20 essential terms for NSE backtesting, factor investing, and SEBI-compliant education. Updated Feb 2026.
Last Updated: February 17, 2026 • Author: T. Desai, BacktestIndia
Master factor investing with precise definitions. Each term includes NSE context, backtest implications, and links to our research. Perfect for beginners and pros testing strategies on 18+ years of data.
The National Stock Exchange of India (NSE) is the largest stock exchange in India by trading volume, listing over 2,000 companies. It provides the primary platform for equity, derivatives, and debt trading, with data from December 2006 used in BacktestIndia's 18+ year backtests.
For factor investing, NSE data is the gold standard as it includes real-time prices, corporate actions, and delisted stocks to avoid survivorship bias. All BacktestIndia strategies use NSE EOD data for accurate simulations.
The Bombay Stock Exchange (BSE) is India's oldest stock exchange, established in 1875, and the second-largest by volume. It lists around 5,000 companies, including many small-caps not on NSE.
While NSE dominates backtesting, BSE data complements for broader coverage. BacktestIndia focuses on NSE for liquidity but cross-references BSE for complete Indian market analysis in factor studies.
Long-Term Capital Gains (LTCG) tax is levied at 12. 5% on equity gains from holdings over 1 year (post-2024 Finance Act), with a ₹1.25 lakh annual exemption. This is the most tax-efficient structure for factor strategies.
In backtests, annual rebalancing maximizes LTCG qualification, boosting net returns by 2-4% vs frequent trading. BacktestIndia automatically applies this for realistic post-tax CAGR calculations.
Short-Term Capital Gains (STCG) tax is 20% on equity gains from holdings under 1 year. This applies to frequent rebalancing in momentum strategies.
STCG drag can reduce momentum returns by 3-5% annually. Our tax modeling shows low-vol strategies minimize this through annual holds, making them superior for retail investors.
The Nifty 50 is India's benchmark index tracking the top 50 companies by market cap on NSE, representing 60%+ of market value. Used as the default comparison for all factor backtests.
Factor strategies like low-vol consistently beat Nifty 50 (e.g., +3.67% CAGR in 10Y rolling). BacktestIndia shows net-of-tax outperformance to highlight real edges.
Momentum investing buys stocks with strong recent price performance (e. g., 12-month returns) expecting trends to continue. A core factor in Carhart's 4-factor model.
In India, momentum delivered 14.01% CAGR but with -70% drawdowns. BacktestIndia tests semi-annual rebalancing to balance tax drag and performance.
Value investing targets stocks trading below intrinsic value, using metrics like low P/E, P/B, and high dividend yield. Warren Buffett's classic approach.
Value underperformed post-2020 in India due to growth bias, but our 18Y backtest shows recovery in high-inflation regimes. Combine with quality for best results.
The quality factor selects stocks with strong fundamentals: high ROE, low debt, stable earnings, and consistent profitability. Often overlaps with low-vol.
Quality delivered 13.5% CAGR in NSE tests with low drawdowns. BacktestIndia's multi-factor uses it as a core filter for balanced portfolios.
Low volatility selects stocks with the lowest 12-month price swings, betting on 'defensive' outperformance. The anomaly where risk doesn't equal reward.
Our 100% win rate in 102 10Y periods (14.24% vs Nifty 10.57%) proves it. Ideal for retail: fastest recovery (7 months post-2008) and tax-efficient. Sharpe: 0.38.
The Carhart 4-factor model extends Fama-French (market, size, value) with momentum. Explains 90%+ of stock returns via these systematic factors.
BacktestIndia implements this for India: Low-vol (risk), value (cheap), momentum (trends), quality (fundamentals). Our multi-factor beats single ones by 2% CAGR.
P/E ratio divides stock price by earnings per share. Low P/E signals value; high P/E growth. Key for value factor screening.
In NSE, value portfolios target <15 P/E. BacktestIndia filters dynamically, adjusting for sector (e.g., banks vs tech) to avoid traps.
ROE measures profitability: net income / shareholders' equity. High ROE (>15%) indicates efficient management, core to quality factor.
Quality screens require ROE >20% consistently. Our backtests show it reduces drawdowns by 15-20% vs pure value.
Beta measures stock volatility vs market (Nifty 50 = 1. 0). Low beta (<0.8) = defensive; high beta (>1.2) = aggressive.
Low-vol strategies target beta 0.6-0.8. BacktestIndia shows low-beta beats high-beta in 80% of periods, especially crashes.
Alpha is excess return over benchmark after risk adjustment. Positive alpha means outperformance due to skill/factor, not luck.
Factor alphas in India: Momentum +4%, Low-Vol +3%. BacktestIndia calculates rolling alpha to validate strategies.
Sharpe ratio = (return - risk-free) / volatility. Higher = better risk-adjusted performance. Risk-free often 7% (Indian bonds).
Multi-factor hits 0.48 Sharpe vs Nifty 0.35. BacktestIndia displays it to compare: Low-vol often leads (0.38 in standard config).
Maximum drawdown is the largest peak-to-trough decline (e. g., -44% for low-vol in 2008). Key risk metric.
Low-vol's 7-month recovery vs Nifty's 60 months is why it wins long-term. BacktestIndia flags max drawdown for every strategy.
CAGR is the smoothed annual return over time, accounting for compounding. The gold standard for strategy comparison.
Our net-of-tax CAGRs: Low-vol 12.38%, Multi 14.61%. BacktestIndia always shows pre/post-tax to set expectations.
SIP is monthly fixed investments, averaging rupee costs over time. Popular for retail but doesn't fix poor strategies.
Our Lost Decade SIP test: Low-vol +3.31% CAGR vs Nifty. BacktestIndia simulates SIPs with tax for real scenarios.
Rupee cost averaging buys more shares when prices fall, less when high. The SIP benefit in volatile markets.
It reduces timing risk but our tests show strategy > averaging: Low-vol SIP still beats Nifty by ₹9.86L.
Survivorship bias ignores failed companies, inflating backtest returns. Delisted stocks must be included for accuracy.
BacktestIndia includes 1,700+ stocks with delistings, avoiding the 2-3% return overstatement common in other tools.
This glossary is for educational purposes only. BacktestIndia is NOT SEBI-registered and does NOT provide investment advice. All terms and backtests are hypothetical simulations. Before implementing any strategy, consult a SEBI-registered Investment Adviser.
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