Public sector banks occupy an important space in India’s financial system, and their performance is reflected by the Nifty PSU Bank Index. But what is Nifty itself? Rather than being just one benchmark, Nifty represents a suite of indices created by NSE to track different slices of the market — from the country’s largest companies to specific sectors like PSU banks. By following these sectoral indices, investors can gauge how specific industries, shaped by policy and economic reforms, are performing within the larger equity landscape.
What is Nifty PSU bank
Nifty PSU Bank index is a sectoral benchmark comprising 12 largest Indian public sector banks – financial institutions where the government holds more than 50% of stock – in terms of free-float market capitalisation. The index helps in assessing market trends within the PSU banking sector. Such banks play an important role in executing government-led lending and infrastructure initiatives. Thus. the Nifty PSU Bank Index is often interpreted by investors as an indirect gauge of policy impact and credit growth trends.
Nifty PSU bank stocks selection criteria
Constituents of the index are determined based on certain rules and eligibility criteria set by the NSE. These include:
- Public sector banks alone: (government holding ≥ 51%) are eligible for inclusion in the index.
- Market capitalisation filter: Based on market cap and turnover over the last six months, the qualifying companies should be within the top 800.
- Liquidity test: Trading frequency should be at least 90% in the last 6 months.
- Listing history: The company should have a minimum listing history of 1 month as on the cutoff date.
The top PSU banks representing the industry are designed to be part of the completed portfolio. Only the most representative and liquid PSU banks are covered due to this process. The index maintains its image as an open market indicator and reduces volatility from illiquid names by imposing clear eligibility criteria.
Read Also: What is Nifty: Meaning, Eligibility, Calculation and Benefits
Nifty PSU bank index re-balancing
The index is rebalanced semi-annually to ensure it keeps up with changes in the PSU banking sector. This can result in some constituents changing if they no longer meet the eligibility criteria. Rebalancing ensures the index comprises only liquid and investable PSU banks. For example, if a small PSU bank turns illiquid or if a new PSU bank listing exhibits high turnover, it is adjusted accordingly. This ensures the index remains aligned with market conditions and continues to serve as a representative benchmark.
Nifty PSU bank index governance
Governance is done under NSE Indices Ltd., which is a subsidiary of NSE. There is a three-tier governance structure, which comprises the Board of Directors of NSE Indices Ltd, the Index Maintenance Sub Committee (IMSC) and Index Advisory Committee. This structure is responsible for making decisions, establishing uniformity and maintaining transparency.
These forums create rules of eligibility, track changes in methodology, and resolve disputes. The structure underlying the index is in keeping with international practices for the management of the index. Half-yearly reviews, independent monitoring, and compulsory disclosure lend greater credibility to the process. It helps maintain the index as a fair, rule-based representation of PSU bank performance.
PSU bank weightage
Weightage in the Nifty PSU bank index is determined by free float market capitalisation but capped for concentration control. At each review:
- A single stock is capped at 33%.
- The aggregate weightage of the top three stocks is capped at 62%.
How is the Nifty PSU bank index calculated?
The index uses the free float market capitalisation weighted method. The calculation involves:
- Determining the free float market value of each stock (share price × free float shares).
- Summing all constituents’ free float values.
- Dividing by the base market capitalisation.
- Multiplying by the base index value (set at 1,000).
The objective of this transparent approach is to ensure the index reflects investible size and market movements of PSU banks.
Nifty PSU bank index methodology
The index’s base date is January 1, 2004, with a base value of 1,000, and it was formally launched on 30 August 2007. Capping rules, semi-annual reviews, and free float adjustments help maintain relative stability. By construction, the index represents how PSU banks collectively perform relative to the broader market, making it a practical benchmark for sector funds and research analysis.
Which bank should you pick: Public or private?
Choosing between PSU and private banks depends on investor objectives and risk appetite. PSU banks, represented by the Nifty PSU bank index, are often linked to government lending priorities and infrastructure growth. They may offer exposure to policy driven credit expansion but can face challenges such as higher non-performing assets during downturns.
Private banks, on the other hand, are included in indices like the Nifty Private Bank. They are generally associated with more flexible governance, quicker technology adoption, and customer-centric growth.
The choice that may be suitable for an investor depends on whether they seek exposure to PSU banks, which are often linked to government-led lending, or private banks, which are associated with operational flexibility.
Investors may also consider a balanced portfolio that includes both types of investments.
Read Also: SGX Nifty: Definition, Meaning, Advantages and Its Impacts
Conclusion
The Nifty PSU Bank index offers a structured way to track India’s government-owned banks. It has 12 PSU banks (free float market capitalisation weighted) with bi-annual rebalancing. Regulated by NSE Indices Ltd., the index adheres to clear rules and international index standards.
For investors, it is a gauge of PSU banking sector performance and can be invested in it through index funds or ETFs. But, similar to all sectoral indices, it carries concentration risks and cyclical performance. Knowing methodology, weight limits, and investment channels helps the investor choose whether exposure to PSU banks could be suitable for their overall portfolios.
FAQs
What is Nifty PSU bank?
It is a sectoral index consisting of 12 public sector banks with ≥ 51% government holding, which is tracked and compiled by NSE Indices.
What is the objective of NIFTY PSU bank?
Its aim is to gauge the performance of PSU banks and offer a clear, rules-based benchmark to investors and fund managers.
How to Invest in NIFTY PSU bank?
Investors can invest through sectoral index funds or ETFs that track the Nifty PSU Bank index. ETFs are traded on exchange like shares.
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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