What Is the Gross Rate of Return?

DEFINITION
The gross rate of return is your investment return before you factor in expenses, such as fees and commissions.

The gross rate of return is your investment return before you factor in expenses, such as fees and commissions. You may use this metric when monitoring the performance of an investment. However, the net rate of return, which accounts for these costs, provides a more accurate snapshot of your overall returns.

Understanding the difference between the gross rate of return and the net rate of returns can help you assess your investment portfolio. Learn how to use these numbers to be a smarter investor.

Definition and Examples of Gross Rate of Return

Your gross rate of return is your profit or loss on an investment, expressed as a percentage. This rate is often calculated once per year, in which case it would be called the annual rate of return. However, the gross rate of return can be calculated for any duration you want, such as every month or every quarter.

• Alternate names: Gross returns, nominal returns

There are two types of rate of return:

1. Gross rate of return: Your returns on an investment before you account for expenses. Your returns typically will include capital gains as well as income, such as dividends and bond coupon payments.
2. Net rate of return: Your returns on an investment after accounting for investment costs, including commissions and fees.

The gross rate of return is often the simplest to calculate. You can find the gross rate of return over any period of time using the following formula:

(Ending Value - Starting Value) / Starting Value = Gross Rate of Return

For example, suppose you invest \$1,000 in Company XYZ stock. After one year, your investment is now worth \$1,200. Using the formula above, and assuming your investment didn’t generate income, your gross rate of return would be:

\$1,200 - \$1,000 = \$200

\$200 / \$1,000 = 0.2

0.2 x 100 = 20%

If you used an online stock broker that offers commission-free trades and doesn’t charge a fee, your gross rate of return would be the same as your net rate of return. If your investments have a sales load, though, you’ll also need to subtract those expenses from the ending value of your stock.

A sales load is a commission that’s paid to a broker who sells a mutual fund. There are two main types of sales loads: front end and back end. A front-end load is paid when you purchase fund shares. A back-end load is paid when you redeem your shares.

Suppose you paid a \$10 commission when you made your purchase. Your net rate of return would be:

(\$1,200 - \$1,000 - \$10) / \$1,000 = 0.19, or 19% net rate of return

How Gross Rate of Return Works

The gross rate of return on an investment can help you determine whether an investment is gaining value. But you need to know the net rate of return as well, as even small fees can add up and lower your returns.

For example, imagine you invested \$100,000 and earn an 8% gross rate of return every year. If you had no fees, your investment would grow to over \$466,000 after 20 years.

But if you’re charged a 0.5% annual fee on that same investment over 20 years, that changes things. While your gross rate of return is still 8%, your net rate of return would be 7.5%. By the end of 20 years, you’d have just \$424,785. That’s a difference of more than \$40,000. An investment with a high fee will need to generate higher gross returns than a low-cost investment to produce the same result.

When you’re considering your expected rate of return, you need to account for your investment costs instead of just using the gross rate of return. Be sure to ask about commissions and transaction fees before you open a brokerage account.

Inflation is another factor you need to account for when evaluating your investment performance. Inflation lowers the purchasing power of each dollar. That means your rate of return needs to be higher than the rate of inflation for the value of your money to increase.

If you’re thinking about buying shares in a mutual fund, read through the fund’s prospectus before making a decision. The prospectus will include a fee table that shows the fund’s sales load along with its operating costs. This is often referred to as the expense ratio. The prospectus may include both a gross expense ratio, which reflects the normal costs you pay, along with a net expense ratio, which may include temporary fee waivers or reimbursements.

The gross rate of return is a helpful number for understanding the performance of a stock or mutual fund. But it’s not the only thing that matters. Take time to understand all rates of return, including those that account for fees and commissions, before you make any new investments.

Gross Rate of Return vs. Net Rate of Return

The gross rate of return shows you the total return on your investment. This includes both interest and any income the investment generates. The gross rate of return can give you a broad picture of how well a fund or other investment does over time.

But since the gross rate of return doesn’t take expenses into account, it does not tell you how much money you would take home. For that, you need the net rate of return. This tells you how much your investment grows once fees are taken into account, as those reduce your gains.

Both types of returns are valuable for investors to know. The gross rate of return is quicker and simpler to find. It can be useful when you are initially considering an investment or comparing it to other options. But the net rate of return gives you a more accurate and fuller picture of how an investment will perform over time.

Key Takeaways

• The gross rate of return is the return on an investment before expenses, such as commissions or fees.
• By contrast, the net rate of return produces a more accurate snapshot of investment returns because it factors in expenses.
• High-cost investments require a higher gross rate of return than investments with low costs to yield the same overall performance.

Article Sources

1. U.S. Securities and Exchange Commission. “Rate of Return Definition.” Accessed Dec. 9, 2021.

2. University of Washington. “Introduction to Computational Finance and Financial Econometrics: Return Calculations,” Slide 17. Accessed Dec. 9, 2021.

3. Investor.gov. “Mutual Fund Fees and Expenses.” Accessed Dec. 9, 2021.