Investing Term

Time-Weighted Return (TWR)

Definition

A return measure that removes the effect of cash-flow timing by linking the portfolio's growth over each holding period. It reflects the fund manager's performance and is the basis of the returns shown in mutual fund factsheets.

Mathematical Formula

TWR=∏k=1n(1+Rk)−1TWR = \prod_{k=1}^{n} (1 + R_k) - 1

Context & Practical Application

What is Time-Weighted Return? (Simple Terms)

Time-weighted return (TWR) measures how well the fund itself performed. It ignores when you added or withdrew money: the portfolio is valued before each of your cash flows, and the growth in between is linked together.

Whether you put in ₹1,00,000 as a lump sum or added it in instalments, the fund shows the same TWR. It is the manager’s score, not yours.

Understanding Time-Weighted Return

Fund factsheets show TWR-style numbers, the fund’s own growth, which makes them the fair yardstick for comparing managers. Your experience can differ: the size and timing of each SIP instalment shape what your money earned, and that personal figure is the money-weighted return.

Your own return often trails the published fund number, and that is not an error; the CAGR vs XIRR guide walks through the gap.

Mathematical Analysis of Time-Weighted Return

TWR chains the return of every sub-period between cash flows:

TWR=∏k=1n(1+Rk)−1TWR = \prod_{k=1}^{n} (1 + R_k) - 1

where RkR_k is the return of holding period kk, measured between two consecutive cash-flow dates. Valuing the portfolio immediately before each flow strips the flow’s size out of the math, so a large deposit ahead of a rally cannot flatter the number. Edge cases: frequent flows create many sub-periods and can amplify small timing errors; and with no flows, TWR collapses to CAGR over the same span.

Referenced In Guides & Comparisons

Learn how Time-Weighted Return (TWR) is applied in real-world scenarios across our pathways:

Guide (curriculum-lesson)CAGR vs XIRR: Which Return Metric Should You Trust?