A sovereign wealth fund (SWF) is a state-owned investment fund
composed of financial assets such as stocks, bonds,
property, precious metals or other financial instruments.
Pools of money derived from a country's reserves, which are set
aside for investment purposes that will benefit the country's
economy and citizens.
Sovereign wealth funds are invested globally.
Most SWF’s are funded by foreign exchange assets.
SWFs are state-owned funds
SWFs are managed separately from official foreign exchange
SWFs have high foreign currency exposure
Unlike pension funds, SWFs have no explicit liabilities
SWFs have high-risk tolerance
SWFs have long-term investment horizons
Equalization Abu Dhabi
Authority-1953 Reserve Fund of
Kiribati- 1956 Authority-1976
Coined By Government
Andrew Rozanov Investment
in 2005 Corporation-
Sovereign wealth funds are essentially set up to manage surplus
foreign exchange reserves and revenues.
Some funds also invest indirectly in domestic industries.
In addition, they tend to prefer returns over liquidity, thus they have
a higher risk tolerance than traditional foreign exchange reserves.
In 2012, there are more than 50 sovereign wealth funds, and
according to the SWF Institute, has exceeding north of $5 trillion.
SWFs are typically created when governments have budgetary
surpluses and have little or no international debt.
The main reason for creating a SWF is because of the properties of
resource revenue: high volatility of resource prices, unpredictability
of extraction, and exhaustibility of resources.
Other reasons for creating SWFs may be economical, or strategic
like when a nation has excess money, it uses SWF as a way to
funnel it into investments rather than simply keeping it in the central
bank or channeling it back into the economy.
Generate high return on investment
Ensure domestic economic stability
Reduce the volatility in tax revenues and export income
Diversify from natural resource exports
Strengthen the regional development
Accumulate savings for future generations
Current account surpluses
Profits from sale of natural resources
COMMODITY SWF NON-COMMODITY SWF
Commodity SWF’s are Non-commodity funds are
financed by exporting typically financed by an excess
commodities. An SWF acts as of foreign currency
a stabilizer to diversify the reserves from current
country's money by investing account surpluses.
in other areas. Non-commodity SWF’s
They have seen huge growth totaled $2 trillion in 2012,
as oil and gas prices increased which is three times the total
between 2000 and 2012. In three years earlier.
2012, commodity SWF’s
totaled more than $2.5 trillion.
Transparency- Lack of transparency is a major concern for
nations. SWFs are being criticized for inadequate disclosures
regarding size and source of funds, investment objectives
Several countries are keeping their economies away from SWFs due
to the concern that some investments are being diverted for political
objective to acquire control of strategically important assets. It
has been observed that OPECs have been diverting large pool of
funds in acquiring strategic assets and investing in important sectors
like infrastructure, telecom, energy and media across developed
POSITIVE – Reduce volatility
and Support function
NEGATIVE – Currency
movement and announcement
Role similar to those of Hedge
funds and Financial Institutions.
Our Reserves: What Do They Really Represent?
• India currently faces the highest fiscal deficit it has recorded in
the past decade and a half - a staggering 6.8%.Our reserves stands
at over US $270 billion.
India's reserves do not represent its actual net savings. These
reserves are either debts which need to be paid back, or funds
which may flow out of India at a moment's notice.
• Even if the current reserves could be put aside for SWF
investment, there is little confidence that the current growth rate
of our surpluses can be maintained.
• We do not have surpluses in our reserves which we can invest. A
move to divert these funds from these reserves to form a SWF
would be fraught with danger since it could prove to be disastrous
in the event of a need to liquefy the reserves.
Risky Investments v/s Safe Bets: Assessing India's Risk
• The RBI is entrusted with the responsibility of handling India's
reserves. These reserves are invested in the US treasury bills,
which result in relatively low yields but are safe investments.
• SWFs are generally considered to have an affinity for risky and
potentially high yielding investments.
• Withdrawing vast sums of Indian investments from the US
treasury paves the way for further volatility in the global
economy. This would also translate into the reduction of India's
export competitiveness since the current reserves ensure that an
appropriate level of currency prices is sustained.
India facing challenges despite market recovery
• It has been said that the market situations have considerably
improved over the recent months, India should look to take
advantage of opportunity to set up a SWF and acquire assets at
• Though it is true Indian companies have done very well over the
past couple of quarters, bettering expectations. On the other hand,
the current fiscal deficit of US $270 billion, surging oil prices and
the spiking inflation levels are indicative of the real situation
which, on the whole, is far from favorable.
• Therefore, despite a promising market performance, SWFs may
prove to be far less yielding than expected, or may have longer
gestation period for maturity.
Domestic Needs v/s Overseas Projects: Quenching Whose
• Setting up of SWFs is possible in countries which do not have
challenging domestic needs. In other words, a poverty struck
country like India setting up a SWF is, at best, unusual.
• India faces various domestic challenges and would need to focus
more on and give a higher priority to the problems of poverty,
infrastructure development, fiscal deficits.
Post Recession Investment
• With proper and scrutiny judicious investment India can make
small investments to obtain otherwise expensive assets
India's Current Financial Restraints
• As per some analysts, figured in the list of countries with the most
• With a fractional fund earmarked for a SWF, India can start a
relatively smaller SWF continue its knowledge gathering before
making large investments
• SWF investments over the next few years, India can move
towards reducing its fiscal deficit
Strategic Investments - A Gain in Exchange
• SWFs are also tools of mutual strategic relationship building for
countries, India becoming a world-power should leverage on that
• Investments through SWFs are often used to fulfill the objectives
of a wider economic and/or political strategy of a country.
• For instance, an investment made using a SWF can further
economic relations between the host and the investor country, and
can be translated into mutually beneficial terms of development.
• For SWF a body like SEBI will be created which will monitor,
manage and regulate
Domestic v/s Abroad
• Since India’s economy is investment thirsty a nominal amount
invested judiciously in SWF would prove beneficial than to have
a blanket ban policy to restrict investment
• Returns from these investments can be cycled back into aiding
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