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Definition

The return on an investment before taking the effect of inflation into account. Thus, if an investment is purchased for 1000c and sold a year later for 1100c with a 50c dividend, the return is 150c made on an investment of 1000c - which is a nominal 15% per annum. If inflation is 5% then the real return, after inflation, is 10% p.a. Obviously, it is important to consider the real return from an investment rather than its nominal return - especially if inflation is particularly high. Investors in fixed income investments which earn interest, but have no capital appreciation often mistakenly think of the interest on the investment as income - whereas in reality that income must be reduced by the impact of the inflation on the purchasing power of the capital invested.

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