What is FinNifty?: All You Need To Know

FINNIFTY is just another name for the Nifty financial services index. The National Stock Exchange (NSE) launched the Nifty Financial Services Index i.e. FINNIFTY in January 2021. This index was created to track the performance of stocks in the Indian financial market that includes financial institutions, banks, NBFCs, insurance companies, housing finance and other companies that offer financial services that are listed on the National Stock Exchange (NSE). It tracks the performance of such companies over time.

The index aims to track how the financial sector of India is performing. It is created to reflect the behaviour and performance of the Indian Financial Markets. Financial institutions play a vital role in the success and survival of any economy, especially in countries like India where the economy is undergoing continuous change. They provide a market for money and assets so that capital can be allocated efficiently where it is most useful. For example, a bank takes deposits from customers and lends money to borrowers. FINNIFTY tracks how these different financial services are performing in India. One of the interesting aspects of FINNIFTY is that within a couple of years FINNIFTY has become very popular both among investors and traders. It is more diverse than the Bank Nifty Index.

What constitutes FINNIFTY?

FINNIFTY is the index of twenty stocks some of the bigger names include HDFC bank, ICICI bank, and KOTEK bank they carry much higher weightage than some of the other small institutions where the weighting is very minimal and each stock’s weight depends on its free float capitalization value in the market.

If we broadly classify these companies which include a maximum of twenty stocks in three different categories those are Banks, NBFCs, and Insurance. Where the weightage of the bank is 65% and the weightage of NBFCs companies is about 25% and that of the insurance companies and the rest of the stocks is about 10%. So clearly the banking stocks especially the private sector banks are dominating this index at least as of today which is also a reflection of our economy. For example, in our economy, banking stocks are much more predominant than insurance companies. After the inclusion of LIC, the weightage of insurance has increased and the weightage of the bank has come down.

FINNIFTY Stock and Weightage:

FINNIFTY Index decides the stock weightage based on the valuation of the outstanding shares of the company in the market. Several leading and well-known stocks are listed under FINNIFTY. An interesting thing about FINNIFTY is that the stock with more weightage can not be more than 33% of the index and the top 3 stocks can not be more than 62% of the index this ensures that the index doesn’t become top-sided.

The three largest contributors to the Nifty Financial Services Index are HDFC Bank Ltd., Housing Development Finance Corporation and ICICI Bank Ltd., accounting for up to 59.1% of FINNIFTY weightage.

Who decides which stock should be part of FINNIFTY?

This index is maintained by the National Stock Exchange and they follow a very simple process to select stocks for this particular index. To select 20 eligible stocks, NSE chooses from best of best top 500 companies i.e. Nifty 500 in India. Simply put Companies must be included in the Nifty 500 to be eligible for FINNIFTY. The next step is to calculate the weightage of each sub-sector based on the market capitalisation model. Within eligible stocks, the weights of each sub-sector based on average free-float market capitalization are calculated. Market capitalisation refers to the number of shares of the company multiplied by its market price.

Market Capitalisation = Number of shares outstanding× Market Price

After the weightage of each sub-sector is decided the companies within each sub-sector are then sorted in the descending order of their market capitalisation. The idea is to see top performers in each sub-sector and the top two, top three or sometimes top four companies from each sub-sector are then selected to be part of the FINNIFTY index. Now just because the stock has entered the index, it doesn’t mean that it gets to stay there forever. So every six months NSE does something called Rebalancing. This means that it checks whether the stocks that are part of the index right now are still eligible by the criteria. If not then NSA will replace that stock with a stock which is performing better. It is reconstituted or rebalanced on a semi-annual basis.

 How can FINNIFTY be traded?

Investors cannot buy the FINNIFTY index directly. However, they can invest through mutual fund schemes in those funds whose weightage is equal to and reflective of the results of FINNIFTY. To be able to buy FINNIFTY as an index, investors would have to purchase the entirety of the 20 stock constitutions in correspondent weightage as mentioned. One can also invest in FINNIFTY by buying future contracts or options contracts. Future and options are derivatives i.e. they are financial instruments that derive their value from other assets in this case the underlying asset is FINNIFTY. When you buy an option contract on FINNIFTY, you have the right but not the obligation to execute the contract on or before the expiry date but when you buy a future contract on FINNIFTY; you have the obligation to execute the contract on or before the expiry date. Both futures & options help you make money when you can accurately predict the upside swing but the potential down-sight with the future contracts are much greater.

 The Settlement Process under FINNIFTY:

FINNIFTY derivatives are settled in cash. In the case of monthly contracts, the expiration date is the last Thursday of the expiry month. Weekly contracts, on the other hand, are subject to expiration on the Thursday of the expiration week. Recently NSE has decided to discontinue the weekly index futures contracts of FINNIFTY. The second change announced in the FINNIFTY derivatives contract is on the day of their expiry, now that settlement has been moved from Thursday to Tuesday.

Purpose of FINNIFTY Index:

FINNIFTY assists investors in different ways; FINNIFTY Index can be used for various purposes such as benchmarking fund portfolios, launching index funds, ETFs and structured products. Today it is widely used by mutual funds and other institutions to benchmark the performance of their funds and it is very popular among traders who plan to trade in future and options in this particular index. It is suggested to invest in FINNIFTY as it is a complete package of the Indian financial sector, which includes not only banks but also other financial institutions and has a wide scope in other financial firms.

 Conclusion:

The FINNIFTY Index has performed extremely well since its inception. With more diversified investments in various sectors of the Indian economy, it offers investors more opportunities. It serves as a "risk management tool" for those having exposure to the financial services sector. So far, the FINNIFTY index has performed well. Since its launch, it has outperformed both Nifty Bank and Nifty 50.The CAGR of FINIFTY stands at 18.7%, while Nifty 50 and Nifty Bank have registered a CAGR of 13.9% and 16.9% respectively. A solid fundamental understanding of the market coupled with experience and patience can yield good returns over time. The performance of FINNIFTY has been promising so far and is attracting more investors and traders to NSE.