What is FINNIFTY & How to Invest in the Nifty Financial Services Index?

The FINNIFTY, or Nifty Financial Services Index, is a prominent benchmark on the National Stock Exchange (NSE) of India and was launched in January 2021, it tracks the performance of companies in the Indian financial sector. This includes banks, insurance firms, housing finance companies, and non-banking financial companies (NBFCs). 

FINNIFTY is a useful tool for investors as it provides a snapshot of the financial sector’s performance in one index. This article will explore the constituents, objectives and features of the Nifty Financial Services Index.

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What is FiNNIFTY?

The Nifty Financial Services Index (FINNIFTY) tracks the performance of top companies in India’s financial sector on the National Stock Exchange (NSE). This index includes up to 20 leading firms from banks, insurance companies, and other financial services providers.

Launched in January 2021, FINNIFTY offers insights into the health and trends of the financial sector. Its performance acts as a barometer for the industry’s overall condition. When the index rises, it signals strong sector performance, while a drop suggests weaker conditions.

FINNIFTY includes companies from the Nifty 500 index and is updated every six months. It uses a base value of 1000 as of its start date, with each company’s weight reflecting its market capitalisation.

Constituents of FINNIFTY and their Weightage

FINNIFTY comprises 20 stocks across banks, insurance companies, NBFCs, housing finance companies, and other financial institutions or financial service companies. Here are the stocks on the Nifty Financial Services Index and their respective weightage on the FINNIFTY live chart:

Note: The data above regarding the weightage of FINNIFTY stocks has been taken on 2nd August 2024. This data on the FINNIFTY stocks list is derived from Tickertape Stock Screener.

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Sectors Involved in Finnifty

As of February 2023, banks dominate FINNIFTY, comprising over 65%, with the top 3—HDFC, ICICI, and Kotak Mahindra—contributing more than half. Life insurance companies, such as SBI Life Insurance and HDFC Life Insurance, also play a role, connected to these major banks. Other financial services subsectors, like housing finance, feature companies like Piramal Enter, Bajaj Finserv, and Bajaj Finance.

Derivatives in FINNIFTY 

FINNIFTY futures and options are available for trading and are settled in cash. Traders can choose between weekly or monthly settlements. The lot size for both FINNIFTY futures and options is 40, with a maximum of 45 lots per order.

For monthly contracts, the expiry date is the last Tuesday of the month. Weekly contracts expire on the Tuesday of the relevant week. If this Tuesday falls on a market holiday, the expiry date moves to the previous trading day.

Selection Criteria for Stocks on the Nifty Financial Services Index

• Eligibility: Only companies from the finance sector are considered for the FINNIFTY Index. This includes those involved in housing finance, banks, financial institutions, and other financial services. These sectors are deemed crucial for the index, ensuring that it accurately reflects the financial industry’s performance.
• Weighting by Free-Float Market Capitalisation: The weight of each sub-sector within the index is based on its median free-float market capitalisation. This approach ensures that the importance of each sub-sector is proportionate to its market value, providing a balanced representation of the finance sector.
• Selection of Companies: From each sub-sector, twenty companies are selected. This selection process is designed to ensure that the weights of these companies accurately represent the sub-sector’s overall significance. Companies listed on the NSE’s futures and options segment are given priority, reflecting their higher liquidity and trading activity.
• Inclusion Criteria: For a company to be included in the index, its average free-float market capitalisation must be at least 1.5 times that of the smallest constituent in the index. This criterion helps to ensure that only companies with substantial market presence are part of the index.
• Weighting Limits: The weighting of each stock in the index is determined by its free-float market capitalisation. To maintain a balanced index, the combined weight of the top three stocks is capped at 62%. Additionally, no single stock can exceed 33% of the total index weight at the time of rebalancing. These limits prevent excessive concentration and promote diversification within the index.

Rebalancing of FINNIFTY

Rebalancing of the Nifty financial services index is done to maintain the required criteria for the stocks included in the index. The Finnifty Index is rebalanced every six months, with cut-off dates on 31st January and 31st July. For these reviews, average data from the six months leading up to the cut-off date is used. The market receives a four-week notice before any changes are made.

The quarterly rebalancing takes place in March, June, September, and December, where the weightage of the stocks is adjusted to maintain the required criteria. Stocks that no longer meet the eligibility criteria are replaced with other eligible stocks. The FINNIFTY index is maintained by the National Stock Exchange (NSE), and the changes in the FINNIFTY composition are announced in advance to allow market participants to adjust their investment strategies accordingly.

How To Invest in NIFTY Financial Services Companies?

Futures & Options in FINNIFTY

Trading in FINNIFTY follows a similar process to trading other stock market indices. You can trade using derivative instruments such as futures and options contracts on the NSE. Here’s a clear overview:

• Futures Trading: You can buy or sell FINNIFTY futures based on your predictions about future financial sector movements.
• Options Trading: You can buy options that give you the right, but not the obligation, to buy (call option) or sell (put option) FINNIFTY at a set price within a specified timeframe.

Stocks in FINNIFTY

Investors can also invest in the stocks on the FINNIFTY Index by following the steps below:

1. Open an intraday trading account or demat account. You can open a demat account with smallcase. 

2. Investors can utilise tools like the Tickertape Stocks Screener to explore the Nifty Financial Services Index and the Nifty Financial Services share prices. There are 200+ filters that you can use to create different screeners for comparison of the various stocks on this index. 

3. Place a ‘Buy’ order on the FINNIFTY stocks of your choice. 
Note: Due to the potential volatility and risks involved, it’s important to approach FINNIFTY trading with careful planning and research. Beginners should consider seeking advice from financial experts before starting.

How is the NIFTY Financial Services Value Calculated?

The FINNIFTY index, like other stock indices, uses market capitalisation to determine its value. Market capitalisation is the total market value of a company’s outstanding shares. To ensure accuracy, FINNIFTY employs the free float market capitalisation-weighted method. This approach only includes shares available for trading, excluding those held by promoters or locked in.

The weight of each company in the index adjusts with market changes and regular reviews. To prevent any single company from dominating the index, the maximum weight for any individual stock is capped at 33%, and the top three stocks combined cannot exceed 62% of the index weight. Companies are added to the index if their average free float market capitalisation is 1.5 times higher than the smallest constituent. Regular updates keep the index aligned with the current financial services market.

Benefits of Investing in the Nifty Financial Services Index

Here are a few benefits of investing in the FINNIFTY Index:

• Diversification: FINNIFTY enables you to diversify your portfolio by including the top financial services companies in one index. This can reduce the need to invest in each company individually.
• Sector Exposure: If you believe in the growth potential of the financial services sector, FINNIFTY offers direct exposure to its performance, which can be more representative than focusing solely on the banking sector.
• Trading Flexibility: The availability of futures and options on FINNIFTY allows you to tailor your trading strategies to market conditions and your risk tolerance.
• Liquidity: FINNIFTY derivatives generally have high liquidity. This can make it easier to enter and exit positions.
• Hedging: You can use FINNIFTY to hedge against risks in the financial services sector, helping to protect your portfolio from negative market movements.
• Lower Costs: Trading index derivatives like FINNIFTY can be more cost-effective compared to buying individual stocks.
• Benchmarking: FINNIFTY serves as a benchmark for the financial sector, assisting in performance assessment and asset allocation.

Risks of Investing in the FINNIFTY Index

Here are a few potential risks of investing in the FINNIFTY Index:

• Concentration risk: As NIFTY fin service includes only 20 stocks, it can be prone to concentration risk. If a few stocks perform poorly, it can significantly impact the overall performance of the index.
• Limited exposure to small-cap companies: NIFTY finance service only includes large-cap stocks, which means that it doesn’t offer exposure to small-cap stocks. Investors looking for diversification across different market capitalizations may need to invest in other Finnifty indices as well.
• Heavy reliance on a few sectors: Finnifty is heavily weighted towards a few sectors, including the financial sector majorly. This means that the performance of these sectors can have a significant impact on the overall performance of the index. Investors who prefer a more diversified portfolio may need to consider other indices or individual stocks.

Difference Between FINNIFTY and BankNifty

BankNifty focuses solely on the performance of banks within the NSE, while FINNIFTY includes a wider array of financial services. This broader coverage in FINNIFTY provides more diversification and a different risk profile compared to BankNifty. Understanding these differences helps investors align their portfolios with their goals and risk tolerance. Here is a table of comparison between the two indices

Factors Affecting the FINNIFTY Index

There are several factors that can affect the FINNIFTY Index. Some of the key factors are as follows:

• Overall market sentiment: The stock market is highly influenced by investor sentiment and overall market trends. If investors are optimistic about the market and have a positive outlook, it can lead to a rise in FINNIFTY’s share price.
• Economic conditions: Economic factors such as inflation, interest rates, and GDP growth can have a significant impact on the performance of NIFTY companies. If the economy is growing and interest rates are low, financial stocks may perform well, leading to an increase in the FINNIFTY Index share prices.
• Company-specific news: News and developments related to the individual companies within Finnifty can also impact its share price. Positive news such as strong earnings reports or new product launches can lead to a rise in share price. While negative news such as scandals or regulatory issues can lead to a decline.
• Government policies: Government policies and regulations, such as changes in tax laws or banking regulations, can also have an impact on the financial sector and therefore on the FINNIFTY index.
• Global events: Events such as geopolitical tensions or global economic downturns can also affect the performance of financial stocks and impact the FINNIFTY index.

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To Wrap It Up…

Understanding FINNIFTY can enhance your grasp of the Indian stock market. It serves as a tool for diversification, highlights sector-specific growth, and supports strategic trading. Whether you are trading, investing, or just staying informed, tracking FINNIFTY offers valuable insights and opportunities in the financial sector.

Investing in any stock market index, including FINNIFTY, carries risks. It is important to research thoroughly or seek advice from financial experts before making decisions. Investors interested in the financial sector can also explore smallcase to invest in a basket of stocks or ETFs based on the theme/sector of their choosing. 

Frequently Asked Questions About the FINNIFTY Index

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