This section will be available in all types of static and dynamic strategies for stocks, MFs, and ETFs.
In this article, we are going to talk about the penultimate step in all types of strategies. Here you have two important parameters.
The first parameter is the benchmark. As an informed investor, you should always compare the returns generated by your strategy with a relevant benchmark. What do we mean by ‘relevant’? It means that your benchmark should be comparable to your holdings.
For example, if you create a strategy with large-cap stocks stocks as the universe, then Nifty 50 is the right benchmark. If you are not concerned about the market cap and have stocks of different market caps then Nifty 500 can be the benchmark.
You can select the benchmark from multiple available indices in the dropdown as shown in the image below.
Note that in the next step where you look at the backtest results, your strategy returns will be compared with the benchmark you have selected here. If the benchmark does not have enough historical data you will see a horizontal line till the starting date of the benchmark.
While analysing the strategy performance, it is important to look at the transaction cost. If you are rebalancing your strategy very frequently, then this cost can reduce your returns. That is why you should include this while analysing the historical data. It will give you a more realistic picture of your strategy performance.
Now, in sharpely, we have created a transaction cost model as per Zerodha’s transaction cost. You can select that or you can add the cost manually.
If you select the custom option, you have two choices.
You can see these options in the image below (highlighted in red).
Note that transaction cost is not available in the mutual fund strategy as mutual fund units are not bought on the exchange.
That is it for this article. In the next article, we are going to talk about the backtesting results and how you can paper trade your strategies.