NIFTY BANK

What Is The Nifty Bank Index?

The Nifty Bank Index is a critical index of the National Stock Exchange, which was launched on 15th September 2003. This index focuses on the Indian banking sector and is the benchmark for its performance. This index tracks the behaviour and performance of the 12 NSE-listed PSU and private sector banking stocks.

Nifty Bank or Bank Nifty is considered very important from the perspective of investors and market intermediaries and hence is used to benchmark various ETFs and index funds.

• The Nifty Bank index captures the performance of the Indian banking sector.
• It tracks the performance of the 12 most liquid and largest listed banking stocks. 
• Bank Nifty Index was launched on 15th September 2003.

Which Stocks Are Included In The Nifty Bank Index?

The stocks included in the Nifty Bank Index form part of the Indian banking sector. Its constituents include the most liquid and largest 12 banking sector stocks from both the sub-sectors, the public sector and the private sector.  Listed banking companies like Bank of Baroda (BOB), Axis Bank, and HDFC Bank are some of the major constituents of the Nifty Bank Index.

• The constituents of the Nifty Bank index include 12 Indian Banking stocks. 
• The index consists of stocks like Axis Bank, HDFC Bank Ltd. and SBI.

How Is The Nifty Bank Index Calculated?

The Nifty Bank Index or the Bank Nifty is calculated using the free float market capitalisation method. Under the process, the 12 constituents of the index are weighted according to their free float market cap.

The index value is calculated using the following formula:

Index Value = current free float market cap/ (base market cap * base index value)

The Nifty Bank index is reviewed semi-annually on cutoff dates of 31st January and 31st July. During rebalancing, the index constituents are excluded from the index or new stocks are added to the index per the eligibility criteria. It is important to note that it is not necessary to change constituents at every rebalancing of the index.

• The Nifty Bank index is calculated using the free float market capitalisation method. 
• The index value represents its constituent's aggregate free float market cap relative to the base market cap and base index value.  
• This index is reviewed semiannually on 31st January and 31st July every year.

Eligibility For Nifty Banks Index Constituents

1. Companies must be listed on the National Stock Exchange (NSE) of India. 
2. At the time of review, companies should form part of the Nifty 500 index. 
3. Companies must be a part of the Indian Banking Sector. 
4. The trading frequency of the stock in the past six months should be at least 90%.
5. As of the cutoff dates, the company must have a listing history of 1 month. 
6. The company will be included in the index only if they are allowed to be traded in the F&O segment. 
7. The final selection of companies is based on their free float market capitalisation. 
8. The weightage of no single stock can be more than 33%, and the weightage of the top 3 stocks of the index is capped at 62%.

How to Invest In the Nifty Bank Index?

To invest in the Nifty Bank index, you can choose the following two methods:

1. Direct Stock Selection -  To create a portfolio similar to that of the Nifty Bank Index through this method, you have to manually select and invest in the constituents of the Nifty Bank index while applying the concept of free float market cap and weightage distribution. However, this method is unsuitable for many investors because the manual replication of the Bank Nifty Index is a very complex and capital-intensive activity. For example, initially, you buy one share of each of the index's constituents, and your total capital invested as of 11:54 AM on 1 January 2025 would be Rs 8,292, whereas the value of the Nifty Bank Index is more than 50,000. Now, imagine the amount of capital and calculation required for investing in its constituents in the same weight as they are present in the index and tracking them daily to maintain the similarity between the value of your portfolio and the index value. Thus, investors with the required capital and skills should move forward with this method.
2. Index Funds and Exchange Traded Funds (ETFs) - Index funds and exchange traded funds are passively operated investment vehicles that are managed by experienced fund managers who benchmark these funds with market indices. Investors can choose funds that are benchmarked with the Nifty Bank index to invest and gain returns similar to those of this index.  Index funds and ETFs are similar in various ways. However, ETFs are tradable investments like equities, whereas index funds are a form of mutual fund that can not be traded on the stock markets. Investors can choose the most suitable option from these two to invest in the Nifty Bank with limited capital and risk.

Key Takeaways On Nifty Bank Index

• The Bank Nifty Index is a sectoral index that tracks the performance of the 12 most liquid and largest banking sector stocks. 
• The index helps investors analyse the performance and overall sentiment of the banking sector over a particular period. 
• The index was launched on 15th September 2003 with a base value of 1000 and a base date of 1st January 2000. 
• The Nifty Bank Index or the Bank Nifty is computed using the free float market capitalisation method. 
• It is also reviewed semi-annually each year on 31st January and 31st July. 
• Investors can invest in the Nifty Bank index either by direct stock selection or through index funds and Exchange Traded Funds (ETFs).