An NPS Tier I account earns a nominal return of 8% per annum. The prevailing inflation rate is 3%. Using the simplified approximation of the Fisher Effect, what is the approximate real rate of return?

The simplified Fisher approximation states: Real Rate ≈ Nominal Rate − Inflation Rate = 8% − 3% = 5%. The Fisher Effect, formulated by economist Irving Fisher, expresses that nominal interest rates reflect both the real rate of return and expected inflation. The more precise Fisher formula is: (1 + Nominal) = (1 + Real) × (1 + Inflation), which gives a slightly different answer, but for examination purposes where calculators are not available, the approximation Nominal minus Inflation is the standard approach. In pension fund management, distinguishing between nominal and real returns is critical because the real return determines the actual growth in purchasing power of the subscriber's corpus.