Introduction
Various indices drive the financial market, each catering to specific sectors. Among these, the FINNIFTY index is a unique initiative. Introduced in January 2021, by the National Stock Exchange (NSE), it provides a comprehensive reflection of the financial services sector's performance in India. It is especially useful if you trade in futures and options (F&O). Read on to learn more about FINNIFTY's role, its calculation, and its characteristics.
What is FINNIFTY?
The FINNIFTY is also known as the NSE Financial Services Index. It represents the top 20 companies from the financial services sector. These companies include banking institutions, insurance companies, and other non-banking financial companies (NBFCs). The index represents a sectoral benchmark for the financial services industry.
How is FINNIFTY calculated?
The calculation of FINNIFTY involves a free-float market capitalisation methodology. This is a common method for most NSE indices. Under this method, only the shares that are readily available for trading are considered for market cap calculation. This excludes promoter holdings or government shares. It represents the total free-float market value of all the stocks in the index in relation to the base market capitalisation value.
To calculate free-float market capitalisation, you can use the following formula:
Outstanding shares x price x investible weight factors
In this formula, the investable weight factors help in assessing the weightage of each stock in the index. The weightage ensures that no single company can disproportionately affect the index. This keeps it well-balanced and represents the broader financial sector. It avoids being dominated by a few large-cap stocks.
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Key Characteristics of FINNIFTY
Some of the noteworthy characteristics of FINNIFTY are explained as follows:
· Sector-specific index
FINNIFTY is a sectoral index that tracks the performance of financial services companies. This focus makes it a vital indicator when you want to analyse the financial sector's health. All, while not divulging your time on other unrelated industries.
· Diverse composition
The FINNIFTY index includes the top 20 financial companies from different sectors. They include banking, insurance, and NBFCs. Such a broader scope allows you to participate in a wider range of investments in the financial sector.
· Semi-annual rebalancing
This index is rebalanced every six months. This is to ensure it accurately represents the top-performing financial companies. The typical timeline for rebalancing is on 31st January and 31st July. A four-week notice is issued to the market before any changes are made.
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· Derivatives trading
A notable feature of the FINNIFTY index is its availability for F&O trading. It lets you take positions in the financial sector's future performance through FINNIFTY futures and options. It offers flexibility in trading strategies like hedging or speculating on the sector's movements.
· Bank Nifty vs FINNIFTY
FINNIFTY, like Bank Nifty, focuses on financial sectors. However, they both differ. Bank Nifty is narrower in scope. It concentrates on the banking sector alone. Conversely, FINNIFTY includes not just the banks but also NBFCs and insurance firms, expanding the scope.
Why Should You Consider Trading in FINNIFTY?
FINNIFTY provides numerous benefits which makes it a valuable consideration as an investor:
· High liquidity and trading volume
The stocks included in the FINNIFTY index are among the most liquid ones listed on the NSE. With the liquidity, you can trade in the futures and options market. It lets you quickly enter and exit positions without significant price changes.
· Broad exposure to the financial sector
FINNIFTY exposes you to a wide range of financial companies and institutions not just banks. As a result, you can devise a diversified investment strategy. Also, you can reduce the risk of over-reliance on a single segment of the financial industry.
· Risk diversification
Following up on the broad exposure element, you can diversify your risk with FINNIFTY. As a result, you can mitigate the impact of adverse movements in individual stocks. Overperforming stocks can balance the potential losses of underperforming ones.
· Opportunities in volatility
The financial services sector is likely more volatile compared to other sectors. While this might present risks, it also offers the potential for significant gains. You can create short-term trading strategies like day trading and options trading.
· Performance record
Over the years, FINNIFTY has demonstrated consistent performance. This reflects the growth of India's financial sector. The index includes top companies that have shown resilience and profitability. This makes it attractive for short and long-term investing.
Conclusion
Now that you know what the FIN NIFTY index is, you can explore its potential in the financial markets. With its broad exposure to the financial services sector, you can explore a diverse opportunity in trading. Plus, its calculation is straightforward based on the free-float market capitalisation. Its key characteristics such as volatility, derivatives trading, risk diversification, and more make it highly attractive if you are an active investor. FINNIFTY opens up a comprehensive platform for you to engage in India's dynamic financial sector.
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