In addition to tracking broad market indices like the Nifty 50, many investors look closely at the performance of specific sectors, such as banking and financial services, pharma, metals, automobiles and real estate.
Examining these trends and movements may offer valuable insights into consumption patterns and overall economic health, thereby aiding investors in identifying sectors offering potentially favourable growth prospects.
In this blog, we will discuss FINNIFTY, a sectoral index that focuses exclusively on the financial sector.
What is FINNIFTY?
The Nifty Financial Services Index, or FINNIFTY, tracks the performance of the top 20 companies in the Indian financial services sector. This can include commercial banks, insurance companies, housing finance companies, financial institutions, non-banking financial institutions, and other financial intermediaries. This helps investors get insights into the performance of the financial services sector in India.
Why was FINNIFTY launched?
With rising digital adoption, investor participation and government support, the financial sector of India is expected to potentially continue its growth journey. Hence, it was important to have a barometer that checked the overall health of the sector, rather than the partial exposure that was catered to by the Bank Nifty. With this objective, the FINNIFTY was launched in January 2021, serving as a benchmark and a trading tool for investors looking to diversify their portfolio with exposure to specific financial sectors.
How is FINNIFTY calculated?
The FINNIFTY follows a free-float market capitalisation methodology. This ensures that only shares that are available for trading are considered, with the exclusion of locked-in shares by promoters.
The following formula encapsulates the method of calculation:
Free float market capitalisation = Number of outstanding shares X Market price X Investible weight factor (IWF)
Index value = (Current free-float market capitalisation / Base market capitalisation) * Base index value
The IWF captures the weightage of each stock in the index in a way that provides a true representation of the sector. With an initial base value of 1,000, the FINNIFTY considers 20 stocks from the Nifty 500, and the index is reviewed every six months to capture changes in the market, if any.
Read Also: What is Nifty: Meaning, Eligibility, Calculation and Benefits
What does FINNIFTY track?
The FINNIFTY tracks the performance of the largest players (in terms of market cap) in the financial services industry. Through it, market watchers may get a idea of the sector’s future potential and growth dynamics. It is also used as a benchmark for trading.
Sectors involved in FINNIFTY
The FINNIFTY, in its current composition, covers the following subsectors within the financial services sector:
- Banking
- Insurance
- Non-banking financial institutions (NBFCs)
- Housing finance
- Asset management
- Other financial institutions
Components of FINNIFTY
The components of FINNIFTY go through a rebalancing every 6 months. You can access the latest list of components via the official NSE website or other financial portals that offer this information.
How to trade FINNIFTY derivatives?
FINNIFTY derivatives, in the form of futures and options, are available for trading on NSE (National Stock Exchange of India), deriving their value from the underlying FINNIFTY index. FINNIFTY futures and options have the following features:
Contract size – The minimum value of NIFTY FINNIFTY futures and options contracts upon introduction should not be less than Rs. 15 lakh.
Settlement – The methodology of settlement for NIFTY futures and options is cash settlement.
Trading cycle – FINNIFTY futures and options have a 3-consecutive-month trading cycle: Near-Month, Mid-Month and Far-Month.
- Near-Month:The current month’s contract
- Mid-Month:The next month’s contract
- Far-Month:The contract for two months from now. When the near-month contract expires, a new far-month contract tends to start, so typically, there are always three months available for trading.
FINNIFTY expiry time and date
For FINNIFTY futures and options, the last Tuesday is considered as the expiry date. In the case of monthly contracts, the last Tuesday of the month is considered as the expiry date. However, if the last Tuesday is a banking holiday, the expiry will be the preceding trading day.
FINNIFTY lot size
The current market lot size of FINNIFTY derivatives is 65, as per the latest circular of NSE.
Ways of investing in FINNIFTY
Once a demat account is active, an investor can invest in FINNIFTY in the following ways:
- Exchange - traded funds (ETFs) – FINNIFTY ETFs aim to replicate the performance of the index. They trade on the NSE as shares and may serve as a low-cost strategy for sectoral investment.
- Index funds – These are funds which mirror a portfolio of equities in the FINNIFTY and generally give potential returns similar to FINNIFTY (subject to tracking error).
- Direct investment – Offering a greater degree of customisation, investors also have the option to purchase equities of companies listed on the FINNIFTY index directly.
Read Also: SGX Nifty: Definition, Meaning, Advantages and Its Impacts
Benefits of investing in FINNIFTY
- Sectoral focus – The FINNIFTY helps investors benchmark companies in the financial sector and get a broad understanding of the financial landscape, getting insights into potential opportunities.
- Diversification – By allocating funds across multiple types of companies within the financial sector, be it insurance or Non-Banking Financial Companies (NBFCs), it may help investors diversify their portfolios.
- Cost-efficient – Financial sector exposure without the expense of individual stock investments is possible with FINNIFTY, making it a more cost-effective investment approach.
- Liquidity – It is relatively easier to find entry and exit positions compared to other derivatives. Though trading volumes are lower than Nifty 50 and Bank Nifty, liquidity has been improving as investor participation grows.
- Benchmarking – It empowers investors to make potentially more informed calls with respect to investing in companies in the financial sector by benchmarking their performance against NIFTY stocks.
Conclusion
For investors looking to invest in the financial sector, the FINNIFTY index may be a helpful tool. It helps investors build their portfolios with stakes in large companies. Simultaneously, its diversification helps reduce non-systematic risks such as revenue fluctuations or turnover in senior management. FINNIFTY offers a bird’s-eye view of the financial landscape to investors and may be meticulously used to devise informed investment strategies.
FAQs:
How many stocks are there in FINNIFTY?
There are 20 stocks in the FINNIFTY, curated from the NIFTY 500, using a free-float market capitalisation methodology.
What is the difference between FINNIFTY and NIFTY?
The NIFTY index is what the media and investors commonly call the Nifty50, which constitutes the 50 largest and most liquid stocks acrosssectors, based on free-float market capitalisation. The Nifty 50 is one of India’s benchmark indices and serves as a representation of the overall stock market’s health and The FINNIFTY is a sector-specific index that represents the top 20 stocks in the financial services sector.
What happens when FINNIFTY expires?
When FINNIFTY derivative contracts expire, the settlement is done in cash based on the difference between the contract price and the final settlement price.
What is the FINNIFTY expiry day?
FINNIFTY weekly derivative contracts have their expiry dates on the last Tuesday. For monthly contracts, it’s the last Tuesday of the month.
What is meant by FINNIFTY?
The Nifty Financial Services Index, or FINNIFTY, tracks the performance of 20 companies in the financial sector, comprising banks, insurance, housing, NBFCs, and financial services. This provides a snapshot of the financial services sector in India.
Can I buy FINNIFTY?
You can invest in FINNIFTY through exchange-traded funds (ETFs), FINNIFTY index funds, or by directly investing in the stocks of companies in the FINNIFTY.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
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