What is Sovereign Wealth Fund?

What is Sovereign Wealth Fund?

Let me quote what Wikipedia says

“A sovereign wealth fund (SWF) is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.”

The SWF came into picture after the 2008 crash.

Importance of SWF

It holds significance as nations pension fund could be part of it. It could be investing in real estate.

(Above are few ones among the numerous ones which can be sensed easily by common man)

Why create Sovereign Wealth Fund?

Take a country with plenty of oil with projection that oil will dry up in 20 years from now. The country chooses to pool the profit/trade-surplus from the resource for the benefit of its citizens.  

Eg: Norway’s SWF is among the most famous sovereign fund which has grown now to be a massive fund.

India doesn't have trade surplus hence few economists feel the idea may not suit India. 

Risks and Criticism

The SWF could be used to get political or economic advantage. The way the SWF’s are used by many countries are unclear. Eg: If the SWF uses the pension fund in a ridiculous manner, then citizens would suffer badly.

 The above is a very ultrasimplified version on SWF, just to introduce the concept.


Update 2019:

India has become a favourite destination for SWFs. The SWFs (eg Canadian Pension Plan, QIP etc) from other countries are putting money in Indian firms.