What are Sovereign Wealth Funds? Everything You Need to Know

Imagine a country putting aside a part of its wealth, not just for today’s needs but as a cushion for unforeseen events, economic crises, or opportunities to grow its prosperity. That’s exactly what a sovereign wealth fund (SWF) does. Globally, these funds have helped nations ride out recessions, development, and secure the future of their citizens.

So, what are sovereign wealth funds? Let’s understand.

What are Sovereign Wealth Funds?

The definition of a sovereign wealth fund is that it is a government-owned investment fund, usually built from surplus revenues such as foreign currency reserves, oil or commodity exports, or budget surpluses.

These funds invest in various financial securities, including stocks, bonds, real estate, gold, private equity, and hedge funds, both domestically and internationally. The primary purpose of SWF is to generate returns that can help stabilise the country’s economy during downturns, reduce reliance on volatile revenues such as oil or exports, and fuel long-term development.

History of Sovereign Wealth Funds

The first sovereign wealth fund was set up in 1981 by Singapore’s government, known as the Government of Singapore Investment Corporation (GIC). 

Inspired by the global success of such funds, India announced its own version in the Union Budget 2015 – 16. Mr Arun Jaitley unveiled the National Investment and Infrastructure Fund (NIIF) with an initial government commitment of ₹20,000 crore.

Today, the NIIF has grown into a robust platform managing over USD 4.9 billion (as of mid-2025) to develop India’s core infrastructure and attract both domestic and global investors.

Objectives of Issuing a Sovereign Wealth Fund

The main reasons for setting up an SWF are:

• To generate a good return in the long term. 
• To stabilise the economy when revenues from exports or commodities fluctuate wildly.
• To diversify income sources beyond traditional taxation and natural resources.
• To invest strategically in development and secure financial independence for the future.

Types of Sovereign Wealth Fund

The different types of SWF are:

1. Stabilisation Fund

Stabilisation funds are also called rainy day funds. Their purpose is to support the government in the event of emergencies or unforeseen events that cause economic shocks. 

2. Future Generation Fund

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

3. Reserve Investment Fund

A 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.

4. Pension Reserve Fund

The pension reserve fund aims to support the country’s pension system. This fund aims to alleviate the budgetary burden of paying pensions. Countries with an ageing population can establish this fund.

Advantages and Disadvantages of Sovereign Wealth Funds

The following are the advantages of SWF: 

• If a country is highly dependent on its natural resources, the SWF can supplement the country’s income if those resources are depleting.
• A SWF can offset the effects of a country’s recession and also higher government spending.
• Other than taxes, an SWF can substitute a company’s earnings.

The following are the disadvantages of SWF:

• SWFs don’t guarantee returns, and foreign exchange rates can also impact SWFs.
• Due to a lack of transparency, there is a high risk of mismanagement of the SWF funds.

Sovereign Wealth Fund of India: The NIIF

India’s first SWF is the National Investment and Infrastructure Fund (NIIF). The Government of India started NIIF in 2015. The fund’s main objective is to maximise the economic impact through infrastructure investment in viable projects both in Greenfield and Brownfield. 

The NIIF manages three funds that invest in India’s infrastructure. They raise the capital from domestic and foreign institutional investors. The following are the funds that NIIF manages:

• Master Fund: The Master Fund is an infrastructure fund that invests largely in operational assets across essential infrastructure sectors, including highways, ports, airports, and electricity.
• Fund of Funds: The Fund of Funds invests in funds run by fund managers with experience in India’s infrastructure and related industries. Green infrastructure, mid-income and affordable housing, infrastructure services, and allied sectors are some of the sectors that they focus on.
• Strategic Investment Fund: In India, the Strategic Investment Fund is registered as Alternative Investment Fund II (AIF II) under SEBI. The National Investment and Infrastructure Fund II (‘Strategic Fund’) seeks to invest primarily in equities and equity-linked securities. The strategic fund will concentrate mainly on greenfield and brownfield infrastructure developments.

Conclusion

Sovereign wealth funds aren’t just emergency savings; they’re a smart way for countries to protect their economy and grow national wealth over time. India’s NIIF, though still in its early years, has built a strong base to draw global investors and develop crucial infrastructure. 

As India moves forward, a well-run fund like the NIIF can help the country stay strong and prepared, no matter what challenges come its way.

FAQs

READING RESOURCES

• What is expense ratio
• What are stocks
• What is annual return
• What is annual yield
• What are different types of investment