What is FINNIFTY? Know in Detail Here!

5 mins read

Introduction

In January 2021, the National Stock Exchange (NSE) launched Nifty Financial Services Index i.e: FINNIFTY. This includes financial institutions, banks, insurance companies, housing finance and other companies that offer financial services. The index includes a certain number of stocks in different weights. Read on to know more about the FINNIFTY index in detail, why you should invest and how to go about it.

What Is FINNIFTY?

Financial services in India encompass banks, insurance companies, NBFCs, housing finance companies, and so on. FINNIFTY essentially tracks the performance of such companies over time. The index includes a maximum of twenty stocks, and each stock’s weight depends on its free float capitalization value in the market.

An easy way to understand this is: free-float market capitalization = shares outstanding x price x investible weight factors/IWF

The more the number of investors’ shares listed as public, the higher the IWF.

A higher IWF is indicative of more shares under public shareholding listed by each company.  This number is determined based on the shareholding pattern reported by the company to any stock exchange.

Financial entities are crucial for the success and survival of any economy, especially in countries like India where the economy is continuously undergoing changes. Banks provide borrowers with funds lent from surplus savings. NBFCs and housing finance bodies promote the creation of credit and overall economic growth. FINNIFTY aims to reflect the behaviour of these various subsectors within the economy, in one single index. FINNIFTY is the symbol for Nifty Financial Services.

FINNIFTY At A Glance:

  1. The base date of the index is 1st January 2021.
  2. The base value of the index is 1000
  3. FINNIFTY tracks how various financial services in India perform. This includes banks, NBFCs, housing finance, insurance, etc.
  4. The maximum number of stocks is 20.
  5. FINNIFT is reconstituted on a semi-annual basis.
  6. In order to reduce turnover, a buffer is applied based on free-float market capitalization, which also determines each stock’s weightage.
  7. In order to be eligible for FINNIFTY, companies should be included in Nifty 500.
  8. The weight of each stock is based on its free-float market capitalization

FINNIFTY Settlement Process and Contract Type

FINNIFTY derivates are settled with cash, and the expiry date is the last Thursday of the month of expiry for a monthly contract. For weekly contracts, the day of expiry is the Thursday of the expiry week.

The National Stock Exchange has put up options and futures in seven serial weekly contracts and three serial monthly contracts on offer. For the first time, the NSE is offering weekly futures for stock index derivatives.

FINNIFTY Stocks and Weightage

Several prominent and well-known stocks have been listed under FINNIFTY. HDFC bank holds the greatest weightage. Here is a table that shows the list of stocks with their respective weights.

Sectors Involved In FINNIFTY

As of 29th December 2020, banks represent a weightage of 63.1% of FINNIFTY, 20.3% of Nifty 500 Index,26.5% of the Nifty 50 Index and 100% of the Nifty Bank Index

Insurance companies hold 8.0% weight in FINNIFTY, 2.5% in Nifty 50 and Nifty 500, and nil in.

Hence, these subsectors are given more exposure by this index as compared to broad market indices, and FINNIFTY gives a more targeted approach when it comes to investors on the lookout for certain sectors. Meanwhile, the approach towards all subsectors of the economy is quite diverse, as compared to indexes like the Nifty Bank Index.

How To Buy The FINNIFTY Index?

Investors cannot buy the index directly. However, they can invest via mutual fund schemes in funds that posses a weightage that is equal to and reflects FINNIFTY’s results.

In order to be able to purchase FINNIFTY as an index, investors will have to buy the entirety of the 20 stock constitution in the correspondent weightage as mentioned.

An alternative is buying the Nifty Bees, which is the ETF on the index and replicates its performance

Why Should you Invest In FINNIFTY

The primary advantage to investing in FINNIFTY is the manner in which it aids in bringing down non-systematic risk. Unsystematic risks include financial and business risks. Events such as declining revenues, strikes, rise in financing cost, narrowing profit margins, drop in sales or even natural disasters all count as non-systematic risk. These can easily be diversified. By investing in a few different companies, investors can spread out their risks. This is the crux of smart portfolio-building.

Conclusion

So far the FINNIFTY index has performed very well. With more diversified exposure to different sectors of the Indian economy, it provides more opportunities to investors. Since inception, the index has shown returns of 18.7% per annum, as compared to the 13.9% per annum return of Nifty 50 and 16.9% per annum returns of the Nifty Bank index. On a CAGR point-to-point return basis, the FINNIFTY index has outperformed the Nifty 50 Index as well as the Nifty Bank Index. For any investor, the key thing to remember is portfolio diversification and thorough research on every investment scheme and index in the market. A solid foundational understanding of the market, along with experience and patience can bring good returns over time.  FINNIFTY’s performance has been promising so far and is drawing more investors and traders to the NSE.