Sovereign Wealth Fund

Sannihitha Ponaka • Updated on 8 Aug, 2022

4 Mins

Article Content

What is Sovereign Wealth Fund?
The Objective of Issuing a Sovereign Wealth Fund
What are the Types of Sovereign Wealth Fund?
Advantages and Disadvantages of SWF
Sovereign Wealth Fund of India

Sovereign Wealth Fund was first set up in 1981 in Singapore. However, in India, it was rolled out in Budget 2015-16 by then finance minister Mr Arun Jaitley. A Sovereign Wealth Fund aims to cushion the country from economic shocks and unforeseen events.

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What is Sovereign Wealth Fund?

A Sovereign Wealth Fund (SWF) is an investment fund that the government owns. It invests in financial securities like stocks, bonds, real estate and gold. Some SWFs invest a surplus such as foreign currency reserves. While some SWFs invest the revenue earned by the government. Some other sources include budgeting surplus and bank reserves. The main purpose of SWF is to cushion a country from economic shocks.

The first Sovereign Wealth Fund was set up in 1981 by Singapore’s government and was known as Singapore’s Government Investment Corporation (GIC). In India, SWF was set up by then finance minister Mr Arun Jaitley in the union budget 2015-16. India’s SWF is the National Investment and Infrastructure Fund (NIIF).

The Objective of Issuing a Sovereign Wealth Fund

The main purpose of a Sovereign Wealth Fund is to generate a good return in the long term. Also, when the Indian exports revenue and other revenue are extremely volatile, the income from SWF can help in stabilizing the budget and economy.

SWFs ensure long term growth of the capital. Moreover, it will help diversify the export of non-renewable commodities. Since SWFs majorly invest in financial instruments, when the country is facing a deficit in revenue due to the exhaustion of renewable resources, SWFs will come to rescue the economy.

What are the Types of Sovereign Wealth Fund?

The different types of Sovereign Wealth Funds are:

Stabilization Fund

Stabilization funds are also called rainy day funds. Their purpose is to aid the government in case of emergencies or unforeseen events causing economic shocks. For example, increase unemployment rates or a sharp rise in the price of oil or other natural resources increasing the expenses for the government.

Future Generation Fund

Future generation fund aims to cater to the emerging expenses of the future elderly population. This also reduces the burden on the future budget of the country.

Reserve Investment Fund

Reserve investment fund is purely for investment and generating long term returns. The main goal of the fund is to earn high yields from long term investment options.

Pension Reserve Fund

The pension reserve fund aim is to support the pension system of the country. This fund aims to reduce the burden of paying pension on the budget. Countries with an increasing elderly population can set up this fund.

Advantages and Disadvantages of SWF

Following are the advantages of SWF:

Alternate source of income: If a country is highly dependent on its natural resources, the SWF can supplement the country’s income if those resources are depleting.
Counter economic setbacks: A Sovereign Wealth Fund can offset the effects of a country’s recession and also higher government spending.
Source of income: Other than taxes, an SWF can substitute a company’s earnings.

Following are the disadvantages of SWF:

Returns are volatile: SWF doesn’t guarantee returns, and also foreign exchange rates can have an impact on SWFs.
Mismanagement of funds: Due to a lack of transparency, there can be a high chance of mismanagement of the SWF funds.