Definition and examples of the gross rate of return
How the gross rate of return works
Gross rate of return vs. net rate of return
Definition and examples of the gross rate of return
The gross rate of return is your investment return before considering expenses such as fees and commissions. You can use this measure when monitoring the performance of a particular investment. However, the net rate of return, which takes these costs into account, provides a more accurate picture of your overall returns.
How the gross rate of return works
The gross rate of return on investment can help you determine whether the investment is gaining value. But you also need to know the net rate of return, as small fees can accumulate and reduce your returns.
When thinking about the expected rate of return, you should consider investment costs rather than just using the gross rate of return. Be sure to inquire about commissions and transaction fees before opening a brokerage account.
Gross rate of return vs. net rate of return
The gross rate of return shows you the overall return on your investment. This includes interest and any income generated by the investment. The gross rate of return can give you a general picture of how a fund or other investment has performed over time.
However, since the gross rate of return does not take expenses into account, it does not tell you how much money you will take home. Therefore, you need to know the net rate of return. This rate informs you how much your investment grows after accounting for fees, as these fees reduce your profits.
Both types of returns are valuable for investors to know. The gross rate of return is quicker and easier to find. It can be useful when considering a new investment or comparing it to other options. But the net rate of return gives you a more accurate and comprehensive picture of the investment’s performance over time.
Keys to understanding
- The gross rate of return is the return on investment before expenses such as commissions or fees.
- Conversely, the net rate of return produces a more accurate picture of investment returns because it accounts for expenses.
- Investments with higher costs require a higher gross rate of return than investments with lower costs to achieve the same overall performance.
Sources
- U.S. Securities and Exchange Commission. “Rate of Return Definition.” Accessed Dec. 9, 2021.
- University of Washington. “Introduction to Computational Finance and Financial Econometrics: Return Calculations,” Slide 17. Accessed Dec. 9, 2021.
- Investor.gov. “Mutual Fund Fees and Expenses.” Accessed Dec. 9, 2021.
Source: https://www.thebalancemoney.com/gross-rate-of-return-5212526
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