TWRR vs XIRR: two correct answers to two questions
TWRR judges the manager. XIRR shows what the client's own money earned.
TWRR (time-weighted rate of return) measures how well the portfolio manager's decisions performed, with the effect of the client's deposits and withdrawals removed. XIRR (extended internal rate of return, a money-weighted return) measures what the client's own money actually earned, including the effect of when they put money in or took it out.
Both are correct; they answer different questions. SEBI requires PMS performance to be shown in both, and a client who reads only one can draw the wrong conclusion.
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The two methods
Answers
TWRR
How good were the manager's decisions?
XIRR
What did this investor's money earn?
Cash flows
TWRR
Neutralised: returns are linked across sub-periods split at each flow
XIRR
Included: each flow is dated and weighted by time invested
Affected by client timing
TWRR
No
XIRR
Yes
Best for
TWRR
Comparing managers and benchmarks
XIRR
The individual client's own experience
SEBI use in PMS
TWRR
Investment approach performance, disclosure document, marketing
XIRR
Each investor's report, plus min, max and median XIRR across investors
| TWRR | XIRR | |
|---|---|---|
| Answers | How good were the manager's decisions? | What did this investor's money earn? |
| Cash flows | Neutralised: returns are linked across sub-periods split at each flow | Included: each flow is dated and weighted by time invested |
| Affected by client timing | No | Yes |
| Best for | Comparing managers and benchmarks | The individual client's own experience |
| SEBI use in PMS | Investment approach performance, disclosure document, marketing | Each investor's report, plus min, max and median XIRR across investors |
One portfolio, two answers
Priya opens a discretionary PMS with ₹50 lakh. Year 1 returns +20%, so the account is ₹60 lakh. Pleased, she adds ₹50 lakh (a fresh investment by an existing client must also be at least ₹50 lakh), taking it to ₹1.1 crore. Year 2 returns −10%, and the account ends at ₹99 lakh.
TWRR links the yearly returns: 1.20 × 0.90 = 1.08, an 8% gain over two years, about 3.9% a year. That is the manager's record.
XIRR asks what rate makes her flows balance: ₹50 lakh in at the start, ₹50 lakh in after a year, ₹99 lakh value at the end. Solving 50(1 + r)² + 50(1 + r) = 99 gives r of about −0.7% a year. She put in ₹1 crore and has ₹99 lakh. Her second sum, and the larger balance, met the bad year.
Neither number is wrong. The manager earned about 3.9% a year on each rupee it managed throughout; Priya's timing turned that into a small loss. Reversing the order (add money before a good year) would make her XIRR higher than the TWRR.
Other return measures in Chapter 10
- Holding period return (HPR)
- (Ending value − beginning value + income) ÷ beginning value, for the whole period, not annualised. ₹50 lakh growing to ₹56 lakh with ₹1 lakh of dividends is a 14% HPR.
- CAGR
- The constant yearly rate that turns the beginning value into the ending value: (ending ÷ beginning)^(1/years) − 1. ₹2 crore to ₹2.44 crore over two years is about 10.5% a year, not 11% (that would be simple division of the 22% gain).
- Gross vs net return
- Gross is before fees and expenses; net is after. SEBI requires PMS performance to be reported net of all fees and all expenses, including taxes.
Free account, this exam preselected.
What SEBI requires
From the SEBI (Portfolio Managers) Regulations, 2020 and the Master Circular for Portfolio Managers (July 16, 2025):
- check_circleA discretionary portfolio manager's performance in the disclosure document is calculated using TWRR for the immediately preceding three years (Regulation 22(4)(e)).
- check_circleWhenever an investment approach's performance is communicated, advertised or published, it is shown as TWRR with the trailing return of the selected benchmark (para 5.6.1). This applies to any entity publishing it, distributors included (para 5.6.7).
- check_circleEach investor's own report shows their XIRR alongside the approach's TWRR and benchmark (para 5.6.2). The client reporting page covers what that report must show.
- check_circlePerformance includes cash and liquid fund holdings and is reported net of all fees and expenses, including taxes (para 4.5.3).
How XXI-A tests this
Definition questions ask which method removes the effect of external cash flows (TWRR) and which reflects the investor's timing (XIRR or money-weighted). Calculation questions ask for HPR, CAGR or a two-period TWRR. The trap answers add or average yearly returns instead of compounding them, or use the simple total gain where an annualised figure is asked.
FAQs
What is the difference between TWRR and XIRR?expand_more
TWRR measures the portfolio manager's performance by removing the effect of the investor's deposits and withdrawals. XIRR is a money-weighted return that reflects the size and timing of the investor's own cash flows.
Why is my PMS return different from the published return of its investment approach?expand_more
Published figures for an investment approach use TWRR across all clients. Your own return (XIRR) depends on when you invested or withdrew and on differences in your portfolio, which SEBI requires PMs to disclose.
Which return method does SEBI require for PMS performance?expand_more
TWRR for investment approach performance and the disclosure document, and XIRR in each investor's own report, shown alongside the approach's TWRR and benchmark.
Is PMS performance reported before or after fees?expand_more
After. SEBI requires PMS performance to be reported net of all fees and all expenses, including taxes.