Time was apt to launch derivatives on Nifty Financial Services Index
Last week, the NSE received approval from SEBI to launch derivative contracts on the Nifty Financial Services index. The launch of these new contracts will be effective from 11 January 2021 and the exchange will offer futures and options on the Nifty Financial Services index. The exchange will also be offering 3 monthly F&O contracts for the near month, mid month and far month. In addition, there will also be 7 weekly contracts permitted on the Financial Services index. This will be the first time NSE will be offering index contracts other than Nifty and Bank Nifty. What are the highlights of the Nifty Financial Services Index and how does it help!
A broader financial index
The problem with the traditional Bank Nifty was that it was only focused on the banks. Even within banks, the Bank Nifty almost becomes a proxy for the large private sector banks as there is no worthwhile representation of PSU banks in the heavyweight stocks other than SBI. It is in this context that the Nifty Financial Services Index assumes more significance. Today, if you look at the top-10 stocks with the highest market cap on the Nifty; there are 2 NBFCs. Both HDFC and Bajaj Finance do not find a place in the Bank index but are more valuable than majority of the banks in India. Then there are PSU NBFCs like PFC and REC as well as the fast growing private life insurance companies in India. The list can go on.
It is the big growth area
For a long time, banks have been seen as equivalent to financial services. That is not the case any longer. While banks still dominate the space, there are a lot of new stories that have emerged and also new stories that are emerging. We already have Bajaj Finance, HDFC and Bajaj Finserv in the bulge bracket. Then there are PSU finance companies like REC, PFC, and IRFC that could acquire more heft over time. Life insurance companies like HDFC Life and SBI Life have already entered the indices and could play a bigger role in financial services. AMCs are just about starting out and we have not counted LIC. In short, financial services are today at 34% of the BSE-500, down from a peak of 41% last year. That’s big opportunity.
Better trading opportunities
For a trader looking at a broader play on the financial services index, the Bank Nifty offered a very narrow choice. The Nifty Financial Services Index offers a much broader option that is a play on a number of sectors and also has an element of diversification and hedging built into it. For institutional investors that are substantially exposed to the financial services sector, this index will offer a much sharper hedge compared to the Bank Nifty or the Nifty. Above all, the weekly options will offer the leeway to play short term cues. It needs to be seen how quickly volumes pick up!