NIFTY FIN SERVICE

What Is The Nifty Financial Services (Finnifty) Index?

The Nifty Financial Services Index is a sectoral index of the National Stock Exchange of India that was launched on 7th September 2011. It is a real-time index that tracks the behaviour of the financial services sector of the stock market. The index comprises 20 financial services stocks, representing subsectors such as insurance companies, banks, non-banking financial corporations, and many more.

The primary goal of the Nifty Financial Services Index (Finnifty) is to capture the real-time behaviour and performance of the financial services sector to help investors gauge the overall sentiment of this sector and make suitable investment decisions.

• The Nifty Financial Services is a sectoral index of the National Stock Exchange. 
• It tracks the performance of 20 NSE-listed stocks in the Financial Service sector. 
• The Finnifty index was launched on 7th September 2011.

How Is The Nifty Financial Services Index Calculated?

The Nifty Financial Service Index is calculated using the period-capped free-float method. To calculate the index value of the Finnifty index, the base market value and the base market index value are considered along with the index market cap.

Index value = Index market capitalisation/(base market cap * base market index value)

The Nifty Financial Services Index is subjected to semiannual rebalances, and the cutoff dates for the same are 31st January and 31st July. For this semiannual review, the average data for six months ending the cut-off date is considered.

Eligibility For Constituents The Nifty Financial Services Index

1. The stocks representing the subsectors of the Finnifty index from the Nifty 500 are eligible for selection. Subsectors include banks, Non-Banking Financial Corporations (NBFCs), Housing Finance Corporations (HFCs), insurance and other financial institutions.
2. The weightage of each stock of the Nifty Financial Service Index is calculated based on its free-float market capitalisation. Also, the weight of no single stock can be more than 33%, and the aggregate weightage of the top 3 stocks should not be more than 62% at the time of rebalancing.
3. The weight of each subsector within the eligible universe is based on the average free-float market cap method. 
4. The selection of 20 companies from each subsector is made in such a manner that their weightage is similar to that of the subsector.
5. Within each subsector, preference is given to those companies that are available for F&O trading on the NSE.
6. Companies will be included if the average free-float market capitalisation is 1.5 times the average free-float market cap of the smallest index constituent.

Subsectors Covered By The Nifty Financial Services Index

The Nifty Financial Services Index mainly covers the below subsectors of the financial services industry:

1. Banks  - Banking institutions are considered the core of our economy because they are the financial institutions which assist in mobilising funds from the savers into the hands of borrowers.  By doing so, banks help to maintain liquidity and money circulation in the economy. Also, banks are highly regulated by the Reserve Bank of India, creating a secure heaven for depositor's money. These institutions offer a wide range of financial services, which include accepting deposits, giving out loans and advances, investment management and advisory, and other ancillary services.
2. NBFC - Non-Banking Financial Corporations (NBFCs) also operate similarly to banking institutions. However, unlike banks, they are not allowed to accept deposits and issue checks to their customers. Also, NBCs do not play a significant role in the payment settlement cycle. However, all these differences do not make NBFCs less critical; they are important financial institutions in the Indian economy. They are registered under the Companies Act 1956 and offer services of loans and advances, hire and purchase, leasing, and acquisition of shares, bonds or other marketable securities.
3. Insurance - Insurance companies are another vital aspect of the financial services sector covered by the Finnifty index.  These companies help mitigate the risk from the insured (who takes the insurance) in exchange for policy premiums. By selling insurance policies, the insurance companies provide security to their customers against the insured items or products.
4. Housing Finance Corporations - Housing Finance Corporations (HFCs) are specialised financial institutions that are focused on providing housing loans and other types of loans related to housing. The products offered by HFCs include loans against collaterals, loans for improvement and loans for home construction. HFCs differ from baking institutions because they are focused on providing loans only for housing projects where, whereas banks offer a wide range of services, including acceptance of deposits and loan advancement.
5. Other Financial Institutions  - Financial institutions other than banks, insurance, and NBFCs are included under this head.

Why Should I Invest In The Nifty Financial Services Index

Investing in the Nifty Financial Services Index (Fininfity) can be beneficial for investors because it provides the following benefits:

1. Diversification - The Finnifty Index can help you invest in various sectors of the financial services industry, which leads to the distribution of stocks amongst companies and sectors. Thus, investors can reduce their risk significantly by investing in the index.
2. Future Growth Potential - With the increasing demand and changing economic landscape of the Indian economy, the financial services sector is set to grow in importance and operational capacity. Therefore, the investors can benefit from this long-term growth of the industry and simultaneous increase in the value of the Ffinifity index.
3. Transparency - Because the Nifty Financial services sector is a stock market index, investors can easily track its performance in real-time and make wise investment decisions.
4. Dividend Income - Investing in quality stocks of the Finnifty index can provide dividend-earning opportunities to investors.
5. Sectoral Benchmark - Tracking the movement and sentiment of a whole sector, such as financial services, can be challenging. Therefore, the Nifty Financial Services index acts as a benchmark for the performance of the financial service sector.

Risk Of Investing In The Nifty Financial Services Index

Investing in the Nifty Financial Services Index or its constituents also carries certain risks:

• Macroeconomic risk: The performance of the Indian stock market is affected by various factors such as changes in government policies, economic downturns or a war. These factors are not in the direct control of companies or investors. Therefore, market indices like the Finnifty can also experience negative momentum due to these factors.
• Company-specific risk - Each listed company has its own way of operation, resulting in a unique set of risks. Thus, the constituents of the Nifty Financial Services index are also subjected to these risks that lead to downward movement in share prices. Some examples of company-specific risks are negative financial performance, management clashes, or involvement in unethical business practices.
• Regulatory risks - Being one of the most regulated sectors of the economy, the financial services sector is always under the risk of scrutiny from regulators. Reserve Bank of India, Insurance Regulatory and Development Authority of India.

Key Takeaways On Nifty Financial Services Index

• The Nifty Financial Services Index tracks the performance of 20 financial services stocks. 
• It is a sectoral index of NSE that represents the overall performance of the financial services sector. 
• The Finifty Index is calculated based on the period-capped free-float market capitalisation method and is rebalanced semiannually on 31st January and 31st July. 
• The index covers subsectors such as banks, non-banking financial corporations, insurance companies, and other financial institutions.