TIME WEIGHTED RATE OF RETURN

WHAT IS IT?

It is important to calculate the rate of return on investment to determine how well it did over a period of time. The popular methods to do so are simple return or the internal rate of return (IRR). TWRR is also a method of calculating portfolio returns but is different.

HOW IS IT DIFFERENT?

While most of us invest at regular intervals, we also redeem from time to time. In such cases, calculating a simple point-to-point return may not work; neither would it be accurate to calculate an IRR because that assumes that all the money is reinvested at the same rate of return, which may not be the case. What TWRR does is calculate returns for every period before an addition or a withdrawal.

HOW IS IT CALCULATED?

Suppose you invested a fixed amount at the start of a month and then added another amount to that investment on the 15th day of the month. The formula to calculate the return of a single period is as follows: (End value - start value – net cash flow)/(start value +.5*cash flow). Here, end value is the value at the end of the month, start value is the value at the beginning of the month and cash flow is any addition and redemption made. The figure 0.5 has been taken because the addition was made on the 15th of the month; assuming 30 days in the month, the weight is 15/30 or 0.5. Once all such period returns are calculated, they are linked together geometrically with another formula to arrive at the overall annual return. You can also calculate returns daily and then

link them. LISA PALLAVI BARBORA