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Difference between inflation-adjusted return, tax-adjusted return and internal rate of return?

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Difference between inflation-adjusted return, tax-adjusted return and IRR?
The expected return from an investment that drives decision of an investor is to be computed considering different integral factors that eventually determine actual and final return from an investment. And calculation accounting such factors enable us realize that whether we should head with the investment or not. So, return on assets assumes different forms and knowledge of each for arriving at an investment decision is crucial.

 

Inflation-adjusted return: Also referred to as real rate of return, this form of return accounts for inflation and provides what an investor is going to earn keeping inflation into consideration. And it is suggested that if an investment instrument does not earns a return at par with likely rate of inflation in future course, it hardly makes sense to deploy money towards it. And with rate of inflation in a country like India standing at approximately 10% on an year-to-year basis, any instrument or asset with less than 10% return should not qualify for investment.

Bank fixed deposits that on an average provide a pre-tax rate of return of 9.5% p.a in the current scenario when the CPI inflation for the month of November stands at 11.24% yields negative real rate of return.

Tax-adjusted return: With tax-implications on almost every investment made with some exceptions, for a regular investor, tax-adjusted return should be the basis for deciding on whether to head for the investment purchase or not. And instruments yielding similar returns but with different tax implications should be well looked upon as tax on interest earned on different instruments considerably eats into otherwise earned income from the investment and it instead makes sense to invest in tax-free instruments such as tax-free bonds when compared to other instruments providing similar yield subject to other considerations per se the investment.

Internal rate of return (IRR): Not an apt parameter to consider for from an investor's point of view as the same is suitable for fund managers and other high profile professionals in the industry to consider.

 

IRR computes effective compounded rate of return or the yield from the capital earmarked in an investment instrument on an annual basis. More generally, IRR is computed by firms for deciding on their capital budgeting decisions.

GoodReturns.in

Story first published: Thursday, December 19, 2013, 14:41 [IST]
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