This guide explains general concepts for educational purposes. It is not financial, tax or legal advice, or a recommendation to buy, sell, hold or change a financial product or strategy. It does not take into account your objectives, financial situation or needs. Rules, caps, thresholds and product terms can change. Check the current official information and obtain advice appropriate to your circumstances before making a financial decision.
Income return
Income return is money produced by an investment while you hold it. Examples include interest from cash and fixed-interest investments, rent from property, dividends from shares and distributions from managed funds.
The amount and reliability of income vary between investments. A high headline yield may reflect greater risk and should not be considered separately from possible changes in the investment’s value.
Capital growth or loss
Capital growth occurs when an investment rises in value; a capital loss occurs when it falls. The gain or loss generally becomes realised when the investment is sold, although managed-fund distributions can also include realised capital gains.
Tax treatment depends on the investment, ownership structure, holding period and current law. Capital growth is not guaranteed, and an investment can be worth less than its purchase price.
Understanding total return
Total return combines income with the change in capital value. It provides a more complete comparison than looking only at yield or price growth.
The result that matters is the return remaining after fees, tax and inflation, considered alongside the risk taken and the timeframe for the goal. Tax rules and personal outcomes can change, so obtain current tax and financial advice before acting.
The period and calculation method matter
A one-year return describes a different period from an annualised return over several years. Annualising expresses a multi-year outcome as a yearly rate; it does not mean that the same return occurred every year. Contributions and withdrawals can also affect the investor's personal experience compared with a published product return.
Reported figures may be before or after particular fees and taxes. Comparing like with like requires consistent periods, treatment of income and the same basis of calculation. A high income yield by itself does not establish a high total return if the investment's capital value has fallen.
Nominal returns and purchasing power
A nominal return measures the change in dollar value. A real return considers the effect of inflation on what those dollars can buy. Retirement planning is concerned with purchasing power because spending needs change over time, even when a bank balance appears stable.
Returns also vary from period to period. An average can conceal a difficult sequence of results, especially when money is being withdrawn. The timing of income and withdrawals is therefore relevant alongside the headline rate when explaining how an investment supports a financial goal.