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How FinNifty Helps In Diversifying Your Portfolio5 min read

June 6, 2023


How FinNifty Helps In Diversifying Your Portfolio5 min read

Diversifying your investment portfolio is super important if you want to manage risks and make the most of your returns. You know that the classic strategy involves investing in different financial assets like stocks, bonds, and mutual funds. 

But guess what? The fintech industry has grown exponentially, resulting in even more options for diversification. FinNifty is one such exciting index that lets you invest in a bunch of financial services companies.

Now, let’s break it down. 

The Nifty index has different sub-indices that focus on specific sectors. FinNifty and BankNifty are two such indices that focus on the financial services and banking sectors. 

BankNifty is made up of 12 banking stocks, and the weight of each stock is based on its market capitalization. It broadly represents the trends in India’s banking sector with the biggest and most liquid banks listed on the NSE.

But FinNifty takes it up a notch. Along with 5 banks, it also includes non-banking financial companies (NBFCs), insurance companies, and asset management firms. So, you get a more diverse range of companies from the financial services industry. 

In FinNifty, you’ll find big players like Bajaj Finance, Bajaj Finserv, SBI Life Insurance, HDFC Life Insurance, Muthoot Finance, SBI Card, and Shriram Finance, among others. (Source: NSEindices.com)

In this blog, we will cover companies and their weightage in FinNifty. 

We will also delve into the correlation between BankNifty and FinNifty, along with the historical trends shown by these indices.

A comparison between FinNifty and BankNifty

BankNifty came first. But then it was quickly understood that this index couldn’t represent  the financial sector as a whole. 

That’s when FinNifty came into the picture. This brought in the participation of NBFCs, insurance companies, asset management firms and other financial services. 

BankNifty represents the banking sector with 12 big banks that have enormous balance sheets. FinNifty, on the other hand, contains a more diverse range of 20 companies from the financial services industry, including 5 banks.

While the 5 banks make up a solid 65% of FinNifty, there are other financial players in the mix too. Along with the 5 banks, FinNifty has companies like Bajaj Finance, Bajaj Finserv, SBI Life insurance, HDFC Life insurance, Muthoot Finance, SBI Card, and Shriram Finance. The weight of each stock depends is proportional to its market cap on the exchanges.

You should note that BankNifty and FinNifty are a bit more volatile compared to the broader market index, Nifty 50. That’s because they’re more concentrated, with fewer stocks.

Bank Nifty is the wildest of the bunch with a high standard deviation of 1.55. You should note that in a good economy, it’s a good buy, but that banking stocks can get a little crazy with the fear of defaults when the economy takes a downturn. On the other hand, FinNifty has a lower standard deviation at 1.46. (Source: NSEindices.com)

The higher volatility also means they can experience bigger drawdowns during bear markets compared to the Nifty 50. 

And hey, you can’t just buy FinNifty directly like individual company shares. You’ll need to invest via instruments like index mutual funds, exchange-traded funds (ETFs), or futures and options contracts.

The top 10 companies in BankNifty and their weightage in the index are as follows:

While these are the top 10 companies of the FinNifty index:

The differences in the weights of the top constituents of BankNifty and FinNifty highlight the different characteristics and risk exposures of these indices. 

Investing in FinNifty can help investors gain exposure to the financial services sector of the Indian stock market and potentially benefit from its growth prospect. FinNifty gives exposure to companies that are not just banks, but represent the wider ecosystem. Also, as the individual companies in the FinNifty index have lower weightage, so a downfall in one does not impact the performance of the index as a whole. 

The correlation between FinNifty and Bank Nifty

Out of the 20 stocks included in the FinNifty index, 5 are also part of BankNifty. These 5 stocks hold a significant weightage of 63.89% in the FinNifty index and 87.48% in BankNifty. 

Given that the 5 companies that are common and heavy in both indices, it is quite natural for the indices to react similarly towards market stimuli. As a result, FinNifty is seen to have a correlation of 98% with BankNifty. 

The graph above is a visual representation of the fact that both indices follow a similar pattern. You can see crests and troughs at the same instances in both the graphs. The magnitude of the impact of a market event may be different in terms of movement in their value, but the pattern largely remains the same. 

FinNifty, a historical analysis 

FinNifty has a strong correlation of 94% and a beta of 1.2 with the Nifty 50 Index.

FinNifty is also highly correlated, at 98%, with BankNifty. Over the past 5 years, the Nifty Financial Services index (FinNifty) has produced annualized returns of 14.99%. Which is a sound level of inflation-besting returns.

Historically, FinNifty has outperformed the Nifty 50 index. This is because the financial services sector in India has been a top performer with massive growth potential in the future as well.

FinNifty has also attracted a lot of investments from Foreign Portfolio Investments (FPIs), with a good chunk of their assets allocated to this sector. Plus, there have been some major Initial Public Offerings (IPOs) in the financial services sector recently, with more big companies getting listed in the near future.

To conclude

To sum it all up, FinNifty has shown strong performance, broad exposure, and attractive returns. 

Thanks to its broad exposure, FinNifty has displayed superior performance in terms of its compounded annual growth rate (CAGR) of up to 18.64%. 

If you’re looking to diversify your portfolio with FinNifty, you should do your research responsibly. 

With the right knowledge and patience, you could potentially reap some nice rewards. So go ahead and explore the different avenues available to invest in this promising index.

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