Ch.10 · Benchmarks and Performance Evaluation · medium
What is the 'real rate of return' and why is it important for long-term investors?
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EXPLANATION
Real rate of return = Nominal return - Inflation. If a debt fund returns 7% and inflation is 6%, the real return is only 1% — the investor's purchasing power barely grew. Equity funds that deliver 12-15% CAGR in a 6% inflation environment generate 6-9% real returns, genuinely growing wealth. This is why equity is recommended for long-term goals — to beat inflation meaningfully.
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