After recording an all-time high of 47,303 in December 2023, Bank Nifty is retracing a bit now. The index performance has been phenomenal in the last decade. Bank Nifty regularly outshines Nifty and its past 10-year record is proof enough. Compare the Nifty 50 chart to the Bank Nifty chart and you’ll see that the latter has outperformed Nifty six times between 2011-12 and 2020-21.
What is Bank Nifty?
Bank Nifty is an NSE-listed index that consists of 12 bank stocks. These banks are selected in the index based on their market capitalization. Bank Nifty measures the performance of the largest and the most liquid banks in the country. The highest share of an individual bank in the index can be 33%.
The valuation of Bank Nifty is done on the free-float market capitalisation method. Free float means shares that are free to trade in public and not held by promoters.
Here’s the list of banking stocks making up the Bank Nifty share:
- HDFC Bank
- mCap: 10,96,836.12 Cr
- Share: 27.04%
- ICICI Bank
- mCap: 7,13,435.71 Cr
- Share: 23.03%
- State Bank of India
- mCap: 5,59,350.05 Cr
- Share: 11.27%
- Kotak Mahindra Bank
- mCap: 3,62,468.27 Cr
- Share: 11.72%
- Axis Bank
- mCap: 325131.34 Cr
- Share: 11.18%
- Bank of Baroda
- mCap: 122793.99 Cr
- Share: 1.84%
- Punjab National Bank
- mCap: 1,20,295.34 Cr
- Share: 0.91%
- IndusInd Bank
- mCap: 1,18,207.51 Cr
- Share: 5.58%
- IDFC First Bank
- mCap: 58,453.1 Cr
- Share: 1.08%
- AU Small Finance Bank
- mCap: 41,815.12 Cr
- Share: 2.69%
- Bandhan Bank
- mCap: 35,995.97 Cr
- Share: 1.98%
- Federal Bank
- mCap: 35,317.34 Cr
- Share: 1.68%
Why should you trade in Bank Nifty?
Ever since it was launched in 2003 (base year: 2000), Bank Nifty has generated a compound annual growth rate (CAGR) of 17.6% in the 22 years between 1st Jan 2000 and 31st December 2021. The Bank Nifty share is touching new heights on account of the strong performance of banks and the robust financial milieu of the country.
The strong performance of the banking sector led by HDFC, ICICI, and Kotak Mahindra Bank has led to such an impressive show by Bank Nifty. As a result, investors are bullish on the index and people are investing and trading a lot on the Bank Nifty share.
There are three ways to trade in Bank Nifty. These are mentioned below:
- Bank Nifty Futures and Options Trading
If you like to trade in derivatives, then Bank Nifty offers you a lucrative avenue. You can trade in Bank Nifty Futures and Options. These are financial instruments that derive their value from the underlying stock.
- Bank Nifty ETF
If you are a long-term investor who doesn’t like to dabble in the risk of option trading, you can opt for a SIP plan in a Bank Nifty ETF. These are exchange-traded funds that track the underlying stocks of Bank Nifty and invest accordingly.
- Buy shares of individual stocks in Bank Nifty
You could also invest in the underlying stocks of Bank Nifty if you’re a risk-averse trader. Choose the high-performing stocks in the index and buy shares of them at your convenience.
Ideally, a combination of the three methods should be used to trade in Bank Nifty. It will keep your portfolio diversified and maximise your returns at the same time. Regardless of how you trade in Bank Nifty, if you don’t let greed take over, there’s a good chance you’ll make enormous profits on the index.
Trading psychology to protect your capital
If you’re trading in the Bank Nifty F&O segment, you should tread carefully. Bank Nifty has been historically more volatile than the Nifty 50 chart. If you’re not careful, the volatility could wipe out your entire capital. Still, that’s no reason to refrain from trading in Bank Nifty as the rewards are huge. With the right trading setup and proper mindset, you can generate consistent returns on Bank Nifty.
Here are a few things to keep in mind before you immerse yourself in Bank Nifty trades:
- Stick to one trading setup
Identify a trading strategy that works for you and stick to it. See what works for you – indicator-based price action trading or OI and IV-based trading setups. Don’t use too many indicators as it’ll only confuse you.
- Don’t lose more than 1% of your capital in a trade
You are operating with a finite capital and it’s your job to fiercely protect it, especially if you’re an option buyer. Time-decay works against the option buyer and this has to be kept in mind while trading. If you lose 1% of your money on a single trade, cut your loss immediately.
- Don’t lose more than 10% of your capital
Never lose more than 10% of your capital in a single month. If you lose 1% of your capital in a single day, stop trading for the day. If you face two or three consecutive losses, stop trading for the week and if you lose 10% of your capital, don’t trade for the entire month. Study your mistakes and come back afresh next month.
- Avoid revenge trading
The reason 90% of F&O traders lose money is they often go for revenge trading. The latter refers to taking trades that go against the trend, especially after a losing trade. Traders go against the trend in the hope that their luck will turn around and they’ll make profits!
Key Takeaway
The Bank Nifty share has given extraordinary returns in the past two decades and the trend is likely to continue. Don’t miss out on the lucrative returns on the index. Consult an investment platform and plan your investment carefully.