Investing is a complex journey that involves making informed decisions, analyzing market trends, and assessing the performance of your portfolio over time. One crucial metric that you can use to check your investments is the Time-Weighted Rate of Return (TWRR). The TWRR is a method of calculating the compound growth rate of an investment over a specific period.
This metric offers a clearer perspective on the performance of your investments, free from the distortions caused by external factors like deposits or withdrawals.
Open Your free Demat Account in just 5 minutes!
Understanding TWRR is significant as it informs you about your investments' accurate and unbiased performance across various periods. This becomes significant, especially when you have made deposits or withdrawals from your investment portfolio.
Here's why TWRR is essential:
Sub-periods: You can divide their investment horizon into sub-periods or intervals. They represent the time between significant cash flow events or valuation dates.
Valuation dates: These dates are the ends of each sub-period. An investment's value is determined at these points, allowing for the calculation of returns for each sub-period.
Cash movements: Any time you put in or take out money while investing, it affects how much your investments are worth. You can consider these money movements by looking at the value of your investments each time money goes in or out.
The above factors help you see how TWRR can indicate the performance of your investments without getting confused by external or internal financial fluctuations.
You can compute the TWRR using the following formula:
TWRR = [(1 + R1) x (1 + R2) x ... x (1 + Rn)] - 1
To calculate the returns for each sub-period, subtract the beginning balance of the sub-period from the ending balance. To reach the final result, divide the number arrived at by the beginning balance of the sub-period.
For example, suppose you decide to invest Rs. 1,000 in a mutual fund. The fund returns 0.10 in the first year and 0.05 in the second. The calculation of TWRR for the two years is as follows:
TWRR = [(1 + 0.10) x (1 + 0.05)] - 1 = 1.15 - 1 = 0.15 = 15%
This means your investment has grown to Rs. 1150 over the two years at a return rate of 15%.
Understanding TWRR is vital for making well-informed investment choices. By grasping its significance, you can accurately gauge your investment performance and decide whether to hold or adjust your investments.
If you are looking for a free and convenient way to invest in the stock market, the Motilal Oswal free Demat account is a good option. Sign up today and start investing!