Time Weighted Rate of Return (TWRR): Meaning, Formula & Example

When it comes to investing in the share market, the first thing that you usually check is the stability of the company. For this, there are various technical analysis indicators that you can use. But using just these indicators might not be enough. You actually need to identify the returns with respect to time. And this varies for different types of investments. 

This is where the Time Weighted Rate of Return (TWRR) becomes valuable. TWRR helps you measure the true performance of an investment portfolio. It does this by eliminating the impact of cash inflows and outflows. 

Where this money helps you to check the efficiency of your investment, you also need to understand this well to ensure better application. So, what is the TWRR? Well, read this guide to know what it is and how it can be calculated. 

What Is Time Weighted Rate of Return (TWRR)?

The Time Weighted Rate of Return (TWRR) is a method used to measure the performance of an investment. It is done by focusing purely on how the portfolio itself performed over time. It does not take into account when money was added or withdrawn. 

It gives a fair picture of how efficiently the fund manager is handling the investments. This helps you to get a picture of what returns you can expect. Also, it is important to note that it is a result that is obtained after removing the effects of investor behavior.

In short, it is the measure that shows you the compound growth rate of a portfolio over multiple periods. This makes it ideal for comparing fund managers or strategies across different time frames.

Key Features of TWRR

• Removes Cash Flow Impact: It ignores deposits and withdrawals made by the investor, showing only portfolio performance.

• Accurate Manager Evaluation: This helps to check the performance of the fund manager. It does not take into account the investor activity.

• Period-Based Measurement: The portfolio return is divided into sub-periods. Then each is weighted equally in time.

• Ideal for Comparisons: It is quite useful for comparing multiple portfolios or funds over the same duration. It helps with portfolio rebalancing as well.

• Reflects Compound Growth: This is a metric that shows how investments grow over time on a compounded basis.

Time Weighted Rate of Return (TWRR) Formula

To understand the Time Weighted Rate of Return (TWRR) better, it is important to know the formula as well. So, to start with, let us think of it as a way to calculate how your investments performed. This is based on the idea that no deposit or withdrawal is going to impact the fund's performance.

So, in the simplest terms, it considers the start and end value of the amount and avoids all the changes in between. Then it divides those into smaller segments, and for each segment, the start and end amount is considered for calculation.

The Formula is Now

TWRR = [(1 + R?) × (1 + R?) × (1 + R?) × ... × (1 + Rn)] - 1

Here

• R?, R?, R?... represent the return earned in each sub-period.

Now, to understand this better, we first need to look at the steps that are followed when you are looking to calculate the Time Weighted Rate of Return.

How to Calculate Time Weighted Rate of Return (TWRR)

To calculate the Time Weighted Rate of Return (TWRR), there are certain steps to follow. These are quite simple, and when followed properly and systematically, you will be able to gain the desired outcomes well. 

So, here are the steps that you would need to follow when you are trying to calculate the TWRR.

Step 1. Divide the Investment Period into Sub-Periods

Understand and divide the entire investment time properly. Each time you add or withdraw the funds, you will find a new sub-period. So, these points will be the end and start of a sub-point. 

Step 2. Calculate Return for Each Sub-Period

Now that you have the sub-periods, it is time you start calculating for each period. This is what you would need to do here:

R = [Ending Value - Beginning Value - Cash Flow] / Beginning Value 

Step 3. Convert Each Return into a Growth Factor

Add 1 to each sub-period return (for example, 10% becomes 1.10, 5% becomes 1.05).

Step 4. Multiply All Growth Factors Together

Multiply all the sub-period growth factors, then subtract 1 from the result to get the overall time-weighted return.

To understand this in an even clearer manner, let us now look at the simple example over here. 

Example of TWRR

Suppose you invest Rs. 1,00,000 in January. Now, this is indeed the first amount you invest, which is followed by some additional investments. 

Now, around March, your investment grows to Rs. 1,10,000. You are gaining greatly from the power of compounding.

For better returns, you plan on additional investment. You now plan for another lumpsum investment. 

You now add Rs. 40,000. This takes your total portfolio to Rs. 1,50,000.

As you reach June, you get a new portfolio value. It is now at Rs. 1,65,000.

So, now the question is TWRR. So, let us now follow the simple calculator steps here.

Step 1: First, calculate the returns for each period. If you see, there are two periods mainly. 

• For the first period: (1,10,000 – 1,00,000) / 1,00,000 = 10%

• For the second period: (1,65,000 – 1,50,000) / 1,50,000 = 10%

Step 2: Apply the formula.

TWRR = [(1 + 0.10) × (1 + 0.10)] - 1 = (1.21 - 1) = 0.21 = 21%

So, your Time Weighted Rate of Return is 21%. This shows how efficiently your portfolio performed overall, ignoring the effect of your extra investment.

Pros and Cons of Time Weighted Rate of Return (TWRR)

The Time Weighted Rate of Return (TWRR) is a reliable method for assessing portfolio performance. But using this alone might not be enough. If you are really looking forward to the actual outcomes, you need to club it with other metrics as well. 

You can check the mutual fund fact sheet for the same. But if you are using TWRR, you must know its pros and cons as well. These are listed here.

Pros of TWRR

• Removes the effect of deposits and withdrawals, giving a fair view of portfolio performance.

• Helps accurately evaluate a fund manager’s skill without investor timing bias.

• Shows compounded growth of investments over multiple periods.

• Accepted globally as a standard method for performance measurement.

• Allows easy comparison of different funds or strategies over the same period.

Cons of TWRR

• Complex in nature due to the need for precise sub-period data.

• Ignores how investor timing affects actual returns received.

• Needs regular and accurate valuation data to avoid errors.

• Not apt when the cash flows are irregular in nature.

• Not very practical for individual investors without automated tools.

Conclusion

The Time Weighted Rate of Return (TWRR) is one of the most valued and reliable methods to help you with portfolio evaluation. This helps investors and fund managers understand true portfolio efficiency. All this happened by removing the influence of deposits or withdrawals. 

Yes, this indeed takes effort and time for calculation. But it gives a clear, unbiased view of how well your investments have been managed. And if you are looking for an effective calculator, you might need expert support. 

This is where you can explore investment insights and tools with Rupeezy. This is your trusted platform for smarter trading and investing decisions.

FAQs

What is the main difference between TWRR and IRR?

TWRR removes the impact of cash flows. On the other hand, IRR includes them to measure the actual return experienced by the investor. 

Is TWRR suitable for mutual fund investors?

Yes, TWRR is ideal for evaluating mutual fund performance. This is mainly because it isolates fund management efficiency from investor behavior.

Can TWRR be negative?

Yes, TWRR can be negative. This can happen if the value of the portfolio declines over the period of investment.

Does TWRR consider dividends or interest earned?

Yes, TWRR includes all income. This includes incomes such as dividends, interest, and capital gains reinvested during each period.

Why do professionals prefer TWRR over simple return?

Professionals prefer TWRR because it provides a fair and consistent measure of performance, unaffected by the timing of cash inflows or outflows.