Financial indices become very essential in the financial markets to tell the performance of a certain part of an economy. The Nifty Financial Services is termed as FINNIFTY, representing the Indian financial services sector. This document will take you through what FINNIFTY is, its composition, methodology, and its significance for the Indian stock market.
We will also check how it stands against other indices, especially the Bank Nifty, and why it is becoming a salient tool for the investor and trader.
Understanding FINNIFTY
The Nifty Financial Services Index (FINNIFTY) is to be constructed to track the market changes in the Indian financial services section. It would be a sub-index of the all-encompassing Nifty 50 index, constituting the 20 most prominent financial services companies of India with capitalization weighting. This new index was launched to give investors a comprehensive benchmark for the financial services sector, which formed a huge part of the Indian economy.
Composition and Methodology
FINNIFTY consists of 20 stocks covering each sub-sector related to financial services—bank, NBFC, insurance company, or any other kind of institution in the financial sector. Nearly all these components have been rated quite high on issues normally rated at qualitative numbers by rating companies. This is a free-float market capitalization-weighted index. That could only effectively mean that the larger the market capitalization, the greater its impact on the index computed. Therefore, the performance of this segment is truly reflected in this index.
The companies that should form a part of FINNIFTY must necessarily form a part of the Nifty 500 index. This helps to ensure that it is only the crème de la crème of the financial companies that come into this particular index. The base date for this index base is January 1, 2014, with a base value of 1000, and this therefore gives consistency to the comparative analysis across years.
Sectors and Key Companies in FINNIFTY
It is a broad sector comprising a number of sub-sectors, including the financial services sector, housing finance, life insurance companies, and more such. Lastly, banks form the largest component of FINNIFTY. As of February 2024, an impressive 65% of the index is dominated by banks. This showcases the significant impact of banks on the market. Following that are the NBFCs, insurance companies, and other financial institutions. Some top stocks included under this index are HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Bajaj Finance, and SBI Life Insurance.
FINNIFTY vs Bank Nifty: A Comparative Analysis
FINNIFTY is always benchmarked, whereas the Bank Nifty is yet another very prominent index. Although both indices constitute banks, it can be considered one facet or the other:
- Sector Composition: Bank Nifty includes only banking stocks, whereas FINNIFTY has a diversified basket of financial services companies, including NBFCs, insurance, and housing finance companies.
- Volatility: Consisting of simply the banking sector, Bank Nifty is more volatile in nature. In contrast, because of its diversified constitution, FINNIFTY has experienced comparably lesser levels of volatility across time periods.
- Correlation with Nifty 50: Bank Nifty Move is more in tandem with the broader market. While FINNIFTY still remains correlated, the exposure to different sub-segments of financial services gives a slightly different risk-return profile.
- Risk and Return: FINNIFTY offers a more balanced risk-return profile compared to Bank Nifty due to diversified exposure. End investors, therefore, find it as an ideal vehicle that provides appropriate exposure to the financial services sector while partly ablating some of the risks that are idiosyncratic in nature to sector-specific indices.
Key Features and Benefits of FINNIFTY
FINNIFTY offers a lot of special features which make it an attractive investment vehicle:
- Diversification: Mixture in composition with banks, NBFCs, insurance, and other financial services companies primarily helps diversify the exposure of FINNIFTY by providing broad exposure to investors in the financial services sector with lesser unsystematic risks.
- Free-float Market Capitalization: The index is calculated on the methodology of free-float market capitalization, where the only free-float shares’ market capitalization are captured. This will bring down the turnover which, in other instances, would distort the movement of the market.
- Trading Opportunities: FINNIFTY, being an index-based trading order, gives an investor a tradable opportunity to hedge their position with respect to index movement or take a view on it. With contracts available on a weekly and monthly basis, it is all the more attractive for those looking to trade.
Why Invest in FINNIFTY?
There are a number of reasons why investing in FINNIFTY stands strategic:
- Exposure to a Growing Sector: This, of course, is one of the fastest-growing sectors of the Indian economy. With FINNIFTY, investors get the chance to have exposure to this growing company, which consists of some big and stable companies in India.
- Risk Management: We have previously explained that FINNIFTY’s diversified construct reduces unsystematic risks, and hence it is a much safer bet compared to other relatively more concentrated indices like the Bank Nifty.
- Market Benchmark: The FINNIFTY provides a benchmark for financial services companies, very clearly showing how the sector is performing in comparison with the movement of the whole market. Thereby, it becomes a very handy tool for institutional and individual investors, as also fund managers.
- Investment Flexibility: Most Importantly, with the mutual funds that track FINNIFTY or with the option of trading the futures and options contracts directly, there are multiple ways of gaining exposure to this index. In fact, this makes FINNIFTY quite an accessible index to most investors.
Conclusion
The Nifty Financial Services Index (FINNIFTY) is an integral dispenser if you are interested in investing in India’s financial services sector. Well-diversified is the composition of the index with a robust methodology. It offers the investor and trader the opportunity. Whether you are interested in getting market exposure to India’s financial sector, looking forward to making a hedge for your portfolio, or would want to just be keen on tracking the performance of this vital economy, FINNIFTY offers a solution.
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
