The real return formula

A client we have known for many years opened our last review meeting in the way most clients do. He had pulled up his portfolio the night before, run his eye down the right-hand column, and worked out — correctly — that he had earned a little over fourteen percent on his equity book in the year just ended. He said this with the quiet satisfaction of a man who had checked the math himself. And he was right. That was the number on the statement.

It was not, however, the number he had earned.

What the statement does not say

The statement quotes a nominal return — the headline change in the value of what you own, before anything else has been subtracted. To turn that number into the one that actually compounds your family's wealth, four things have to be taken out. They are not new, they are not contested, and every senior partner in this industry knows them. They are simply not, in our experience, part of the conversation as often as they should be.

Nominal return	14.0%
Less: inflation (household, ~6%)	−6.0%
Less: long-term capital gains tax (12.5%)	−1.7%
Less: expense ratio (regular plan, ~1.7%)	−1.7%
Real, after-tax, after-cost	≈ 4.6%

The fourteen percent is real. So is the four-and-a-half. They are simply describing different things, and only one of them is what a family can spend.

The four leaks

The first leak is inflation. A six-percent nominal return at six-percent inflation is no return at all. We use household inflation rather than the headline CPI because it is closer to what families actually experience — education, healthcare, domestic help, club fees, and travel all rise faster than the index. For most HNI families in our book, the working assumption is six to seven percent. It is a floor, not a forecast.

The second leak is tax. The arithmetic became blunter after the 2024 budget: long-term capital gains on equity above the small annual threshold are taxed at 12.5%; equity-oriented mutual funds redeemed after a year sit at the same rate; debt funds bought after April 2023 are taxed at slab. Whatever one feels about the policy, the post-tax number is the only one that lands in the family's account.

The third leak is cost. The total expense ratio of an actively managed equity mutual fund in the regular plan sits between one and a half and two percent a year. Compounded over a decade, it is the difference between, say, thirteen percent and eleven — and on a meaningful corpus, that difference funds a child's education abroad. We do not think this means active management is never worth its fee. We do think the fee should be visible, and weighed against the conviction it is paying for.

The fourth leak is the hardest to put a number on, and the most consequential of the four. It is the behavioural gap — the persistent shortfall between the return a fund delivers and the return its investors actually realise, because they buy after it has done well and sell after it has done badly. Across most studies of Indian equity funds, the gap is between one and two percent a year. For the family that switches schemes often, it is more.

The fourteen percent is real. So is the four-and-a-half. Only one of them compounds.

Why nobody quotes the real number

There is a reason the real number is not on the statement, and it is not a conspiracy. It is conversational physics. Nominal returns are easy to quote, easy to compare, and pleasing to deliver. Real returns require a footnote, a tax assumption, a fee disclosure, and an honest conversation about behaviour. They make the messenger look smaller, even when the family ends up larger.

The result is an industry-wide habit of speaking in numbers that nobody can spend. It is not dishonest — the numbers are real — it is just incomplete. And incompleteness, repeated quarterly for thirty years, becomes a kind of slow misdirection that nobody quite intended.

What we are doing about it

Every quarterly review at Accrue begins with the nominal number, and then walks through the four subtractions out loud. We do not particularly enjoy this. The number gets smaller every time, and there is no chart in the world that makes a four-percent compounding rate look as good as a fourteen-percent one.

But it is the only number a family can plan on. A retirement corpus, a spending plan, a decision about whether the children's education abroad is fundable from the portfolio or requires a top-up — all of these have to be built on the real, after-tax, after-cost number. Built on the nominal number, they fail quietly, ten or fifteen years from now, when nobody can remember why the math ever felt right.

The most important number on a wealth statement, in the end, is the one that is not on it. Putting it there — clearly, every quarter, without flinching — is, we think, much of what being on your side of the table is for.