Internal rate of return (IRR) and time-weighted return are two methods for calculating investment returns. IRR is the discount rate that makes the net present value of cash flows equal to zero, while time-weighted return uses geometric means to determine returns over periods of time. IRR is more suitable when cash flows can be controlled, while time-weighted return is better for open-ended funds where cash flows are not controlled. Some advantages of IRR include its ability to account for cash deposits and withdrawals, while time-weighted return eliminates the effects of cash flows and better measures a fund manager's performance.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/internal-rate-of-return-and-time-
weighted-return
Internal Rate of Return & Time-Weighted
Return

2. 1. Meaning
2. Differences
3. Advantages of IRR over Time-Weighted Return
4. Advantages of Time-Weighted Return over IRR
5. Reference
Content

3. INTERNAL RATE OF RETURN is the discount rate / interest rate or nominal rate at which the net present value of
the total expected cash flow over the period of investment or project becomes zero.
TIME-WEIGHTED RETURNS are calculated by determining the geometric means of returns on an investment or
portfolio.
Meaning

4. 1. Suitability:
Internal rate of return is used in case of funds where the manager can control the timing of incoming and outgoing cash
flows. Time-weighted returns are useful where the timing of cash flows is not within the control of the fund manager.
2. Application:
The internal rate of return is generally useful for closed-ended funds. Open-ended funds use time-weighted return
metrics.
3. Requisites:
The internal rate of return uses external cash flow details along with the terminal market value of the investment.
External cash flow history along with regular updates of the value of funds, usually monthly, is necessary in the event of
a time-weighted return.
4. Time-period:
Time-weighted rate of return uses a geometric mean to calculate the rate of return over the investment
period. While, the internal rate of return delivers the return over the entire investment period and not
just fragments of time.
Differences

5. 5. Common examples:
Private equity funds, close-ended real estate funds, etc. uses IRR while investment funds, hedge funds, exchange-traded
funds or investment options with less formalities regarding deposits and withdrawals usually use time-weighted rate of
return.
Differences

6. Following are the advantages of IRR over Time-Weighted Return:
1. Cash deposits and withdrawal
2. Prevalence
Advantages of IRR over Time-Weighted Return

7. Following are the advantages of Time-Weighted Return over IRR:
1. Eliminates cash inflow and outflow effect
2. Ideal for measuring fund manager’s performance
Advantages of Time-Weighted Return over IRR

8. Reference
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