Twrr

[Devi k]

Hi,

I am not being able to understand TWRR. My doubt is how to take cash flows (+ or - ) in between 2 fund values.explain me by giving example.stuck on this!!!!!

 

[Sanjay]

Hi,

I am not being able to understand TWRR. My doubt is how to take cash flows (+ or - ) in between 2 fund values.explain me by giving example.stuck on this!!!!!

It's pretty simple. First of all draw a time line indicating the cashflows and the the funds at various points of time.
Lets assume that the fund values are F0,F1,F2 and F3 and there are two cashflows C1 and C2 on the same dates as F1 and F2 (it will usually be on the same date. But I could be wrong!). now the TWRR for n years will be:

(1+i)^n = [ F1/(F0+C0)] x [F2/(F1+C1)] x [F3/(F2+C2)]

[Here I have assumed that there are inflows of cash and that's why the sign is positive. If there's any outflow, the sign will change,i.e, deduct it from the fund value then.]

If you still have a hard time understanding this, i'll tell you how I remember it:-
Succeeding Fund Value/Now (Fund value + Cashflow) with reference to any two points of time(like from time 0 and time 1, time 1 and time 2 and so on). I'm pretty sure that this method is illegal in certain countries.
Just have a look at the Uk papers if you have the time, you'll understand it better, but like I said draw a time line first.

Kind regards
Sanjay.