Stock market indexes are collections of selected stocks that typically represent a specific sector. They reflect the performance of the underlying stocks and allow you to invest in a diversified portfolio. As a result, if stock prices rise, the index increases as well. There are many indices in the Indian Stock Market and the top two are BSE Sensex and NSE Nifty. FinNifty is another index representing the financial market performance in the Indian economy.
FinNifty is the Nifty Financial Services Index. This index was established in January 2021 and includes various financial stocks. It was created to monitor the performance of equities in the Indian financial industry, which covers sectors such as banks, financial institutions, NBFCs, insurance companies, housing finance, and other financial services companies.
Updated on: 01/12/2023
FINNIFTY: 20,055.00 – In the last trading session Finnifty entered into a negative trend. You can go short in Finnifty with a stop loss of 19,830 on a daily closing basis. Finnifty is considered bearish until it trades below 19,830 levels.
|FINNIFTY||Level 1||Level 2||Level 3|
Constituents of FinNifty
Constituent means the stock of a company that is included in the index and helps in determining the index value. Each constituent’s weight in the overall index is determined by market capitalization. The FinNifty index is built using the free float market capitalization approach. In this approach, a company’s valuation is based only on the outstanding shares held by the public. Shares owned by promoters, trusts, government, directors, etc. are not taken into consideration. The base value of this index is 1000.
Free float market capitalization = Outstanding shares X Price X IWF
Here, IWF is the Investible Weight Factor, where greater IWF indicates that there are more shares listed under public shareholding. Each stock’s weight is determined by the free float market capitalization factor and the weightage keeps changing. Every six months, this weightage will be rebalanced. This index is administered by the National Stock Exchange (NSE) and stocks for this index are chosen using a long process.
Here is the list of FinNifty stocks, along with their weightage:
|S.No.||FinNifty Stocks||Industry||Value (in lakhs)|
|3.||State Bank of India||Banks||1,29,612.23|
|6.||Shriram Finance Ltd.||NBFC||57,050.07|
|7.||Bajaj Finance Ltd.||NBFC||51,089.29|
|8.||HDFC Life Insurance Company Ltd.||Life & health insurance||38,742.65|
|9.||Cholamandalam Investment & Finance Company Ltd.||NBFC||19,979.82|
|10.||Bajaj Finserv Ltd.||Financial Services||18,777.35|
|11.||HDFC AMC Ltd.||Financial Services||16,549.88|
|12.||Power Finance Corporation Ltd.||Finance term lending||12,822.75|
|13.||ICICI Lombard General Insurance Company Ltd.||General Insurance||12,649.18|
|14.||ICICI Prudential Life Insurance Company Ltd.||Life Insurance||10,496.21|
|15.||REC Ltd.||Finance term lending||9,834.14|
|16.||SBI Life Insurance Company Ltd.||Life & health insurance||6,847.85|
|17.||SBI Cards and Payment Services Ltd.||NBFC||6,622.53|
|18.||Indian Energy Exchange Ltd.||Financial Services||4,345.17|
|19.||LIC Housing Finance Ltd.||Housing Finance Company||4,163.65|
|20.||Muthoot Finance Ltd.||NBFC||2,293.96|
Source: NSE India, Nov 2023
Advantages of Investing in FinNifty
- The financial services sector is a growing sector and if you are bullish about the overall finance sector, then it is a good option for you.
- Another important factor is diversification. By investing in various companies, you can diversify your portfolio and minimize your risk connected with investing in individual equities.
- The Nifty Financial Services index has provided stable and good returns since its inception. As a result, it would be an excellent addition to your portfolio.
- There is a huge potential in the financial services sector and it has given 21.62% returns in the last 1 year.
- The FinNifty index is extremely liquid, thus, you can readily purchase and sell shares in the index at any moment during trading hours.
Disadvantages of Investing in FinNifty
- There are a limited number of stocks in the Nifty Financial Services index and if any of them underperforms, then there is a chance of concentration risk.
- Due to regulatory and economic factors, you may see volatility in the Financial services companies, and in the FinNifty index.
- FinNifty index only contains large-cap companies, therefore it does not provide exposure to small-cap equities.
How to Invest in FinNifty?
To invest in FinNifty, you must first open a Demat account with a reputable stock broker. There are different ways to invest in FinNifty:
Futures & Options (F&O): The FinNifty index can be traded using derivatives such as Futures and Options. This allows you to make hedges and speculate. For a monthly contract, the expiration date of FInNifty derivates is the last Tuesday of the month. However, it might be a risky option for inexperienced investors, as they might lose their money.
Index Fund or Exchange Traded Fund (ETF): You may decide to invest in mutual funds or ETFs that track the FinNifty stocks. Some of the top mutual funds in this category are ICICI Prudential Banking and Financial Services Fund, Invesco India Financial Services Fund, UTI Banking and Financial Services Fund, etc. And the top ETF scheme comprising of FinNifty stocks is Mirae Asset Nifty Financial Services ETF.
Individual FinNifty stocks: You can buy stocks of specific firms that are listed on the FinNifty index. You need to buy the same stocks mentioned in the index in the same weightage. This will be a time-consuming process and you need to accept the risk that is associated with the selection of individual stocks.
Difference between FinNifty and Bank Nifty
- Bank Nifty is comprised of 12 banking stocks, where each stock’s weight is determined by its market capitalization. It only contains the banking stocks. However, FinNifty takes it a step further. It is comprised of 20 stocks, which not only contain banking stocks but include NBFCs, financial institutions, insurance companies, housing finance, and other financial services companies.
- Both FinNifty and Bank Nifty are volatile because they consist of fewer stocks as compared to Nifty 50. However, it is seen that Bank Nifty is more volatile than FinNifty because it includes only the banking stocks.
- FinNfity has demonstrated better returns, great performance, and broad exposure if compared to Bank Nifty. Also, the FinNifty index is more diversified than the Bank Nifty index.
Important points to consider before Investing in FinNifty
- Each stock can weigh only 33% and the cumulative weightage of the top 3 stocks in the FinNifty index should not surpass 62%.
- Rebalancing of FinNifty stocks is done on a semi-annual basis.
- FinNifty only looks into companies that are part of the Nifty 500 index.
- There is a freeze limit for FinNifty, which is set by NSE and this limit is reviewed and announced every month.
- FinNifty is the 1st index derivative that includes a weekly futures contract as well as weekly options.
Should you Invest in FinNifty? Is FinNifty right for you?
The FinNifty index is sectoral-based and thus contains a high level of risk and volatility. So, it is suitable for investors who are bullish on the financial services sector like banks, NBFCs, etc. As we know, there are different ways to invest in FinNifty and if you are an experienced trader then only you should invest through derivatives contract. If you are a newbie and do not have much experience in stock markets and still want to make a bet on FinNifty, then you can go for mutual funds or ETFs.
At last, we can conclude that the FinNifty index is useful to diversify your portfolio which allows you to invest in the financial services sector. While investing in the FinNifty index, it is critical to monitor economic and political factors because they will have an impact on FinNifty stocks. It is also essential to have a disciplined attitude to trading or investing. Over time, a sound fundamental grasp of the market, combined with experience and patience, can provide good results. So far, FinNifty’s performance has been more positive than Nifty 50 and Bank Nifty, luring more investors and traders to the NSE.
FAQs – FinNifty
1. What is FinNifty?
Ans: FinNifty stands for Nifty Financial Services Index and it reflects the performance of the financial services industry in India.
2. How can I invest in FinNifty?
Ans: You need to open a demat account first before trading in FinNifty and then trade through Futures & options, or you can also invest through mutual funds/ ETFs.
3. Are FinNifty and Nifty 50 the same?
Ans: The primary difference between FinNifty and Nifty 50 is the number of stocks. Nifty 50 has 50 no. of stocks, while FinNifty has 20 stocks. Furthermore, 10 FinNifty stocks are on the Nifty 50 stock list.
4. What is the difference between FinNifty and Bank Nifty?
Ans: Bank Nifty is comprised of 12 banking stocks and FinNifty is comprised of 20 stocks, which not only contain banking stocks but they include NBFCs, financial institutions, insurance companies, housing finance, and other financial services companies.
5. Why Should I Invest in the FinNifty Index?
Ans: You can diversify your unsystematic risks in order to maximize your earnings because FinNifty consists of the top and leading companies in the financial services sector.