Nifty Financial Services Index - NSE to Launch Derivative Contract cover

Nifty Financial Services Index – NSE to Launch Derivative Contract!

Introduction to Nifty Financial Services Index: Good News, Good news!! A new and very exciting product has been added to the kitty of the market participants trading in the Indian trading ecosystem. We are talking about the Index “Nifty Financial Services Index”.

In today’s article of Market Forensics by Trade Brains, we’ll be discussing all about the Nifty Financial Services Index i.e what is Nifty Financial Services Index, its constituents, F&O Contract Specifications, and more. Let’s get started.

What is Nifty Financial Services Index?

NSE in its circular published on 10th Dec 2020 made the announcement that they have got permission to allow Nifty Financial services to be traded as a derivative product. From January 11, 2021, Nifty Financial Services will be allowed to trade in Futures and Options contract.

Till now the major indices that are being allowed to trade in the Indian equity market are Nifty and Bank Nifty. However, with the addition of Nifty Financial Services, there will be a total of three indexes allowed to have Futures and Options (F&O) contracts. 

Therefore, adding the ‘financial services’ as a tradeable index to the trading ecosystem provides a huge boost and impetus for traders looking for more avenues to trade. And rather than having to trade all the constituents, one can express his/her view on the same by trading Nifty Financial Services. 

Constituents of Nifty Financial Services Index

The Nifty Financial Services mainly comprises 20 stocks from various sectors like Banks, Non-Banking Financial Services, Insurance, etc. The following is the comprehensive list of all the constituents along with their weightage as on November 27, 2020. (Source: nseindia.com)

S. NoStock Name & Weightage (%)
1HDFC Bank Ltd. (27.13%)
2Housing Development Finance Corporation (17.51%)
3ICICI Bank Ltd. (14.14%)
4Kotak Mahindra Bank. (12.10%)
5Axis Bank Ltd. (6.46%)
6Bajaj Finance (5.64%)
7State Bank of India (4.06%)
8Bajaj Finserv Ltd. (2.29%)
9HDFC Life Insurance (2.21%)
10SBI Life Insurance (1.43%)
11Power Finance Corporation
12Shriram Transport Finance Company Ltd.
13REC Ltd.
14ICICI General Insurance Co. Ltd
15Cholamandalam Investment and Finance Company Limited
16Bajaj Holdings and Investment Limited
17Mahindra & Mahindra Financial Services Limited
18Piramal Enterprises Limited
19ICICI Prudential Life Insurance Company Limited
20HDFC AMC

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Criteria to be a part of Nifty Financial Services Index

Here are some of the criteria for companies to be a part of this Index:

  • NIFTY Financial Services Index is computed using the free-float market capitalization method, wherein the level of the index reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value.
  • The company has to be a part of Nifty 500 to be able to qualify to be a part of this Index. But in case the number of eligible players falls below 10, then the companies will be selected from the Nifty top 800.
  • The company’s trading frequency should be at least 90% in the last six months.
  • The company should have a listing history of 6 months. A company, which comes out with an IPO will be eligible for inclusion in the index if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. 
  • The weightage of each stock in the index is calculated based on its free-float market capitalization such that no single stock shall be more than 33% and the weightage of the top 3 stocks cumulatively shall not be more than 62% at the time of rebalancing.
  • Finally, the rebalancing of the companies included in this index happens semi-annually. 

Nifty Financial Services F&O Contract Specifications

Here are some of the key Nifty Financial Services Futures and Options Contract Specifications:

  • The contract size for Nifty Financial services will be 40 units.
  • There will be a total of 7 weekly expiring contracts and 3 monthly expiring contracts
  • For Option trading, there will be a total of 30 In the Money contracts,1 At the Money contract, and 30 Out of Money contracts. 
  • The strike interval will be 100 for options trading i.e., the gap between two consecutive strike prices will be 100. Say, for example, if the current At the Money Strike Price is 14300, then the immediate Out of Money strike will be 14400, and the immediate In the Money strike will be 14200. 
  • Both Futures and Options contracts will be Cash Settled.
  • The daily circuit limit for a futures contract is 10%.  

Closing Thoughts

The addition of an extra index for trading Futures and Options contracts provides an extra impetus for investors and traders willing to trade in the Indian Financial spectrum. It remains to be seen whether the contract garners sufficient interest from investors. But looking at the popularity of Bank Nifty as a derivative instrument, it is expected that the Financial services contract also attracts similar interest from investors and traders. 

That’s all for today’s Market Forensics article on long-short funds in India. We hope it was useful for you. We’ll be back tomorrow with another interesting market news and analysis. Till then, Take care and Happy investing!