Why Adjust for Inflation?
Imagine you have ₹1 Lakh today. You can buy a certain amount of goods with it. In 10 years, due to inflation (price rise), the same goods might cost ₹1.8 Lakhs. This means the Purchasing Power of your money has decreased.
Standard SIP calculators show you the "Nominal Return" (e.g., ₹2.49 Crores). But in 20 years, ₹2.49 Crores will obviously look like a big number, but it won't buy you a ₹2.49 Crore luxury villa of today's standards. It might just buy a 2BHK. This calculator shows you the "Real Value" of your money in today's terms.
The Formula for Real Rate of Return
To calculate inflation-adjusted returns, we use the specific formula:
If your mutual fund gives 12% return and inflation is 6%, your real rate of return is NOT just 12 - 6 = 6%. It is slightly lower: 5.66%.
Key Takeaway for Investors
- Don't feel rich seeing big numbers: Always account for 6-7% inflation when planning long-term goals like retirement.
- Invest in Equities: Only Equity Mutual Funds (12-15%) have the potential to beat inflation significantly. Fixed Deposits (6-7%) barely scratch the surface, often yielding negative real returns post-tax.