Nifty Bank

NIFTY Bank

Nifty Bank, or Bank Nifty is an index of a select set of bank stocks listed on the National Stock Exchange (NSE). It is one of the most important indices of the NSE with multiple ETFs, F&O and index funds based on it. Options and futures with the Nifty Bank index as the underlying asset have high trading volumes. Read on to learn more about how Nifty Bank is calculated and what are the overall trends in the index.

What is the Nifty Bank Index?

The Nifty Bank is a sectoral index on the National Stock Exchange (NSE) that captures the performance and behaviour of large and liquid banks. It is a diversified index consisting of a maximum of 12 stocks, which include public sector banks, private sector banks as well as other banks.

This Bank index was launched on September 15, 2003, with the base year set to 2000 and the base value at 1000. It is reconstituted semi-annually in order to ensure that it continues to reflect the changing dynamics of the Indian financial markets and the economy. However, no single stock can exceed the cap of 33%, and the top 3 stocks must cumulatively adhere to the cap of 62%.

The Nifty Bank Index has generated a compound annual growth rate (CAGR) of approximately 17.6% between January 1, 2000 and December 31, 2021. In the same 22 years, the Nifty 50 has generated a CAGR of roughly 11.5%. Nifty Bank has outperformed Nifty 50 in six of the 10 years, between 2011-12 and 2020-21.

As of August 2023, the Nifty Bank index captures almost 13.34% and around 88% of float-adjusted market capitalisation on the NSE and its banking universe, respectively. The total traded value of all index constituents is approximately 14.84% of the traded value of all stocks on NSE for the preceding 6 months from August 2023.

The Nifty Bank index is governed by a three-tier structure that comprises the BOD (Board of Directors) of NSE Indices Limited, the Index Advisory Committee (Equity) and the Index Maintenance Sub-Committee. The Nifty Bank index has a variant in the form of the Nifty Bank Total Returns Index. This index is ideal for launching index funds, ETFs, structured products, and benchmarking fund portfolios.

How is the Nifty Bank Index Value Calculated?

The Nifty Bank index value is determined by weighing its 12 stocks on the basis of free-float market capitalisation. Free float refers to the shares which are not held by promoters and are readily available to the public for trading. The index value is calculated using the formula as follows:

Index Value = (Current Index Free Float Market Capitalisation / Base Free Float Market Capitalisation of Index) * Base Index Value

Where,

Index Free Float Market Capitalisation = Current shares outstanding * IWF * Capping factor * Price

[IWF = Investible Weight Factor i.e. the portion of the outstanding shares that is open to trading for the public on the exchange

Capping factor = 1 in case of uncapped indices]

The Nifty Bank index is reviewed semi-annually based on 6 months’ data ending in January 31st and July 31st of each year. The replacement of stocks in Nifty Bank, if required, is implemented from the last trading day of March and September.

Nifty Bank Scrip Selection Criteria: How are Stocks Selected for Inclusion in Nifty Bank?

The constituent stocks need to meet the following eligibility criteria:

1. Should be part of the Nifty 500.
2. Minimum number of stocks in the index should be 10. If the number of eligible stocks falls below 10, then in such cases, the deficit number of stocks shall be selected from the universe of top 800 ranked stocks based on both average daily turnover and average daily full market capitalisation data of the previous 6 months.
3. Should be a part of the Banking sector.
4. Should have a trading frequency of at least 90% in the past 6 months.
5. Should have a listing history of at least 6 months.
6. Should be tradeable in the F&O segment.
7. A recently listed company (IPO) can be included if it meets the above eligibility criteria for a period of 3 months.
8. Should adhere to the upper limit of 33% share in the total index in case of a single stock and 62% for the top 3 stocks cumulatively at the time of rebalancing.
9. Eligible companies will be ranked as per the average free-float market capitalisation.
10. Companies will be included if their free-float market capitalisation is at least 1.5 times the free-float market capitalisation of the smallest constituent in the index.

How To Invest in Nifty Bank Stocks?

You can invest in the Nifty Bank in the following ways:

1. You can invest in an ETF or an index fund that tracks the Nifty Bank, i.e. it invests in a similar pattern in the same set of stocks as the Nifty Bank. This will allow you to directly enjoy capital gains based on the growth in the index’s value.
2. You can trade futures and options which have the Nifty Bank as the underlying asset. The changes in the value of the Nifty Bank will determine the outcome of the future or the option.
3. You can make a list of all the stocks that come under Nifty Bank and buy those stocks in the same proportion as in the Nifty Bank.

What are the Benefits of Investing in the Nifty Bank?

The following are some of the top benefits of investing in Nifty Bank:

1. Nifty Bank stocks include some of the top banking stocks in the country. The index itself has shown tremendous performance since its inception. Therefore, buying stocks under Nifty Bank will help your wealth grow.
2. Futures and Options on Nifty Bank are some of the derivatives with a high trading volume. This reduces the level of risk that may be involved in F&O trading as you can sell the derivative contracts held by you more easily.

History of the Nifty Bank

As we read before, Nifty Bank was launched in the year 2003 with the base year set at 2000 and the base value at 1000. As of August 10, 2023, its value is 44,544, which means that since 2000, its value has grown by 44.5 times.

Since 2009, the Nifty Bank has been on a robust growth trajectory. Nifty Bank saw its sharpest decline in the period between 2nd December 2019, when it was at around 32,137, and 2nd March 2020 by, when it had dropped to around 19,224, a nearly 40% fall. However, it quickly recovered in the period between September and December of 2020. Thereafter, the recovery of the economy from COVID helped the Nifty Bank surge past its old levels to reach its present levels.