Many readers are often confused between the concept of yield and return. Generally, they sound similar when discussing in regards to investment decisions. However, there is a difference between Return and Yield.

Return is basically backward-looking in nature whereas Yield is forward-looking in nature.

Simply, a return is defined as a quantity of amount an investment generates over time. In other words, how much an investment gains or loses over the period of time, reflecting as the difference in the holding amount dollar value.

Yield is the amount of income an investment generates during a given period, reflected in the percentage (%).

The real rate of return is the return earned on an investment. It is the annual rate of return considered along with the rate of inflation and the percentage of taxes paid. The rate of return considered eliminating the inflation rate and the percentage of taxes paid is known as the Nominal rate of return.

Before making an investment decision it is highly important to understand the real rate of return on investment as the inflation rate can reduce the time value of money. For example, an Rs.100 return earned today on an investment will not value the same as the Rs. 100 earned one year down the line.

The real rate of return is based on the formula of Nominal Interest Rate (%) - Inflation Rate(%)

In this regard, the Nominal Rate of Return is always greeted than the Real Rate of Return.

For example, an investment increases by 1% and inflation increases by 2% an investor is actually losing money in real terms even though if the investment has clinched in the value. It is always important to compare the investment return with the inflation return.

Real Rate of Return matters:

The real return gives you the actual return investment is generating. This gives you an in-depth picture of the investment caliber. It gives an accurate picture of investment performance as compared to the nominal rate of return.

In today’s time, the rate of inflation is beyond 5% which means the value of money reduces as time passes by and taxes certainly take a lot of chunk out of it.

However, before investing it is important to understand the objectives behind investing as well as your risk appetite that impacts the outcome of an investment.

Bondskart has a team of experts that guides you through investment decisions.