Your parents talk about the price of a cup of tea when they were your age. You laugh, and then you remember what a movie ticket cost when you were in school. Prices move. Slowly, every year, in one direction.
That simple fact changes how you should read every rate of return you are ever quoted.
The headline rate
Every return is quoted in rupees: this much a year, that much over five years. Your goals are priced in rupees too, a home, a child's education, retirement, but those prices keep rising. So the headline rate on its own is the wrong number to judge an investment by. Two things come off it first.
Tax takes the first cut
Interest, dividends and capital gains are each taxed differently, and what you pay depends on your income slab and how long you hold. Two investments with the same headline rate can leave you with quite different amounts. The figure worth comparing is the one after tax. Our guide to tax-saving mutual funds covers the current rules for equity funds.
Inflation takes the second
School fees, medical bills and groceries cost more each year. If your growth after tax does not keep up with those prices, you end up with more rupees that buy less. Nothing in your statement shows it, which is exactly why it catches people out.
What is left: your real return
What remains after tax and inflation is your real return: how much more you can actually buy. That is the number worth comparing, and the one that decides whether a goal is reached.
- Look at returns after tax, for your own slab and holding period.
- Compare them with how fast the prices you care about are rising: fees, rent, health care.
- Money for the next year or two has a different job: your emergency fund should be boring.
- Money for long goals has to do more than keep its rupee value.
None of this says any one kind of investment will beat inflation; none can promise that. It says what the benchmark is. If you would like to look at your own numbers after tax, talk to us.
Inflation is the benchmark, not the headline rate.