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Why a 12% return can beat a "great" year, depending on where you started

The difference between nominal and real returns, and why the headline percentage rarely tells the whole story.

9th September 2026   |   Read time: 8 mins

Why a 12% return can beat a great year

Quick Summary

  • Nominal return is the percentage your investment earns before accounting for inflation.
  • Real return shows how much your purchasing power actually grew after inflation.
  • A lower nominal return can deliver a higher real return when inflation is lower.
  • For example, an 18% return with 13% inflation gives a real return of about 4.4%, while 12% with 4% inflation gives about 7.7%.
  • For long-term goals, looking beyond headline returns can help you understand what your investment growth may actually be worth.

Someone mentions their portfolio did 18% last year, and yours did 12%, and for a second it feels like you did something wrong. Here's the thing though: that comparison is missing a variable that matters more than most people realise: inflation. A 12% return in a low-inflation year can genuinely leave you better off than an 18% return in a high-inflation one.

This article is for educational purposes only and should not be treated as investment advice. Investors should consult an independent financial advisor before making investment decisions.


What's the difference between nominal and real returns?

A nominal return is the number you see on your statement, the raw percentage your investment grew by. A real return adjusts that number for inflation, showing you how much your purchasing power actually increased. If your investment grew 12% but prices in the economy also rose 6% that year, your real gain would be lower than 12%. To understand the actual impact on your purchasing power, you need to adjust the return for inflation using the appropriate formula rather than simply subtracting the two percentages.


How does inflation actually eat into a return?

Inflation raises the cost of everything, from groceries to school fees to rent. If your money grows slower than prices rise, you're technically earning a positive nominal return while losing purchasing power in real terms. The formula used to calculate this properly is: real return equals (1 plus nominal return) divided by (1 plus inflation rate), minus 1. It's not a simple subtraction, though subtracting inflation from the nominal figure gets you a rough estimate that's usually close enough for a quick gut check.


A simple illustration: Two years, very different real outcomes

Say in Year One, an investment returns 18% nominally, and that year inflation runs high at around 13%. Using the formula, the real return works out to roughly 4.4%.

Now say in Year Two, the same investment returns a more modest 12% nominally, but inflation that year is lower, around 4%. The real return here works out to roughly 7.7%.

Nominally, Year One looks better. In real terms, Year Two actually left the investor better off. The "great" 18% year did less for actual purchasing power than the "ordinary" 12% year did.


Why does this matter when comparing fund or portfolio performance?

Comparing two years, or two funds, purely on nominal returns can be misleading if the inflation backdrop was different. A fund that returned 12% during a low-inflation stretch may have delivered a better real outcome than one that returned 15% during a high-inflation stretch. This is especially relevant for long-term goals like retirement or a child's education, where what matters isn't the number on the statement but what that number can actually buy years from now.

The SEBI investor education page on inflation explains this concept in more detail and is a useful independent resource if you want to go deeper into how inflation interacts with long-term financial planning.


What does this mean for how you plan long-term goals?

When you're setting a target for a long-term goal, using a nominal return assumption without accounting for inflation can leave your plan short of what you actually need. If you're mentally telling yourself "my investments will grow at 12% a year, so I need X amount," it's worth asking what that 12% looks like once inflation over the same period is factored in. If you're still setting up the basics before you get to this stage, our beginner's guide to opening a demat account is a reasonable starting point.


Final thoughts

The headline return number is useful, but it's not the full picture. Two years with very different nominal returns can leave you in a similar real position, or a lower nominal return year can genuinely outperform a flashier one once inflation is accounted for. Getting comfortable with this distinction makes it easier to judge your own portfolio fairly, rather than chasing whichever number sounds bigger.

If you're ready to start investing with this in mind, you can open an account through Chola Securities via the KYC portal.

Disclaimer: Cholamandalam Securities Limited (CSEC) is a SEBI-registered stock broker and depository participant. CSEC does not provide investment advisory services. Investors are advised to consult an independent financial advisor before taking any investment decisions.


Frequently asked questions

Only if inflation for that period was exactly zero, which is rare in practice. In most years, the real return will be somewhat lower than the nominal return.

A quick estimate is nominal return minus inflation rate. For a more precise figure, use the formula: (1 plus nominal return) divided by (1 plus inflation rate), minus 1.

Inflation figures, typically based on the Consumer Price Index, are published by government sources and widely reported in financial news. It's worth checking a current, reliable source rather than relying on an old figure.

No. Different asset classes respond differently to inflation. Some tend to hold up better during inflationary periods than others, though this varies by market conditions and isn't guaranteed.

Both are useful. Nominal returns show what your statement says, while real returns show what that growth actually means for your purchasing power. Looking at both gives a fuller picture.

Nominal returns are simpler to calculate and compare directly, since inflation data can vary by source and time period. It's a useful habit to mentally adjust for inflation yourself when comparing performance across different years.