Everyday finances

Understanding your personal rate of return

Understanding your personal rate of return

There are different ways of calculating the performance of a mutual fund.* Are you familiar with them?

A mutual fund* that you have invested in posts a certain annual return, but it doesn’t seem to be your own rate of return… Is that possible? Yes, because there are two main methods of evaluating the rate of return on an investment, and each one has its purpose.

There are returns... And then there are returns


The first method can be useful for comparing different fund managers based on their performance. However, this method does not take into account the various times that you have made deposits or withdrawals, that is, your monetary movements.

And that can make quite a difference.

A case in point

Let’s say, for example, that you invested $100,000 on January 1. Suppose that you did nothing else with that account during the year, and let’s assume that you found yourself with a balance of $112,710 on December 31**. In this scenario, your rate of return is very easy to establish, since you earned $12,710 on an investment of $100,000, for an annual return of 12.7%.

Now let’s say that after making your initial investment, you also decided to invest an additional $50,000 on June 30. Let’s assume that on December 31 your balance is $161,769. What would your rate of return be?

Using the time-weighted rate of return method, your rate of return for the year would still be 12.7%. But this calculation doesn’t account for the fact that a significant portion of your investment was made midway through the year, and the return wasn’t necessarily the same during the second half. The money-weighted rate of return, which takes monetary movements into account, would thus be 9.4%, as shown in the table below.

The same year...


The principle behind the calculation

An investor’s money-weighted rate of return thus largely depends on the timing of any deposits and withdrawals. The principle to keep in mind here is:

  • if you make a large deposit before a period of positive returns, your personal rate of return will be higher than the fund’s rate of return;
  • if you make a large deposit before a period of negative returns, your personal rate of return will be lower;
  • conversely, if you make a large withdrawal before a period of positive returns, your personal rate of return will be lower than the fund’s rate;
  • if you make a large withdrawal before a period of negative returns (as in our example), your personal rate of return will be higher;
  • finally, if you don’t make any deposits or withdrawals during a given period, your personal rate of return will be exactly the same as the return posted by the fund for the same period.

How is it calculated?

While calculating a fund’s time-weighted rate of return is relatively simple, the formula for calculating the money-weighted rate of return is complex, since it takes into account both the value and the exact timing of any monetary movements.

Fortunately, since the end of 2016, people who invest in mutual funds automatically receive an investment performance report that provides the money-weighted rate of return for the previous year.

It’s a practical tool you can use with your mutual fund representative to take stock of the annual rate of return that you have obtained.

*       Mutual funds are offered by mutual fund representatives at SFL Investments, Financial Services Firm.
**     Performance assumptions are for illustration only. Mutual funds fluctuate in value and their performance is not guaranteed.

The following sources were used in preparing this article.
IFSE Institute, “Time weighted vs. money weighted returns,” 2016