When your mutual fund shows a 12% annual return, it feels like you’ve made it, right? The numbers look great on paper, your SIP is growing, and everything seems to be going just fine.
But here’s a truth bomb:
Even after earning 12% per annum, you might still be losing money.
Sounds shocking? Let’s break it down.
The Illusion of “Good Returns”
Suppose you invested ₹6 lakhs over time — through a SIP or lump sum. After 5 years, your investment grows to around ₹10.52 lakhs, assuming a consistent 12% CAGR (Compound Annual Growth Rate).
At first glance, this seems like solid growth — a gain of over ₹4.5 lakhs. People often take this number and start feeling financially confident. Some even start planning holidays or upgrades.
But here’s what they miss: This figure is not your real earning.
Tax and Inflation — The Hidden Killers
We often forget that what we see is not always what we get.
Let’s now subtract two invisible forces that quietly eat into your wealth:
- Capital Gains Tax
- Inflation
1. Long-Term Capital Gains (LTCG) Tax (As of 2025)
From July 2024, the Government of India revised the LTCG tax on equity mutual funds:
- 12.5% LTCG on gains exceeding ₹1.25 lakh per year
- No indexation benefit
2. Inflation: The Silent Eroder
Inflation in India averages around 6% per year. That means what costs ₹100 today will cost ₹134 in 5 years. So, unless your money grows faster than inflation, your purchasing power actually falls.
Let’s Crunch the Numbers
| Particulars | Amount (₹) |
|---|---|
| Investment | ₹6,00,000 |
| Value after 5 years @12% CAGR | ₹10,52,000 |
| Capital Gain | ₹4,52,000 |
| LTCG Exemption (as per new rule) | ₹1,25,000 |
| Taxable Gain | ₹3,27,000 |
| LTCG Tax @12.5% | ₹40,875 |
| Post-Tax Value | ₹10,11,125 |
| Value after adjusting for 6% inflation | ~₹7,50,000 (approx.) |
| Real Gain | ~₹1.5 lakh over 5 years |
| Effective Real Return (CAGR) | ~5.2% |
So, while your investment showed a 12% return, your actual real return is just around 5%.
And this is before considering fund fees or exit loads!
What Most Investors Overlook
The mutual fund industry often showcases CAGR in bold. But CAGR is a nominal number — it doesn’t account for real-life factors like tax or inflation.
Most retail investors:
- Don’t factor in LTCG
- Don’t adjust for inflation
- Celebrate the “growth” without understanding the actual value added
This isn’t just a math problem. It’s a mindset gap.
Why Real Return Matters
Let’s say your money grows at 12% but inflation is 6%, and LTCG takes another 1.5% yearly on average.
Your effective wealth growth is barely 4.5% — and that’s not enough if you’re aiming for major goals like retirement, children’s education, or buying a home.
Remember:
“It’s not about how much you earn, but how much you keep — and what it can buy in the future.”
Smart Investors Think Differently
To really grow wealth, you must look beyond headline returns. Here’s how savvy investors do it:
1. Use Tax-Efficient Investment Vehicles
- Index Funds: Less portfolio churn = lower realized capital gains
- ELSS (Equity Linked Saving Scheme): Comes with ₹1.5 lakh deduction under Section 80C + LTCG applies only on actual withdrawals
- Long-Term Holding: Avoid frequent buying/selling which triggers capital gains
2. Always Adjust for Inflation
When setting financial goals, don’t just say “I need ₹50 lakhs in 10 years.” Ask:
- “What will ₹50 lakhs be worth in 10 years after 6% inflation?”
- Use real return calculators to plan better
3. Look at Real CAGR
Before celebrating a 12% return, ask:
- What’s the post-tax return?
- What’s the post-inflation return?
- Is it aligned with my financial goal timeline?
The Mindset Shift You Need
Most people are emotionally driven investors. If their fund shows a ₹3 lakh profit, they think they’re rich.
But real investors think long-term:
- They focus on wealth preservation and growth
- They evaluate investments based on net gain in purchasing power
- They’re realistic about taxes, fees, and market risks
Real investing is not about feeling good — it’s about doing the math.
Key Takeaways
- A 12% CAGR doesn’t mean a 12% profit in real life.
- After the new 12.5% LTCG rule and 6% inflation, your real return may drop to ~5%.
- Always calculate post-tax, post-inflation returns before judging performance.
- Use tax-efficient strategies and review your portfolio with real growth in mind.
Final Thoughts
So, the next time someone says, “My SIP gave me 12% returns,” smile politely — and ask,
“Is that before or after tax and inflation?”
Because true financial literacy begins when you stop chasing shiny numbers and start understanding value.
For more no-fluff, honest financial content, follow Easy Finance on YouTube and visit easygyaan.com — where we simplify money, investing, and everything in between.
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