Nominal return
What is it?
It is the financial return of an investment without taking into account inflation or other factors that may affect the purchasing power of money. Nominal return is the basic calculation of an investment’s return, expressed as a percentage of the capital invested. This type of return does not adjust for price variations or the cost of living, so it does not reflect the real impact of inflation on the value of money.
Although nominal return is useful for calculating the gross return of an investment, it does not provide a complete view of the real return, as it does not account for the purchasing power of money over time.
Key aspects to consider
One of the limitations of nominal return is that it can give a distorted view of the real performance of an investment, especially in high inflation contexts. If the nominal return of an investment is 5% but inflation is 3%, the real return (adjusted for inflation) will only be 2%. Therefore, nominal return may seem positive, but in terms of purchasing power, the return could be much lower.
It is crucial for investors to also evaluate the real return, which adjusts the nominal return considering inflation, in order to get a more accurate picture of the true value of their returns. Additionally, some investors may want to compare nominal returns with those of other assets or indices to assess the competitiveness of the investment.