What is Time Weighted Rate of Return (TWRR)? Explained with a Simple Story

"Did your portfolio perform well because of the fund manager's skill, or simply because you invested more money at the right time?"

This is exactly the question that Time Weighted Rate of Return (TWRR) tries to answer.

TWRR is one of the fairest ways to measure the performance of a Portfolio Management Service (PMS), Mutual Fund or any investment manager because it removes the impact of your own deposits and withdrawals.

In simple words,

TWRR measures how well the portfolio performed, irrespective of when the investor added or withdrew money.

Imagine You Are on a Road Trip

Suppose you are travelling from Mumbai to Goa.

Along the way, you stop for breakfast, fuel, lunch and sightseeing.

These stops increase the total travel time, but they do not change the quality of the road or your driving.

Similarly, in investing:

• Adding more money is like taking a stop.
• Withdrawing money is like taking another stop.

These cash flows should not affect how the investment manager's performance is measured.

That is why TWRR ignores the effect of these cash flows and measures only the investment journey.

A Simple Illustration

Rahul invests ₹10 lakh in a PMS.

After six months, his investment grows to ₹11 lakh.

Happy with the performance, he adds another ₹5 lakh.

The total investment now becomes ₹16 lakh.

At the end of the year, the portfolio value becomes ₹17.60 lakh.

At first glance, many investors may simply calculate the overall return.

But was the return because the PMS performed well?

Or because Rahul invested an additional ₹5 lakh during the year?

TWRR separates these two effects.

It measures only how efficiently the portfolio was managed, without being influenced by Rahul's additional investment.

Why is TWRR Important?

TWRR helps investors compare different PMS strategies or fund managers fairly because every portfolio is measured on the same basis.

It answers questions like:

• How well did the portfolio manager perform?
• Was the investment strategy effective?
• Can I compare two PMS strategies objectively?

Without TWRR, investors who add or withdraw money at different times would end up comparing returns that are not truly comparable.

Why PMS Uses TWRR

SEBI requires PMS performance to be reported using Time Weighted Rate of Return (TWRR) because it reflects the performance of the investment strategy rather than the timing of an investor's cash flows.

This creates a common and transparent basis for comparing different PMS strategies.

Key Takeaway

Think of TWRR as the report card of the portfolio manager—not the investor.

It tells you how well the investment strategy performed, independent of whether you invested more money, redeemed some money or made multiple transactions during the investment period.

When comparing PMS strategies, TWRR is one of the most reliable measures because it focuses on investment performance rather than investor behaviour.

Remember: Two investors may invest in the same PMS and earn different personal returns because they invest at different times. However, the TWRR of the PMS remains the same, making it the best measure for evaluating the manager's performance.

Disclaimer: This article is intended for educational purposes only. The illustration is hypothetical and simplified to explain the concept of Time Weighted Rate of Return (TWRR). Actual portfolio performance may differ depending on market movements, cash flows and investment strategy.