All you need to know about Sovereign Wealth Funds

The Union Budget 2015-16 saw Arun Jaitley, the then Finance Minister, amending the National Investment and Infrastructure Fund (NIIF), which happens to be India’s first Sovereign Wealth Fund (SWF). The NIIF was proposed to build an investment fund which offers long-term capital for infra-related projects, and the Indian Government would provide Rs 20,000 crore.

What is a Sovereign Wealth Fund?

An SWF is an investment fund which is primarily owned by the National Government. These funds generally invest in financial instruments such as bonds, stocks, gold, and real estate. A few SWFs invest the government’s surplus funds such as foreign currency reserves while the other SWFs invest revenues resulting from trading crude oil and commodities.

Objective of SWF

Generally, the country’s central bank is in charge of managing the reserves of the foreign exchange, and it aims at offering liquidity at times of crisis and market intervention. It doesn’t focus much on providing long-term returns.

On the other hand, an SWF’s primary objective is to generate good returns over a long-term duration. Furthermore, SWFs are formed with the intent to protect and stabilise the budget and economy at times when the revenues and exports are excessively volatile. The SWFs ensure the long-term growth of the capital and diversifying the export of non-renewable commodities.

Background of SWF

Singapore’s Government Investment Corporation (GIC) is known to be the first SWF; it was established in the year 1981. Prior to the existence of SWFs, Calpers was in place, which was state-owned. The revenues generated by Calpers belonged to the government while the revenues of SWFs go to the pensioners. Currently, 49 countries have state-owned SWF.

Operating Principle of SWF

The operating principles for SWFs were framed in 2008 to ensure that funds would act for economic growth. Santiago principles are laid down which dictates that a sovereign wealth fund must compulsorily invest for good returns and has a transparent structure. However, these rules apply only to those countries that volunteer to follow.

Pro’s of SWF

• If a country heavily relies on natural resources, and when the resources are drained, then you can supplement the income with the help of SWF.
• An SWF can be used to counter a recession and increased government spendings.
• An SWF can act as a substitute for the company’s incomes other than taxes.

Con’s of SWF

• The returns are not guaranteed, you can lose everything at once.
• The foreign exchange rates can be impacted.
• Lack of transparency may result in mismanagement of the funds.

India’s SWF: NIIF

As per the latest data, NIIF manages funds of over USD 3.4 billion. The NIIF currently manages the following funds:

• Mater Fund: The master fund is an infra-related fund with the primary objective of developing roads, ports, and airports.
• Fund of Funds: This fund invests in the funds operated by fund managers having an excellent history in infrastructure.
• Strategic Investment Fund: This fund is registered with SEBI as ‘Alternative Investment Fund II’. The objective of this fund is to invest mainly in the equity-linked instruments.

Investors in NIIF

Abu Dhabi Investment Authority (ADIA) signed the first international investment agreement of worth USD 1 billion with the NIIF in October 2017. The Government of India holds a stake of 49% in the NIIF. Notable domestic investors are ICICI Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Life. Asian Infrastructure Investment Bank (AIIB) invested USD 200 million in NIIF in June 2018. The AIIB invested USD 100 billion in June 2018 and agreed to invest USD 100 billion at a later stage.