- Date : 24/12/2021
- Read: 3 mins
Bank Nifty as a standard for investing in stocks in the banking sector
For tracking any investment or measuring its performance - whether the stock is performing well or not - the primary thing even a novice trader or investor does is to compare it with the stock market index. In this context, it is worth mentioning that there are broad indices as well as sectoral indices. Bank Nifty belongs to the latter category.
What is Bank Nifty?
Bank Nifty (also referred to as Nifty Bank) is a stock market index specifically designed to track the banking sector. It comprises stocks having the highest market capitalisation and high liquidity quotient. Both private and public sector banking stocks are included in this index. There are a total of 12 stocks:
- IndusInd Bank
- ICICI Bank
- Federal Bank
- Axis Bank
- RBL bank
- Kotak Mahindra Bank
- IDFC First Bank
- HDFC Bank
- Bandhan Bank
- AU Small Finance Bank
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How is Bank Nifty different From Nifty?
By 'Nifty', people generally refer to the broad stock market index (Nifty 50). It is an index comprising of stocks from all sectors. There are 2-3 stocks of each sector having the highest market capitalisation. Bank Nifty, on the other hand, is a sectoral market index having only bank stocks. Nifty 50 is for tracking the overall share market and the economy as a whole, whereas Bank Nifty solely tracks the performance of the banking sector.
Uses of Bank Nifty
Here are two main uses of Bank Nifty:
1. Bank Nifty as the benchmark
It works like a benchmark for investors and mutual fund managers. The primary motto of any fund manager who is investing in a portfolio of banking stocks is to surpass the returns of Bank Nifty. Let’s assume a fund manager or an investor has invested in a few banking stocks and earned a return of 18% in a year (2020-2021). Now, Bank Nifty has provided a return of 21.21% in this one year. So, in this case, the fund/portfolio couldn’t outperform the index. If the fund had returned 23%, it would have outperformed the banking sector/index. Generally, mutual fund investors and retail investors use this index to understand how well their investment is performing.
2. Bank Nifty options
Another use of Bank Nifty is as an option. It is known for providing quick profits, and daily it moves around 2%-3%. There are different option trading strategies that investors can implement for trading Bank Nifty options.
The banking sector has been growing well over the years, and it has been one of the top choices of investors. In the past five years, deposits across all banks in the country grew around 13.93%. So, if you are thinking of investing in bank stocks, following the Bank Nifty index can give valuable insight into the sector, and you can compare and track the performance of your investment.