January 2021 saw a new launch in the National Stock Exchange (NSE) with the launch of FinNifty or the Nifty Financial Services Index. The ideology behind FinNifty in stock market is that it includes the stock value of multiple corporates, companies, and institutions, a major aspect of the Indian financial sector. 

Banks make up more than 65% of this stock index, whereas the rest comprise of financial institutions that include insurance companies, NBFCs and other financial service providers.  

FinNifty is an index that helps in maintaining and tracking the stock performance of corporates and subsectors within the economy. So, if the Indian financial sector does well in investor confidence and finances, then the FinNifty increases in value. 

It is because of this reason that FinNifty is the perfect benchmark for investing and trading.

What is FinNifty - Table of Contents

What is FinNifty?

FinNifty is known to help track the overall performance of financial institutions over time. These indexes can only have up to 20 stocks. The stock's weightage is selected based on the free market floating capitalization rate available in the market. 

The free-float market capitalization can be calculated through the formula:

Outstanding shares x Investable Weight Factors x Price

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IWF

When the shares are listed as public, then the IWF is higher. These numbers are based on the patterns reported by multiple companies. These financial entities ensure the country's economy can help it succeed and survive. In India, when the economy continues to evolve, multiple financial entities have multiple roles to play. Banks start offering borrowers funds acquired from surplus savings. Housing financial institutions and NBFCs help facilitate credit creation and overall economic growth. 

So, when trying to understand 'what is FinNifty?', it is important to help reflect the characteristics that are involved in different economy subsectors. But when it comes to a single index, FinNifty in the stock market helps serve as a symbol for Nifty Financial Services.

All companies that are included in the Nifty 500 list are eligible for Nifty Financial Services, and investors must have a base value of 1000.

What are Some FinNifty Highlights?

• The index base date of FinNifty in the stock market is January 2021.
• The index base value is 1000.
• FinNifty helps track multiple financial service performances in India and includes banks, insurances, NBFCs, housing finances, and more.
• Only 20 stocks are available on the FinNifty index.
• Companies or corporates must be listed in the Nifty 500 to be eligible for FinNifty.
• FinNifty is reconstituted semi-annually.
• A buffer is based on the free-floating stock market capitalization number to reduce the turnover. This helps determine the weightage of every stock. 
• The stock weightage depends on the free-floating capitalization rate.

Another easy option to explain the free float market is: 

Free-Floating Market Capitalization = Outstanding Share x Prices x Investible Weight Factors

What are the FINNIFTY Derivative Settlement Days?

The FinNifty derivative settlement is based on a weekly or monthly basis that is paid in cash. If an investor collects payment monthly, then the expiry date is considered the last Tuesday of that month. For weekly payments, the date is every Tuesday of that week. Regarding holidays, the previous trading day is the expiry date.   

What are FINNIFTY Stocks and Weightage?

FinNifty has several prominent stocks listed, out of which HDFC bank has the highest weightage. So, let's look at a list of the best FinNifty index stocks with their weightages. Please note these weightages keep changing based on the free-floating market capitalization.

Some other stocks in this index include: 

• SBI Card 
• Chola Investment and Finance Company 
• ICICI Prudential 
• HDFC AMC 
• Muthoot Finance 
• ICICI Lombard 
• Shriram Finance 
• Piramal Enterprises 
• Power Finance 
• REC.

But, these are subject to change over time.

[ Learn How To Invest in Stocks For Beginners? ]

Which Sectors Are Involved In FINNIFTY?

The banking sector represents the highest subsector in the FinNifty, with over 65% as on February 2023. In this sector, the top three banks making over 50% of the share are HDFC, ICICI, and Kotak Mahindra banks. 

Some other subsectors included in the FinNifty index are life insurance corporations that have bank ties like SBI Life Insurance or HDFC Life Insurance. Some other subsectors, such as housing finance, like Bajaj Finance, Piramal Enterprise, and Bajaj Finserv, are also part of the list.

How To Buy In The FINNIFTY Index?

If you already have an online or offline trading account, then you can search for FinNifty options and trade in its derivatives. But for this, you may have to activate your trading segment option. In actuality, you cannot purchase from the FinNifty index directly. But you can invest in mutual funds. They are known to have the same weightage that reflects the same results. 

Purchasing FinNifty in stock market means buying the 20-stock limit corresponding to each stock's total weightage.  

Why Should You Invest In FINNIFTY?

There are multiple reasons as to why you should invest or trade in FinNifty. They are as follows: 

1. Reduces Risk and Diversify:

One of the biggest reasons to invest in FinNifty is to bring down any non-systematic risks. This can include any business or financial risks, such as declining revenues, narrow profit margins, rising financial costs, drop in sales, etc. So, having a diverse portfolio can spread out your risks. 

2. Sector-Based Bet:

If your ideas about the finance sector are bullish, then you now have a proper benchmark to help you choose the right index. You can also use this information to build ETFs and option trading strategies. This becomes a better representation of the financial industry as a whole rather than a Nifty Bank. 

3. Performance-Based:

As per the market, FinNifty is performing quite well. As there is more diversified exposure to different sectors in the Indian economy, a higher investment opportunity is available. From its inception, the index has provided returns of 17.54% p.a. as compared to the Nifty '50s 11% p.a. return and Nifty Bank Index's 18.85% p.a. returns.

[ Learn How To Invest in Share Market For Beginners? ]

What are the Differences Between Finnifty and Nifty 50?

There are both similarities and differences between FinNifty and Nifty 50. Some differences between them are: 

• There are at least 10 FinNifty companies based on the Nifty 50 index list 
• The 10 FinNifty companies also account for 93% of the weightage in the FinNifty index and 40% in the Nifty 50 list 
• FinNifty mainly comprises stocks from financial institutions, so it is more volatile than Nifty 50 
• The risk-reward ratio for FinNifty is 0.64, whereas for Nifty 50 is 0.61.

Conclusion

As an investor, the major concept to remember when it comes to FinNifty is diversifying your portfolio. Since its beginning, this index has highlighted the importance of research and understanding. FinNifty has also outperformed both Nifty 50 and Nifty Bank with CAGRs of 18.7%, 13.9%, and 16.9%, respectively. The FinNifty index can help you earn proper returns when you get a basic understanding of the market and diversify your portfolio.

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