Among the various types of investments, choosing the one that best fits our profile and objectives involves some factors. One of them is concerning income.
What many investors do not know, is that financial institutions, when disclosing the profitability of an investment, generally consider it a gross amount. In other words, administration and custody fees, the Income Tax rate, inflation, and other costs are not shown.
This means that if, for example, we say that an application has yielded a percentage X in the last year, it is very likely that we are referring to a gross rate, without considering discounts. When this happens, the investor ends up not being accurate about the profitability of an application.
The problem can especially affect novice investors. To resolve this issue, there is the Real Return on Investments. This is what we will talk about in this article. Check out!
Tajarat Properties strives to be Pakistan’s biggest real estate developer ever, guaranteeing the highest international standards, prompt execution, and lifetime customer loyalty. For further detail, Park View City is an example.
The real return on investments considers the return on investment with the discount of inflation. And what does inflation have to do with investments?
Simple: inflation interferes with purchasing power. The amount of products you buy with R $100.00 today, in the supermarket, is not the same as 5 years ago.
Inflation is, incidentally, one of the main reasons why you should not let your money standstill. It is also because of it that we cannot make the mistake of investing based on past returns.
So, for you to understand well, note that the real return on investments concerns the net remuneration obtained above the inflation for the period. Knowing it is important for all investments, especially long-term ones.
In addition to the real profitability, there is nominal profitability.
Nominal return is the gross return on an investment over a given period. This is the rate shown when we make our investment. For example, when we invest in a CDB that pays 120% of the CDI, the announced 120% rate is the nominal rate.
Essentially, the difference between the real return on investments and the nominal return is that the first consider inflation.
You will agree that everyone who invests does so wanting, at the very least, to preserve financial assets.
Yeah, It is precisely for this reason that when we invest, we must at least try to maintain purchasing power (that is, the R $100 invested today should, in 5 years, allow us to have the same or more purchasing power. Otherwise, for would we invest?).
To exemplify, suppose that the R $100 invested yielded, at the end of the period in which we left the applied amount, 10%. The investment was therefore updated to R $110.
It turns out that at that time the inflation rate was 5%. With that, we understand that the purchasing power has changed, and to buy what we bought with R $100, we now need more money.
The whole point is that we have R $110, but what was the real profitability, considering the inflation for the period? It is this answer that seeks the calculation of real profitability.
This is precisely the real gain from an investment that makes our assets grow. Thus, we say that it is important to understand the real profitability because the nominal one does not tell the whole story about how much the profitability of the money invested will be.
Following the example above, you may think that to calculate the real return on investments we must subtract the inflation from the rate. In fact, the calculation must also involve the nominal return.
Showing in practice:
To perform the calculation, we must take the final corrected value, which in our example was R $110. Next, we compared the value with the inflationary effect, which was R $105 (R $110 – 5% of inflation).
In the mathematical formula, we have:
With this result, we believe that the real return on investment was 4.76% (and not 10%). The rest of the amount was affected by inflation for the period.
Now, let’s take an investment whose return was 10% in one year. Inflation in the period was 6%.
In the formula, we have:
In the second example, the real return on investment was 3.77%, while the rest was eaten by inflation for the period.
As you saw, inflation ends up compromising the final result of the investment. To maintain purchasing power, especially when the investment is long-term, it may be worth looking for investment alternatives that allow protection against inflation.
The IPCA + Treasury is one of these alternatives, as its profitability considers a fixed rate, plus a percentage corresponding to the accumulated inflation in the period.
Other investments yield a certain rate + IPCA. This is the case of CDBs, LCIs, and LCAs linked to inflation, which are low-risk fixed-income securities.
We emphasize that to seek better real profitability, it is essential to diversify the investment portfolio. Many investors are unaware that asset diversification is a basic principle of building and managing investments.
Financial educator André Bona, on his YouTube channel, explains how and when to make this diversification. Watch the video.
Investing is for anyone, as long as the investor is willing to, first of all, educate themselves financially.
Those who are part of this investment world, already know that many details make a difference. Some of these details are often unknown, as is the case with nominal return and real return on investments.
The phrase “Italy luxury yacht dry drowning” recently made headlines after a tragic incident that…
Selling a domestic can be a frightening, time-eating method filled with challenges, in particular if…
The apparently ideal world of reality TV was rocked recently by a scandal involving well-known…
Pakistani TikHub influencer Imsha Rehman lately removed her social media accounts after her private video…
South Korean artists and fans are shocked by how quickly star Song Jae-rim died. They…
The garment industry is continuously taking new shapes with the changing demand forecasting, consumer behavior,…