What is the difference between mutual funds tracking Nifty Bank Index and Nifty PSU Bank Index?
Nifty Bank Index vs. Nifty PSU Bank Index
Investing in mutual funds that track specific indices is a popular strategy for many investors, offering a way to gain exposure to particular sectors of the market. In India, two notable indices that mutual funds often track are the Nifty Bank Index and the Nifty PSU Bank Index. Understanding the differences between mutual funds tracking these indices can help investors make informed decisions.
Nifty Bank Index
The Nifty Bank Index represents the most liquid and large capitalised Indian banking stocks. It provides investors with a benchmark that captures the capital market performance of Indian bank stocks. Mutual funds tracking the Nifty Bank Index aim to invest in the same stocks that comprise the index, in the same proportions, thereby replicating the index’s performance before expenses.
Also Read: Nifty PSU Bank plunges 6% in a week, six stocks including PNB, Canara Bank tumble by over 9%; what’s causing the fall?
Eligibility criterion to be part of Nifty Bank Index
The Nifty Bank Index, a significant barometer of the Indian banking sector’s performance, is composed of the most liquid and large capitalised Indian banking stocks. It provides investors and market participants with a benchmark to capture the capital market performance of Indian banks. But what makes a bank eligible for inclusion in this prestigious index?
Let’s delve into the detailed eligibility criteria that determine a bank’s entry into the Nifty Bank Index.
Nifty 500 Membership: First and foremost, a company must be a part of the Nifty 500, which is a broad-based index representing 500 of the largest Indian companies listed on the National Stock Exchange (NSE).
Banking Sector Classification: The company should be classified under the banking sector, ensuring that the index remains a pure reflection of the banking industry’s performance.
F&O Segment Trading: Only those companies whose shares are permitted to be traded in the Futures & Options (F&O) segment of the NSE can be considered for inclusion. This requirement ensures that the stocks have adequate liquidity and are suitable for derivative trading.
Listing History and Trading Frequency: A 90% trading frequency over the past six months as of the data cut-off date. This criterion is set to ensure that only those stocks that have been actively traded and have established a certain level of market presence are included.
Market Capitalization and Liquidity: The stocks included in the Bank Nifty are expected to have a high market capitalization and liquidity ratio. This ensures that the index accurately reflects the market movements and can be a reliable indicator for investors.
Semi-Annual Review: The Nifty Bank Index undergoes a semi-annual review to ensure that it continues to represent the top banking stocks. During this review, the index composition may be altered based on the eligibility criteria, and stocks may be added or removed accordingly.
Free-Float Market Capitalization: The weightage of each stock in the index is determined by its free-float market capitalization, which is the proportion of shares that are readily available for trading in the market. This method ensures that the index is weighted by the market value of the stocks that are actually available for investment.
The Nifty Bank Index robust eligibility criteria ensure that it remains a reliable and representative index for the banking sector. For investors looking to gauge the performance of Indian banks or considering investment opportunities within the sector, understanding these criteria is crucial. The index not only serves as a benchmark but also as a guide for investors to make informed decisions in one of the most vital sectors of the Indian economy.
Nifty PSU Bank Index
The Nifty PSU Bank Index is designed to reflect the performance of the public sector banks. Mutual funds tracking the Nifty PSU Bank Index, such as the Nippon India ETF Nifty PSU Bank BeES, aim to provide returns that closely correspond to the total returns of the securities represented by the index. These funds also carry a ‘Very High’ risk rating and are recommended for investors who understand the risks associated with the banking sector and are willing to accept significant fluctuations in their investment value.
Eligibility criterion to be part of Nifty Bank Index
The Nifty PSU Bank Index is a significant indicator of the performance of public sector banks in India, reflecting the economic and financial stability of the country’s banking sector. For investors, understanding the eligibility criteria for inclusion in this index is crucial for making informed decisions. Here’s a detailed look at the prerequisites for a bank to be part of the Nifty PSU Bank Index.
Listing and Trading Requirements: To be considered for inclusion, a public sector bank must be listed and traded on the NSE. This ensures that only those banks that are actively traded and have a presence on the NSE are included in the index.
Ranking Based on Turnover and Market Capitalization: Banks must rank within the top 800 stocks based on both average daily turnover and average daily full market capitalization for the last six months. This criterion ensures that the index only comprises banks that have a significant trading volume and market presence.
Government Ownership: A minimum of 51% of the outstanding share capital of the bank must be held by the Central Government and/or State Government, directly or indirectly. This requirement is in line with the definition of a public sector bank.
Trading Frequency: The bank’s trading frequency should be at least 90% in the last six months. This high threshold guarantees that the banks included in the index have consistent trading activity, providing a reliable reflection of the sector’s performance.
Listing History: Banks should have a minimum listing history of one month as of the cutoff date. This short period allows newly listed banks to be quickly included in the index, ensuring that it remains up-to-date with the latest market entrants.
Free Float Market Capitalization Method: The index is computed using the free float market capitalization method. This means that 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.
Index Rebalancing: The Nifty PSU Bank Index undergoes semi-annual rebalancing to ensure that it accurately represents the current state of the public sector banking industry.
By adhering to these criteria, the Nifty PSU Bank Index maintains its integrity as a benchmark for the performance of India’s public sector banks. It serves various purposes, including benchmarking fund portfolios, launching index funds, ETFs, and structured products. For investors and market analysts, these criteria provide a transparent framework for evaluating the banks that make up this pivotal index.
Comparison and Considerations
When comparing mutual funds tracking these two indices, investors should consider several factors:
Sector Exposure: The Nifty Bank Index includes both private sector and public sector banks, offering a broader market representation, while the Nifty PSU Bank Index is focused solely on public sector banks.
Risk and Return: Both types of funds carry high risks due to their focus on the banking sector, which can be volatile. However, the performance of private sector banks and public sector banks can differ significantly, affecting the returns of the respective index funds.
Investment Objective: Investors should align their investment objectives with the fund’s strategy. Those looking for exposure to the banking sector as a whole may prefer Nifty Bank Index funds, while those interested specifically in public sector banks might opt for Nifty PSU Bank Index funds.
Tracking Error: This is the difference between the fund’s performance and the index it tracks. A lower tracking error indicates a fund that closely follows its benchmark index.
Expense Ratio: The cost of managing the fund, known as the expense ratio, can impact the net returns for investors. Comparing the expense ratios of different funds can help in selecting a cost-effective option.
Taxation: The taxation of mutual fund returns can affect the overall profitability of the investment. Both mutual funds tracking the Nifty Bank Index and Nifty PSU Bank Index are classified as equity funds and taxed identically.
In conclusion, mutual funds tracking the Nifty Bank Index and the Nifty PSU Bank Index offer distinct opportunities and risks. Investors should carefully assess their risk tolerance, investment goals, and the characteristics of each fund before making an investment decision.
The Nifty Bank Index and the Nifty PSU Bank Index serve as barometers for the Indian banking sector’s health. While the Nifty Bank Index offers a broader market representation, the Nifty PSU Bank Index reflects the state-owned banks’ fortunes. Investors must consider their investment goals, risk tolerance, and the economic environment when making investment decisions between these two indices. Understanding the nuances between the Nifty Bank Index and the Nifty PSU Bank Index is crucial for stakeholders and investors who seek to navigate the complex landscape of the Indian banking sector. As the industry evolves, keeping a close eye on these indices will provide valuable insights into the sector’s direction and opportunities.
