Sovereign Wealth Fund

Sovereign Wealth Fund (SWF) is an investment fund owned by a country’s government. Like any other fund, SWF is also a pool of money that is invested in various avenues. However, the differentiating factor here is that the pool of money comes from the Central Bank Reserves. Central Bank Reserves include budget and trade surpluses, official foreign currency operations, money from privatisations, government transfer payments and revenue generated by exporting natural resources. These funds help to generate returns and have low liquidity making them more risk-tolerant compared to foreign exchange reserves. The acceptable investments included in each of the SWFs varies from country to country. It is also used as a tool to diversify revenue and hence mitigate the risk. For example: UAE, whose main revenue comes from oil, utilises its SWF to invest in diversified asset class to hedge against oil-related risk. India’s fund on the other hand, invests in a large array of sectors from airports to renewable energy. It has also attracted a lot of foreign investment. Tihir Sarkar, London based partner at Cleary Gottlieb, that counts several prominent sovereign funds as clients said, “India is popular with sovereign wealth funds.” He added, “Almost every jurisdiction in the western world is raising the bar for entry for foreign investors but in India it’s the other way round. There’s also the attraction of the demographics and a lot of assets that sovereign funds like, such as infrastructure, where there’s a huge appetite for foreign funding.”