DEFINITION of 'Sovereign Wealth Fund - SWF'
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. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. The types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments.Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates (UAE) relies on oil exports for its wealth. Therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk.
The amount of money in these SWF is substantial. As of May 2007, the UAE's fund was worth more than $875 billion. The estimated value of all SWFs is pegged at $2.5 trillion.
India needs SWF'S to boost investment-
Swiss brokerage Credit Suisse today said the robust foreign inflows into the country's debt and equities markets will halve to USD 18-20 billion next year on a slowdown in the sovereign wealth funds' (SWFs) play. "The FII (foreign institutional investors) inflows into the domestic markets will come down to USD 18-20 billion in the next 12 months, which is half of the current inflows," managing director for equity research Neelkanth Mishra told reporters here. He attributed this primarily to a possible slowdown in pumping in money by the SWFs. SWFs are short on allocatable resources due to the fall in the crude oil prices, Mishra said. FIIs hold as much as 27 percent in the over USD 1.6 trillion Sensex market capitalisation as of the September quarter, which is at a historic high. Currently, the inflows are almost evenly split between debt and equities, (as there is a USD 25 billion cap on FIIs' holdings in government bonds, though there is a huge demand for more) and Mishra pointed to his in-house research which said around 40-50 per cent of the inflows into domestic equities come from SWFs. It can be noted that oil prices have slid to a five-year low of USD 66-67 to a barrel. Since June, there has been a massive 35 percent fall in the Indian basket of Brent crude. Many of the countries in the Middle East like the UAE and Oman have very active SWFs. Even though the policy-makers sometimes blame such flows to be "fickle", the FII inflows are important for funding the current account gap and reducing the overall deficit, which surged up to 2.1 percent in the second quarter as against 1.2 percent a year-ago.
