The National Stock Exchange of India in January 2021 launched one such index that would share a lot of performance insight about the financial sector of India.
Finnifty, a market capitalization-weighted index, has gained a lot of attention from investors. It offers useful information about the health and trends in the current financial sector of the country. Being a newbie in the market, the Finnifty has created quite a significant amount of stir in the market.
Let us also take a jibe at this entrant index and understand how it is significant for the market.
What is Finnifty?
Similar to the Nifty 50 index in terms of free float methodology, Finnifty (NIFTY financial services) is a share market index that includes twenty of the top-performing financial institutions listed on the NSE. This performance index is aimed at providing an overview of the financial sector of India, including the banking, nonbanking, and insurance companies.
The listed Finnifty stocks are updated according to the free float method. The market cap of each company is evaluated based on the total market value of a company’s outstanding shares. The shares that are not available for trading are adjusted to find the final market cap of the company. The liquidity, sector classification, and market value of the financial institutions are reflected in the price trend of the index.
Do the Stocks within Finnifty keep changing?
As we stated earlier, stocks listed under the Finnifty index change according to the market performance of the financial institutions. The top twenty performers are chosen based on their market capitalization and the weightage of each sub-sector of the institution. One primary condition to be chosen under this index is to be listed within the NIFTY 500 index as well.
Let us put this in simpler words, in order to be added in Finnifty stocks, the company stock needs to be within NIFTY 500 and then be amongst the top 20 in the market.
Based on this selection criteria and the free float methodology, the Finnifty stocks keep changing. It briefly informs the investors about the financial performance of the sector. It also introduces a benchmark for the growth of the financial sector in India.
Why is Finnifty Significant?
Now that we know what Finnifty is and how it works, we should also analyze its importance. It extends a broad overview of the Indian economy and the financial sector within it. Let’s take a look at the significance of this market index:
Diversification and Risk Management
Investors search for stocks with low risks. Finnifty serves as a diversified stock option and hence reduces the risk of underperformance. It shields the losses against low sales, less revenue, drop in sales and many more.
Reflects Market Dynamics
This market index shows the asset performance, liabilities, revenue, and all other market dynamics of the financial sector in the country. It includes the banking, non banking, and insurance companies and other entities as well.
Comprehensive Economic Indicator
Economists and fund managers judge the economic performance of a sector based on their market indices. Finnifty and the performance of Finnifty stocks serve as a comprehensive indicator of how the financial sector of the country is performing.
Conclusion
We have discussed, in detail, the Finnifty index and how it plays an important role in discussing the economics of the financial sector in India. Finnifty, along with other market indices, plays a major role in giving insights into the market performance of all major sectors.
Being sufficiently distinctive from NIFTY 50 and Bank NIFTY, the Finnifty index adds a broader perspective to an investor’s strategy. So, if you plan on investing in financial institutions, the Finnifty index is the first thing you should be analyzing.
