it is its own few lakh of difference. The inflation tax is the quietest line item in investing. No statement prints it, no app flashes it, and it takes its cut every single year regardless.

The point is not to scare anyone off equity. It is the opposite. Cash loses this race while standing perfectly still. Equity at least outruns the tax most of the time, which is the whole reason to take the risk. What I'd change is the reading habit. Treat every brochure CAGR as a nominal number, then deflate it yourself before you decide whether it's enough for the goal you actually have.

Your fund did 12 percent. Inflation did 6. You kept 5.66, and that is the number that retires you.

How to read a return properly