what does the nominal rate of return tell you 
the nominal rate of return helps investors gauge the performance of their portfolio whether it s comprised of stocks bonds or other investments the nominal rate of return strips out outside factors that can affect performance such as taxes and inflation by using the nominal rate of return investors can compare the performance of different investments over different time periods that might have different inflation rates tracking the nominal rate of return for a portfolio or its components helps investors to see how they re managing their investments over time the after tax rate of return of an investment takes the effect of taxation on the investment s returns into account in most cases investors pay different amounts of tax on investments based on the investment how long the investment was held and the investor s tax bracket as a result the two investors may face different after tax rates of return on their investment even if it is the same investment with the same nominal rate of return also different investments will have different tax rates applied to them if an investor is comparing a municipal bond with a corporate bond whereby both bonds have the same nominal rate of return their after tax return is markedly different in most cases municipal bonds are tax exempt while income from corporate bonds is subject to taxation as a result if the irs taxes the corporate bond the rate of return will be significantly less than the rate of return on the municipal bond because the corporate bond is subject to capital gains tax example of a nominal rate of returnlet s say an investor placed 100 000 in a no fee fund to be invested for one year at the end of the year the investment was worth 108 000 given the market price at the end of the same year 108000 100000 100000 0 08 8 frac left 108 000 100 000 right 100 000 0 08 8 100000 108000 100000 0 08 8 the difference between the nominal rate of return and real rate of returna real rate of return is the annual percentage return realized on an investment which is adjusted for changes in prices due to inflation or other external factors adjusting the nominal return to compensate for factors such as inflation allows you to determine how much of your nominal return is a real return conversely the nominal rate of return strips out outside factors that can affect performance such as taxes and inflation limitations of the nominal rate of returnthe nominal rate of return doesn t include inflation or taxes when calculating the performance of an investment for example if an investment earned 10 over one year but inflation was 2 5 for the same period the actual rate of return would be 7 5 or 10 2 5 inflation although the nominal rate return is an important metric when comparing the performance of multiple investments it should be used in tandem with the real rate of return to make sure that investment gains are not being eroded by inflation or rising prices 