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Everything you need to know about FinNifty and its valuation

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Published Date: 30 Nov 2024Updated Date: 30 Dec 20246 mins readBy MOFSL

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Introduction

Formerly introduced as the Nifty Financial Services index in January 2021, FinNifty is an index representing the Indian financial services sector. It comprises up to 20 stocks. These include banks, financial institutions, housing finance companies, and insurance firms listed on the National Stock Exchange (NSE). FinNifty gives a comprehensive overview of the financial sector. Understanding how its valuation works is critical if you seek to align your portfolio with India's evolving financial market.

Valuation and performance of FinNifty

The current market capitalization of FinNifty is Rs. 5,570,201.59 crores as of 19th November 2024. It previously closed at Rs.23,257.70. Year-to-date, this index has delivered a return of 11%. This is slightly behind the NIFTY index, which recorded a return of 24% over the same period. Its current Profit/Earnings ratio is 16.22 with the dividend yield going up to 0.92%. The P/E ratio closely aligns with a 19.90% 1-year return, which balances the evaluation.

Factors influencing the FinNifty performance

The valuation of FinNifty is influenced by key aspects such as:

· Market capitalisation weighting

FinNifty makes use of the free-float market capitalisation as its weighting method. With this approach, the index only considers the shares available for trading. This guarantees that it reflects market activity accurately.

· Sector composition

The index covers sectors such as banks, insurance firms, housing finance companies, and non-banking financial companies (NBFCs). Its valuation reflects the collective performance of these sectors. It is heavily influenced by the respective fundamentals of such segments.

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· Performance of underlying stocks

The individual stocks within the different sectors drive the valuation and overall performance of FinNifty. Stocks with higher weights (For example, well-known banks) have a significant impact on the index's price and metrics.

· Economic and monetary trends

Most of the economic and monetary trends in the country impact how the stock market indices behave. They include interest rate policies, inflation rates, fiscal measures, etc. For example, interest rates can lead to high banking profitability. This positively influences the index's valuation.

· Global financial market patterns

The financial services sector is sensitive to global trends such as changes in crude oil prices,

Benefits of investing in FinNifty

When you track or invest in FinNifty stocks, you can gain the following benefits:

· Diversification

Multiple financial sub-sectors are balanced under this index. Hence, you can mitigate your risks by spreading your investment across a range of financial services companies.

· Sector-specific exposure

FinNifty has a sector-specific exposure to the financial markets. It focuses on the segment that is a critical driver of the Indian economy, giving you an opportunity to grow your investments.

· Liquidity

This index includes liquid and high-trading-volume stocks. Thus, you can buy and sell the index shares at your discretion within business hours. With such liquidity, you can liquidate your holdings.

· Benchmarking opportunity

FinNifty serves as the benchmark for sectoral funds and ETFs. It aids in comparative analysis and portfolio management. You can use this benchmarking index to evaluate the performance of your stocks and allocate assets accordingly.

· Flexibility in trading

You can consider FinNifty for both investments and hedging against risks in the financial services segment. It provides you with the flexibility to strategise according to your needs with the availability of stocks and future options.

Methods to invest in FinNifty

If you are considering investing in FinNifty and wondering how to go about it, consider these ways:

· Exchange-Traded Funds

ETFs operate like individual stocks as they are traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). ETFs act as a seamless means to invest in the financial market. They provide you with a varied selection of the leading financial firms in India. When you buy and sell shares of these ETFs, you can acquire them at the market-determined price.

· Index funds

An index fund is a form of mutual fund that closely aligns with a chosen stock market index, in this case, FinNifty. These funds provide similar advantages of diversification to ETFs. However, you can only trade them once daily at the time of market closing. The trading takes place at the NAV equivalent price.

· Direct investment

You can also opt for a direct approach to investing. Simply purchase the shares of individual companies included under the NSE that come under the FinNifty index. If you opt for this route, you need to conduct thorough research and analysis of the individual company's financial stock. You will have to look into its track record and growth potential while considering risks.

Conclusion

FinNifty is a valuable index if you want to focus on India's financial services sector. Its unique composition of banks, insurance firms, NBFCs, and other financial institutions provides diversity and sector-specific exposure. You can invest in this index through various investment strategies like ETFs, index funds, and direct stock investments, as per your interest. As a result, you get flexibility in aligning your portfolio with FinNifty.