National Stock Exchange (NSE) on 11 January 2021, Monday launched the new derivatives contract named Nifty Financial Services Index (FINNIFTY). The Nifty Financial Services Index is designed to reflect the behavior and performance of the Indian financial market which includes banks, financial institutions, housing finance, insurance companies and other financial services companies.
In this post we will try to find out everything related to the newly launched index by NSE such as no. of stocks included in the index, weightage of different stocks in FINNifty, Lot size, beta value and other contract related specification in detail.
So, let us start by knowing about what exactly is Nifty Financial Services Index (FINNIFTY)? and how it is different from other two major index NIFTY50 and BankNifty.
What Is Nifty Financial Services Index (FINNIFTY Index)?
The Nifty Financial Services Index (FINNIFTY) tracks the performance of Indian financial services companies including banks, housing finance, insurance, NBFCs, other financial services companies etc. The index comprises a maximum of 20 stocks and a stock’s weight is based on its free float market capitalization.
Free Float Market Capitalization = Shares outstanding * Price * IWF(Investible Weight Factors)
Note: Investible Weight Factors (IWF) as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company.
The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges.
As you know the financial services firms are important to the success for any economy in the long run particularly in India the landscape is continuously changing and evolving with time. For example, Banks which have historically played a crucial role in the financial system by providing surplus funds from savers to borrowers.
Similarly in recent years other subsectors of the financial services including Insurance, Housing Finance, NBFCs, Asset Management Companies etc. have gained increased prominence. Similar to Banks, Housing Finance companies and NBFCs support credit creation and growth across the economy.
The Nifty Financial Services Index aim is to capture this diversity of subsectors within financial services and track their performance in a single index. The symbol for the Nifty Financial Services is FINNFITY.
Nifty Financial Services Index In a nutshell:
- The index has a base date of January 01, 2004, with a base value of 1000
- The index tracks the performance of Indian financial services companies including Banks, Housing
- Finance, Insurance, NBFCs, other financial services companies etc.
- The index comprises a maximum of 20 stocks
- The index is reconstituted semi-annually
- A buffer based on free float market capitalization is applied to reduce turnover
- The companies should form part of Nifty 500 at the time of review to be eligible for inclusion in the index
The weight of each stock is based on its free float market capitalization
Nifty Financial Services Index (FINNIFTY) Contract Type and Settlement Process:
The Nifty Financial Services Index Derivatives are cash-settled with expiry day being the last Thursday of the expiry month for the monthly contracts & Thursday of the expiring week for weekly expiry contracts.
NSE is offering futures and options in 7 serial weekly excluding the monthly expiry & 3 serial monthly contracts. This is the 1st time that the Exchange is making available weekly futures for the stock index derivatives.
List Of Stocks In Nifty Financial Services Index (FINNIFTY) With Weightage:
Under Nifty financial services index there are major prominent stocks listed with HDFC Bank having the highest weightage. Checkout the image below to know all the stocks listed under FINNIFTY.
The FINNifty index has 20 constituents and weightage of each stock in the index is calculated based on its free-float market capitalization such that no single stock shall be more than 33% and weightage of top 3 stocks cumulatively shall not be more than 62% at the time of rebalancing.
10 out of 20 stocks in Nifty Financial Services index are constituent stocks of Nifty 50 index. They account for 92.97% weightage in Nifty Financial Services index and 38.41% weightage in Nifty 50 Index.
5 out of 20 stocks in Nifty Financial Services index are constituent stocks of Nifty Bank index. They account for 63.89% weightage in Nifty Financial Services index and 87.48% weightage in Nifty Bank Index
Sectors Involved In Nifty Financial Services Index (FINNIFTY):
Banks account for 63.1% weight of the Nifty Financial Services Index compared to 26.5% in the Nifty 50 Index, 20.3% in the Nifty 500 Index and 100.0% in the Nifty Bank Index, as of December 29, 2020.
Likewise, the weight of Insurance companies in the Nifty Financial Services Index is 8.0% compared to 2.5% in the Nifty 50 Index and Nifty 500 Index and 0.0% in the Nifty Bank Index.
Hence, the Nifty Financial Services Index gives investors more targeted and larger exposure to these subsectors of the Financial Services sector than broad market indices.
Likewise, Nifty Financial Services Index provides more diversified exposure to various subsectors of financial services sector as compared to exposure to only banking sector in case of Nifty Bank Index.
CAGR Returns Comparison For FINNIFTY VS NIFTY50 VS BANKNIFTY VS NIFTY500:
The Nifty Financial Services Index has outperformed both the Nifty 50 Index and Nifty Bank since inception (Jan 01, 2004), with 18.7% CAGR return against 13.9% return for the Nifty 50 Index and 16.9% CAGR return for the Nifty Bank Index.
In the last 5 years, over the period of December 31, 2015 to December 29, 2020, the Nifty Financial Services Index returned 17.3% CAGR compared to 13.3% CAGR for the Nifty 50 Index and 13.7% CAGR for the Nifty Bank Index.
Volatility Comparison For FINNIFTY VS NIFTY50 VS BANKNIFTY VS NIFTY500:
In simple terms, volatility is the opinion of the market on the stock or index next potential move. If the volatility is high, the market thinks the security has potential for large price swings in both(up/down) direction.
Where as low volatility implies the stock will not move as much upon option expiration. It tells us about what the market thinks on the price movement of the underlying. Volatility does not provide a forecast with respect to market direction.
However it does give you a sense for how volatile the market may be in the future, it can also help you determine the likelihood of a stock reaching a specific price by a certain time. That can be crucial information when you’re choosing specific options contracts to trade.
Being a sector index, the Nifty Financial Services Index has been more volatile than the Nifty 50 Index, however being more diversified than Nifty Bank Index, it has been less volatile than the Nifty Bank Index over various time horizons.
Since inception, the Nifty Financial Services Index has had annualized volatility of 29.3% compared to 22.9% for the Nifty 50 Index and 30.5% for the Nifty Bank Index. Similarly, over the last 1 year between December 31, 2019 and December 29, 2020, the Nifty Financial Services Index has had annualized volatility of 41.2% compared to 31.3% for the Nifty 50 Index and 43.1% for the Nifty Bank Index.
This higher volatility over the last year was also due to the pandemic related sell-off in H1 2020, with the economy-sensitive financial sector being significantly affected by pandemic related disruptions.
Return Risk Ratio Comparison For FINNIFTY VS NIFTY50 VS BANKNIFTY VS NIFTY500:
The Nifty Financial Services Index has outperformed the Nifty Bank Index over various time horizons with lesser volatility and better returns and thus exhibited better return risk ratio than the Nifty Bank Index.
Nifty Financial Services Beta and Correlations with Nifty 50 Index, Nifty Bank and Nifty 500 Index:
The Nifty Financial Services index has a 94% correlation and a beta value of 1.2 with the Nifty 50 Index. It has a correlation of 98% with the Nifty Bank index.
Nifty Financial Services Index LOT Size, Symbol, Option Types, Expiry and Other Contract Specification:
The index is available for weekly as well as monthly contracts and it’s current Index level is 15000.
How Nifty Financial Services Index (FINNIFTY) Performed on the Launched Day?
NSE in order to promote the FINNIFTY Index has waived off the transaction charges for trading till June 2021. The index performed positively on the day one itself of the launch. It went up by 141 points and currently trading at 15,658.
How Much Margin Required To Sell FINNIFTY Index In Options?
Margin required to sell Nifty Financial Services, FINNIFTY Options contract for overnight position as well as intraday and cover/bracket order types depends upon the strike price of the contract, for example to take overnight position (sell) for 14 Jan 2021 FINNIFTY Option contract of strike price 15500 at Zerodha you will need Rs.1,21,464 excluding premium receivables.
Checkout the image below to better understand the margin requirements for FINNIFTY Index:
If we remove the premium amount received it comes down to Rs.1,0,1592. Incase of intraday squareoff the margin requirement as per Fyers is Rs. 63,620. On the other hand for cover order types the margin requirement to sell 1 lot of FINNIFTY Index would be approx. Rs. 34, 348 (Total of 20% of SPAN + 100% Exposure).
Above figure is just an estimation, do check out with your respective stock brokers. Although, due to SEBI New Rules For Intraday Margin From December 2020, the margin requirement is equal among all stock broker in India. To get higher margin you can do hedging within FINNIFTY Index.
How Can I buy FINNIFTY Index?
You cannot directly buy FINNIFTY Index, however you can invest through mutual funds companies in a index fund which holds the equal weightage and replicates the return of FINNIFTY index.
Else in order to buy the Index, you’ll have to buy the constituent 20 stocks in the same weightage as they hold on the Index mentioned above.
Alternatively, you can also buy Nifty Bees, the ETF on the Index which will replicate the performance of the Index.
Why Invest In FINNifty Index?
The best thing about investing in good Index like FINNIFTY as it helps in reducing the non-systematic risk.
Non-systematic risk include events such as a strike, plunging revenues, Higher financing cost, Declining profit margins, a natural disaster such as a fire, or something as simple as Management misconduct or slumping sales. Two common sources of unsystematic risk are business risk and financial risk.
However non-systematic risk can be easily diversified. First thing to remember, instead of investing all your money in one company, you can choose to diversify and invest in 3-4 different companies (ideally from different sectors). When you do so, unsystematic risk is drastically reduced. This is also known as portfolio building.
The FINNifty Index which constitutes of 20 major companies, can easily help in diversifying your portfolio. These are premium companies with high market capitalization.
Want to know how much you will get if investing in any mutual funds through SIP’s than you should check moneycontain monthly SIP calculator with inflation here.
How To Create a Portfolio?
It is easy to create a portfolio, which will reliably get the same returns as the index. i.e. if the index goes up by 5%, this portfolio will also go up by 5%.
Suppose an index is made of two stocks, one with a market cap of 1000 crore and another with a market cap of 3000 crore. Then the index portfolio will assign a weight of 25% to the first and 75% weight to the second.
If we form a portfolio of the two stocks, with a weight of 25% on the first and 75% on the second, then the portfolio returns will equal the index returns. So if you want to buy 1 lakh of this two-stock index, you would buy 25,000 of the first and 75,000 of the second; this portfolio would exactly mimic the two-stock index.
A stock market index is hence just like other price indices in showing what is happening on the overall indices.
Other than FINNIFTY there are major key indices offered by NSE, List of which are given below:
You can invest or create a similar portfolio for your investment, depending upon your budget.
I hope you know have a better understanding of What is FINNIFTY? and how does it work in derivatives segment on NSE. In my opinion with launch of FINNIFTY Index it will definitely going to bring more traders and investors and will make higher volume for NSE.
To sum up the things:
- The Nifty Financial Services Index tracks the performance of Indian financial services companies including banks, housing finance, insurance, NBFCs, other financial services companies etc.
- Presently, with 63.1% exposure to Banks, 18.5% exposure to HFCs, 8.1% exposure to NBFCs and 8.0% exposure to Insurance companies, the Nifty Financial Services Index provides a more diversified exposure to the Indian financial services sector as compared to Nifty Bank Index.
- Since inception on January 1, 2004, the Nifty Financial Services Index has returned 18.7% p.a. return vs 13.9% p.a. return of the Nifty 50 Index and 16.9% p.a. return of the Nifty Bank index.
- The Nifty Financial Services Index has outperformed the Nifty 50 Index over the last 3, 5, 7, 10 and 15 years on a point-to-point CAGR return basis, 100% times on a rolling return basis over 7-year and 10-year periods, and returned 16.9% p.a. on average over 7-year horizons on a rolling return basis compared to 12% p.a. for the Nifty 50 Index.
- The Nifty Financial Services Index has outperformed the Nifty Bank Index over the last 1, 3, 5, 7, 10 and 15 years on a point-to-point CAGR return basis, 82.5% times on a rolling return basis over 7-year periods, and returned 16.9% p.a. on average over 7-year horizons on a rolling return basis compared to 16.0% p.a. for the Nifty Bank Index
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