## Money-weighted and Time-weighted Rates of Return

### Definition

The money-weighted rate of return earned by a fund is the same as the internal rate of return – i.e. the interest rate which it is necessary to use when discounting all the cashflows of the fund, including the initial cashflow, withdrawals, additions and income, to achieve a zero net present value (NPV).

The time-weighted rate of return is the rate earned by a fund calculated by compounding the absolute returns achieved over each consecutive period marked by the withdrawal of money from the fund or the addition of new money to it.

### How is it used?

#### Money-weighted rate of return

An internal rate of return is sometimes known as a money-weighted rate of return, because the rate so calculated ...