Adjusted Returns on Investment
If someone asking you, What is your monthly pay check or Salary ?
Then, we are hesitated to tell or show the exact numbers on salary, even after our deduction from salary 🙂 . We are thinking about that we are protecting our income numbers !
That’s not a matter, either showing the pay slip or not. But, on our Investment info, we have to be careful about the returns on numbers we earned it. We just enjoying to show this much returns i had on my investments or I had a profit of XXXXX from my investments. But, do you know what is your real returns received on your hand ?
Returns on Investment can by type of:
- Inflation Adjusted
- Tax Adjusted
- Risk Adjusted
It is the return earned after taxes paid. It also hurts you on paying taxes from your earned income or returns, so reducing the return ratio that comes to your hand.
Usually, Tax Adjusted Returns are lower than the Nominal Returns due to the tax have been paid.
If we had a return of 10 % by an investment amount of Rs. 100 /- and the Tax implication at 30 % (Higher), then
Earned Interest Rate – 10 %
Tax to pay – 30 % of Rs. 10 = Rs. 3 /- [ i.e 10 X 30 / 100 = 3]
So, our Post Tax returns would be approx. 7 %
We can go through this below formula for Tax Adjusted Returns:
Tax Adjusted Returns (TAR): Earned Interest Rate X (1 – Tax Rate)
10 % X ( 1 – 0.30) = 7 %
Why we need to do this calculation ?
When you are going to choose an investment product, we have so many products like Bank FDs, Bonds, Stocks, Mutual Funds, Realty, Gold, etc. We should aware about our Tax Status also to get the Real rate of return.
Suppose, A Bank FD pays you 8 % per annum and the Tax Free bond gives you 7 % p.a, and the Stock pays you 10 % Dividend yield for your investment amount of Rs. 100 /-
Post Tax Returns are:
Bank FD – 5.6 % (After Tax bracket of 30 % at higher)
Tax Free Bonds – 7 % (Totally Tax Free)
Stocks – 10 % (Dividend is free on investor’s hand)
Tax Adjusted Returns are depend upon the investor’s Tax Status. So we can compare the different type of investments and put our money on good-self.
It depends on how much risk we can make on our investments. Usually, Higher Risk indicates to High risk adjusted return, so he will be able to earn a higher return. The Risk Free rate of return is also followed, where the Risk Adjusted returns have the excess return. Excess Return is used to calculate as the excess of the investment return over this risk free rate. Technically in financial markets, there are two types of Risk Adjusted Ratio (measuring) are,
- Sharpe Ratio
- Treynor Ratio
Be clear on your Adjusted Returns next time 🙂