Nominal Return

Nominal return is the figure most often quoted. If an investment grows from 10,000 to 10,700 in a year, its nominal return is 7%.

Nominal returns are straightforward and easy to compare, but they can be misleading over time because they ignore changes in purchasing power. A 7% return is excellent when inflation is 2%, but much less impressive when inflation is 6%.

The relationship between nominal return, real return and inflation is simple in approximate form: nominal return is roughly real return plus inflation. An investment that must preserve and grow purchasing power therefore needs a nominal return above the inflation rate.

Nominal returns can also be quoted before or after fees and taxes. A fund's headline return may be before some costs, and an investor's actual return will be reduced by any tax they pay.

When comparing investments over long periods, or across countries with different inflation rates, real returns usually give a clearer picture of how much wealth has actually grown.