Nifty Financial Services (FINNIFTY): An Overview

Introduction

Nifty Financial Services, also known as FINNIFTY, is an index in the Indian stock market that was founded on September 7, 2022, by NSE. It comprises 20 financial stocks, including financial institutions, housing finance companies, insurance companies, and other finance-related companies. The FINNIFTY works similarly to other indices and tracks the performance of these companies. Financial companies play a key role in a country’s economy, and this index’s behaviour depends on the financial companies’ performance in India. In simple words, FINNIFTY is the abbreviation of Nifty Financial Services.

Structure and Eligibility

The FINNIFTY was established with January 1 2021, as its base date and an initial value of 1000. To be eligible for inclusion in the FINNIFTY, companies must be part of the Nifty 500. The composition of the FINNIFTY may change every six months, depending on several factors and the methodology for selecting its components. In terms of weightage, a single stock has a maximum limit of 33%, as weights are assigned based on free-float market capitalisation. Additionally, up to three stocks can cover up to 62% of the index’s weightage.

Investment Options

Investors cannot purchase FINNIFTY directly like company stocks. However, several investment options are available, including:

1. Mutual Funds
2. Exchange Traded Funds (ETFs)
3. Futures & Options Contracts

Uses of FINNIFTY

The major uses of the Nifty Financial Index (FINNIFTY) include:

1. Providing a sectoral outlook for investors to track financial stocks as a whole was impossible before the introduction of FINNIFTY.
2. It enables investors to buy all stocks in the index with the same weightage, allowing them to invest in the most volatile and highly free-float market capitalisation financial stocks.
3. It allows investors to invest in mutual funds, including FINNIFTY stocks and provides exposure to the index without directly investing in them.
4. Offers futures and options trading for experienced investors who want to trade options or futures contracts related to the FINNIFTY index.

Sector Overview

Some key insights into the financial sector and its relationship with the FINNIFTY index include:

1. The same five stocks occupy 63.89% weightage in the FINNIFTY index and 87.48% weightage in the Bank Nifty.
2. The financial industry accounts for 35% of the total assets under management (AUM).
3. The finance sector is the largest among listed companies, accounting for 33.5% of the Nifty 500 index.
4. In recent years, the financial sector has experienced growth and seen new companies listed.
5. Most Asset Management Companies (AMCs) have schemes related to the financial services sector.
6. Unlike Bank Nifty, which includes only banking stocks, FINNIFTY encompasses banking and finance-related stocks.

Differences between FINNIFTY and Other Indices

FINNIFTY stands out from other indices in several ways:

1. It includes fewer stocks than indices like the Nifty 50 and Nifty 500 but more than the Bank Nifty (12 stocks).
2. It offers higher volatility, making it an attractive investment option for some investors.
3. While Bank Nifty focuses solely on banking stocks, FINNIFTY covers a broader range of finance-related companies.
4. Unlike other options, FINNIFTY options expire on Tuesday rather than Thursday, like other indices and

Constituents- 

The constituent of Finnifty with their related weightage is 

• HDFC Bank (24.04%)
• ICICI Bank (19.92%)
• HDFC (16.44%)
• Kotakbank (8.48%)
• Axisbank (8.33%)
• SBIN (6.47%)
• Bajajfinance (4.22%)
• BajaFinserv (2.35%)
• Hdfclife(1.72%)
• SBILife (1.58%)
• Cholafin (1.06%)
• Shriramfin (0.92%)
• ICICIGI (0.84%)
• SBICards (0.72%)
• PFC (0.57%)
• HDFCAMC (0.56%)
• ICICIPruLi (0.55%)
• RECLTD (0.49%)
• IEX (0.37%)
• MuthootFin (0.36%)

Benefits of Investing in FINNIFTY

Investing in FINNIFTY offers several advantages:

1. Reduced Risk: Investing in FINNIFTY is a systematic way of investing that can help reduce risk. A diversified portfolio is an excellent method to mitigate non-systematic risks, such as events like strikes, declining revenues, low-profit margins, and increased financial costs. By including a variety of financial stocks, FINNIFTY helps create a secure and healthy investment.
2. Growth Potential: FINNIFTY includes banking and financial stocks, and with the Indian economy growing at a faster rate than in previous years, there is a high probability that financial stocks will outperform other sectors. As a result, FINNIFTY presents an opportunity for investors to benefit from this growth.
3. Popular Among Healthy Investors: Financial stocks have always been a part of healthy investors’ portfolios. FINNIFTY offers a diversified selection of the best financial stocks, making it easier for investors to include them in their investments.

Sector Distribution

The weightage of FINNIFTY is distributed among various sectors:

1. Banks: Banks occupy 63.1% of the weightage in FINNIFTY. In the Nifty 50 index, they account for 26.5% of the total weightage, while Bank Nifty is 100% occupied by banks.
2. Insurance Companies: Insurance company stocks represent 8.0% weightage in FINNIFTY and 2.5% in the Nifty 50.
3. Other Subsectors and Financial Companies: The remaining weightage is distributed among subsectors and other financial companies.

Conclusion

In summary, Nifty Financial Services or FINNIFTY is an index that comprises not only banking stocks but also other financial companies. It is a more diversified index offering higher investment opportunities and better growth potential than other indices. While investors cannot directly invest in FINNIFTY, several indirect investment options are available. Investors can choose to buy individual stocks and use FINNIFTY for hedging purposes. Futures and options trading is also available in FINNIFTY, although it is a riskier investment alternative compared to others.