Question 1

What is Time-Weighted Return (TWR)?

Accepted Answer

Time-Weighted Return (TWR) is a measure of the compound rate of growth in a portfolio that eliminates the distorting effects on growth rates created by external cash inflows and outflows (deposits and withdrawals).

Question 2

Why do fund managers prefer TWR over Money-Weighted Return (MWR / IRR)?

Accepted Answer

Fund managers have no control over when clients deposit or withdraw money. TWR isolates the pure investment performance of the manager's asset allocation and stock selection decisions.

Question 3

How is Time-Weighted Return calculated across sub-periods?

Accepted Answer

TWR breaks the overall period into sub-periods every time a cash flow occurs. It calculates the rate of return for each sub-period: R_i = (End Value Before Cash Flow - Start Value) / Start Value, and links them geometrically: TWR = (1 + R_1) × (1 + R_2) × ... × (1 + R_n) - 1.

Question 4

What is the difference between TWR and MWR (Money-Weighted Return / XIRR)?

Accepted Answer

TWR measures the manager's skill by giving equal weight to each time period. MWR/XIRR measures the investor's actual rupee return, giving greater weight to periods when more capital was invested.

Question 5

Is TWR required under GIPS (Global Investment Performance Standards)?

Accepted Answer

Yes. The CFA Institute's GIPS standards require investment managers to present portfolio performance using Time-Weighted Return to ensure fair, unbiased reporting.

Question 6

Can TWR be higher than MWR?

Accepted Answer

Yes. If an investor deposits large sums of money right before a market downturn, MWR will be significantly lower than TWR. Conversely, investing heavily right before a bull run makes MWR higher than TWR.

Question 7

When should an individual retail investor use TWR?

Accepted Answer

Use TWR when evaluating mutual fund performance against a benchmark index (like Nifty 50) to see if the fund manager outperformed the market.

Question 8

How often should sub-periods be created in TWR?

Accepted Answer

A new sub-period must be created every time an external deposit or withdrawal occurs, requiring a portfolio valuation immediately before the cash flow takes place.

Question 9

Can TWR be negative?

Accepted Answer

Yes. If the cumulative geometric product of sub-period returns is less than 1.0, the TWR will be negative, indicating a strategy drawdown.

Question 10

Does TWR account for dividends received inside the portfolio?

Accepted Answer

Yes. Internal dividends reinvested inside the fund naturally increase the ending sub-period valuation and are fully captured in the TWR calculation.

Parameter	Time-Weighted Return (TWR)	Money-Weighted Return (MWR / IRR)
What It Measures	Manager skill / Strategy efficiency	Investor rupee return
Cash Flow Sensitivity	Neutralized (Unbiased by timing)	Heavily influenced by deposit timing
Industry Standard	GIPS Standard for Mutual Funds & PMS	Personal wealth tracking

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