What is FinNifty? Explore Nifty Financial Services Index in Indian Stock Market
Planning to invest in the stock market, but are unfamiliar with the market technicalities?
Fear not! With the right guidance, you can easily navigate the market’s technicalities. And what’s better than investing in the right index that can help to mitigate risks and provide a stable return on investment?
Well, one such index is Finnifty. This unique index hones in on the stocks of financial institutions, offering a safe and profitable opportunity for investors.
In this blog, we’ll provide you with all the information you need to confidently invest in Finnifty and achieve your financial goals. So let’s get started and learn about what Finnifty means in detail!
What is Finnifty?
Finnifty or NIFTY financial services, where Nifty stands for National Stock Exchange of India, is a share market index comprising 20 stocks from various financial institutions and service companies listed on the National Stock Exchange (NSE) in India. These stocks are selected based on their free-float market capitalisation,, similar to the Nifty 50.
The purpose of the Fin nifty index is to track the performance of the financial sector in India and provide investors with a benchmark for the sector’s growth and performance.
Now that we know the Finnifty meaning, let’s see how it is calculated.
History of Finnifty in India
On September 7, 2011, NSE Indices Limited (formerly India Index Services & Products Limited) launched the NIFTY Financial Services index with a base date of January 1, 2004, and an initial value of 1,000. Governed by a three-tier structure—NSE Indices’ Board of Directors, the Index Advisory Committee, and the Index Maintenance Sub-Committee—this index is a key player in the financial market.
A related variant, the NIFTY Financial Services Total Returns Index, finds practical applications in the creation of ETFs, index funds, structured investment products, and serves as a benchmark for fund portfolios.
How to Calculate NIFTY Financial Service Index?
NIFTY financial services index is calculated based on the free-float market capitalization of the 20 stocks included in the index.
Free float market capitalization is calculated by multiplying the total number of Finnifty shares outstanding by the stock’s market price. Then subtracting the shares held by promoters, government bodies, and strategic investors. The Finnifty ndex value is calculated using a base year and a base value of 1000 points. The formula for calculating the Finnifty index value is:
Finnifty Index Value = (Current Market Value of Free Float Market Capitalization / Base Market Value of Free Float Market Capitalization) x Base Index Value (1000)
Here:
- Current Market Value of Free Float Market Capitalization: Sum of the market value of the 20 stocks in the index
- Base Market Value of Free Float Market Capitalization: Sum of the market value of the 20 stocks in the index at the base year
- Base Index Value: 1000 points (set as the base value in the base year)
Composition of the Finnifty Index
Fin nifty is composed of 20 stocks across banks, insurance companies, NBFCs, housing finance companies, and other financial institutions or financial service companies.
The 20 Finnifty companies that are included in the index are as follows:
- HDFC Bank Ltd.
- ICICI Bank Ltd.
- Kotak Mahindra Bank Ltd.
- State Bank of India
- Axis Bank Ltd.
- Bajaj Finserv Ltd.
- Housing Development Finance Corporation Ltd.
- HDFC Life Insurance Company Ltd.
- ICICI Prudential Life Insurance Company Ltd.
- SBI Life Insurance Company Ltd.
- ICICI Lombard General Insurance Company Ltd.
- General Insurance Corporation of India
- SBI Cards and Payment Services Ltd.
- Bajaj Finance Ltd.
- Mahindra & Mahindra Financial Services Ltd.
- Shriram Transport Finance Company Ltd.
- Cholamandalam Investment and Finance Company Ltd.
- SBI Funds Management Pvt. Ltd.
- Aditya Birla Capital Ltd.
- Indiabulls Housing Finance Ltd.
Sectors Involved in Finnifty
As of February 2023, banks dominate FINNIFTY, comprising over 65%, with the top 3—HDFC, ICICI, and Kotak Mahindra—contributing more than half. Life insurance companies, such as SBI Life Insurance and HDFC Life Insurance, also play a role, connected to these major banks. Other financial services subsectors, like housing finance, feature companies like Piramal Enter, Bajaj Finserv, and Bajaj Finance.
| Name of the Sector | Advances | No Change | Declined |
| Banks | 3 | 5 | 2 |
| Finance | 6 | 10 | 4 |
| Miscellaneous | 0 | 1 | 1 |
| Insurance | 0 | 4 | 4 |
Rebalancing of Finnifty
Rebalancing of NIFTY financial services is done to maintain the required criteria for the stocks included in the index. The index is reviewed semi-annually and is rebalanced every quarter. The semi-annual review takes place in January and July, where the eligibility of the stocks is evaluated based on the liquidity, free float, and market capitalization criteria.
The quarterly rebalancing takes place in March, June, September, and December, where the weightage of the stocks is adjusted to maintain the required criteria.
NIFTY fin service stocks that no longer meet the eligibility criteria are replaced with other eligible stocks. The Finnifty index is maintained by the National Stock Exchange (NSE) and the changes in the Finnifty composition are announced in advance to allow market participants to adjust their investment strategies accordingly.
Popular Finnifty Stocks
Here is the list of the most popular Finnifty stocks that you can buy in 2023, in form of a Finnifty chart:
| Finnifty Stocks | Market Cap |
| HDFC Bank | ₹9,61,128.15 Crores |
| Bajaj Finance | ₹4,20,471.83 Crores |
| Kotak Mahindra Bank | ₹4,07,546.16 Crores |
| ICICI Bank | ₹3,92,983.20 Crores |
| HDFC Ltd. | ₹3,36,696.13 Crores |
| Axis Bank | ₹2,52,783.23 Crores |
| State Bank of India | ₹2,19,141.17 Crores |
| HDFC Life Insurance | ₹1,76,758.47 Crores |
| ICICI Prudential Life Insurance | ₹1,48,862.67 Crores |
| Bajaj Finserv | ₹1,47,836.11 Crores |
How are Stocks Selected for Inclusion in NIFTY Financial Services?
To be part of the NIFTY Financial Services index, securities must meet specific criteria
- Listed on the National Stock Exchange
- Included in the NIFTY 500 universe and the Financial Services sector.
- Preferably traded on NSE’s F&O segment.
- Recently listed companies (IPO) meeting eligibility criteria can be included for three months.
- Adherence to quarterly capping limits: 33% for a single stock and 62% for the top 3 stocks cumulatively.
The selection process involves:
- Calculate sub-sector weights in NIFTY 500 for financial services stocks.
- Sort companies within each subsector based on average float-adjusted market capitalization.
- Include companies with market cap at least 1.5 times the index’s smallest constituent.
- Select companies proportionally based on sub-sectors’ weightage in the main index.
Eligibility Criteria for Stocks in Finnifty
The NSE FINNIFTY index includes companies with an average free-float market cap 1.5 times greater than the smallest index components of finnifty. Each stock is limited to a 33% weight for fair representation. In semi-annual rebalancing, the combined weight of the top three stocks cannot exceed 62%.
How to Trade in Finnifty?
Here are three methods to invest in NIFTY financial services:
ETFs tracking Finnifty
Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges like individual stocks. ETFs that track fin NIFTY are a convenient way to gain exposure to a diversified portfolio of the top 20 financial companies in India. Investors can buy and sel finniftyl shares of these ETFs throughout the day at market-determined Finnifty prices.
Index funds tracking
Index funds are mutual funds that track a specific stock market index, such as the NIFTY financial services index. They offer similar diversification benefits as ETFs but trade only once a day at the end of the trading session at the net asset value (NAV) price.
Direct investment in Finnifty stocks
Investors can also choose to directly invest in fin NIFTY stocks by buying shares of individual companies listed on the National Stock Exchange. This requires careful research and analysis of the financial performance and growth prospects of each company, and a willingness to assume the risks associated with individual stock picking.
Advantages of Investing in Finnifty
Here are some advantages of investing Finnifty in NIFTY Fin service:
- Diversification benefits: NIFTY financial services index consists of companies across different sectors, which helps in reducing the risk associated with Finnifty investing in individual stocks. By investing in Finnifty, investors can diversify their portfolios and reduce the impact of market volatility.
- Transparency: The performance of the Finnifty companies is included in the index that is available in the public domain. This makes it easier for investors to evaluate the performance of the companies and make informed investment decisions.
- Liquidity: Finnifty future index is a highly liquid index, which means that investors can easily buy and sell shares in the index at any time during trading hours. This ensures that investors can exit their positions quickly and easily, without any significant impact on the market price.
Why Invest in Finnifty?
FINNIFTY significantly reduces non-systematic investment risk by incorporating top financial industry leaders. This includes mitigating risks associated with falling sales, strikes, rising financing costs, shrinking profit margins, and natural disasters. Additionally, the platform enables investors to diversify their risk across various businesses, addressing both financial and business risks. By focusing on the best-performing financial firms with the highest market capitalization, FINNIFTY offers an engaging opportunity for investors to participate in a well-diversified portfolio.
Disadvantages of Investing in Finnifty
While investing in NIFTY financial services can offer several advantages, it’s important to be aware of its potential disadvantages as well:
- Concentration risk: As NIFTY fin service includes only 20 stocks, it can be prone to concentration risk. If a few stocks perform poorly, it can significantly impact the overall performance of the index.
- Limited exposure to small-cap companies: NIFTY finance service only includes large-cap stocks, which means that it doesn’t offer exposure to small-cap stocks. Investors looking for diversification across different market capitalizations may need to invest in other Finnifty indices as well.
- Heavy reliance on a few sectors: Finnifty is heavily weighted towards a few sectors such as financials, IT, and energy. This means that the performance of these sectors can have a significant impact on the overall performance of the index. Investors who prefer a more diversified portfolio may need to consider other indices or individual stocks.
Factors Affecting Finnifty Share Price
There are several factors that can affect the share price of Finnifty. Some of the key factors are as follows:
- Overall market sentiment: The stock market is highly influenced by investor sentiment and overall market trends. If investors are optimistic about the market and have a positive outlook, it can lead to a rise in Finnifty’s share price.
- Economic conditions: Economic factors such as inflation, interest rates, and GDP growth can have a significant impact on the performance of NIFTY companies. If the economy is growing and interest rates are low, financial stocks may perform well, leading to an increase in the Finnifty share price.
- Company-specific news: News and developments related to the individual companies within Finnifty can also impact its share price. Positive news such as strong earnings reports or new product launches can lead to a rise in share price. While negative news such as scandals or regulatory issues can lead to a decline.
- Government policies: Government policies and regulations, such as changes in tax laws or banking regulations, can also have an impact on the financial sector and therefore on the Finnifty share price.
- Global events: Events such as geopolitical tensions or global economic downturns can also affect the performance of financial stocks and impact the Finnifty share price.
Features of Finnifty or NIFTY Financial Services
Here are a few key features of FINNIFTY:
- Originating on Jan 1, 2021, with a foundational value of 1000.
- Dynamically evolving, the FINNIFTY index refreshes its Nifty 500 roster biannually.
- Uniformly distributing each stock’s representation based on its free-float market capitalization percentage.
Things to Keep in Mind Before Investing in Finnifty
Before considering an investment in Finnifty, it’s crucial to be well-informed about the key aspects associated with this financial instrument. Here are essential considerations:
1. Understanding Finnifty: Familiarize yourself with what Finnifty entails. Gain a clear understanding of its structure, purpose, and how it aligns with your investment goals.
2. Risk Assessment: Like any investment, Finnifty carries inherent risks. Evaluate your risk tolerance and assess whether Finnifty’s risk profile aligns with your comfort level.
3. Market Conditions: Stay updated on prevailing market conditions. Finnifty’s performance can be influenced by various economic factors, making it essential to be aware of the broader financial landscape.
4. Historical Performance: Examine the historical performance of Finnifty. Analyzing past trends can provide insights into its stability and potential returns, aiding in more informed decision-making.
5. Diversification: Consider how Finnifty fits into your overall investment portfolio. Diversification is key to managing risk effectively, so evaluate how this investment complements your existing holdings.
6. Regulatory Environment: Stay informed about the regulatory environment surrounding Finnifty. Changes in regulations can impact its dynamics and influence investment outcomes.
To Wrap It Up…
In conclusion, NIFTY financial services provide investors with an opportunity to invest in the financial sector and diversify their portfolios. While it offers advantages such as diversification, transparency, and liquidity, it also has some disadvantages. Hence, carefully consider your investment goals and risk tolerance before investing in Finnifty index.
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FAQs
Finnifty is a stock market index that tracks the performance of 20 financial services companies listed on the National Stock Exchange of India (NSE). It is a subset of the Nifty 50 index.
Yes, FINNIFTY contracts expire every Tuesday. The expiry date for monthly contracts is the last Tuesday of the month. While the expiry date for weekly contracts is the Tuesday of the week it is meant to expire.
Banks, financial institutions, housing finance companies, insurance companies, and other financial services companies.
By including diverse companies, FINNIFTY effectively mitigates unsystematic risks, offering investors an opportunity to invest in top financial firms with maximum market capitalization.
The key difference between FINNIFTY and Nifty 50 lies in the number of stocks included in each index. While FINNIFTY comprises ten firms, making up less than 40% of NIFTY 50’s weight, the latter consists of 50 companies.
Cash settlement occurs upon contract expiration. FINNIFTY monthly contracts expire on the last Tuesday of the contract month, while weekly contracts expire on the designated Tuesday of their respective week.
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