Sovereign Wealth Funds (SWFs)

A Sovereign Wealth Fund, or SWF, is a big investment fund owned by a country's government. The government puts extra national money into it, often earnings from oil or large trade surpluses. The fund then invests this money in shares, bonds, property and infrastructure around the world to earn returns for the long term. You can think of it as a family putting its extra savings into good investments so that its children and grandchildren also benefit.

Why do countries create them?

Some countries earn a lot from a resource that will one day run out, like oil or gas. If they spend it all now, future generations get nothing. Oil prices also go up and down sharply, which can shake the government's budget. An SWF solves both problems. It saves part of today's income for the future and acts as a cushion when prices fall.

Countries with large trade surpluses, like Singapore and China, also use SWFs to earn better returns than they would by keeping all their money in safe, low-interest reserves.

Where did they come from?

The oldest SWF is the Kuwait Investment Board, set up in 1953 to invest Kuwait's surplus oil money. It later became the Kuwait Investment Authority. Other major funds followed:

• Temasek (Singapore): 1974
• Abu Dhabi Investment Authority (ADIA) (UAE): 1976
• GIC (Singapore): 1981
• Norway's Government Pension Fund Global: set up in 1990 to invest petroleum income; today it is the world's largest SWF, with assets of well over USD 1.7 trillion as of late 2025
• Mubadala (UAE): 2002
• China Investment Corporation (CIC): 2007
• ADQ (UAE): 2018

The term "sovereign wealth fund" itself was coined only in 2005 by Andrew Rozanov, in an article titled "Who holds the wealth of nations?".

What types of SWFs exist?

The International Monetary Fund (IMF) groups them by purpose:

• Stabilisation funds: protect the budget and economy from swings in commodity prices.
• Savings funds: turn a finite resource like oil into lasting financial wealth for future generations.
• Development funds: put money into national priorities, usually infrastructure.
• Reserve investment funds: try to earn higher returns on part of a country's foreign reserves.
• Pension reserve funds: build money to meet future pension costs of the government.

Funds can also be grouped by the source of their money: commodity-based (oil, gas, minerals, as in Norway, Kuwait and Abu Dhabi) and non-commodity (trade surpluses or fiscal savings, as in Singapore and China).

How do they work?

The government sets the fund up by law or decree and gives it money. A professional team invests it according to rules set by the owner government: how much risk to take, what share to put in shares, bonds, property or private companies. Most SWFs invest for the long term. They can wait many years for a road, port or power plant to pay off. This "patient capital" is exactly what infrastructure needs.

What are the Santiago Principles?

Around 2007-08, many Western countries worried that SWFs might buy companies for political reasons rather than profit. To build trust, SWFs worked with the IMF through an International Working Group. In October 2008, they published the Santiago Principles: 24 Generally Accepted Principles and Practices (GAPP) on transparency, good governance and investing on commercial grounds. In April 2009, the group became the International Forum of Sovereign Wealth Funds (IFSWF) through the Kuwait Declaration. Following the principles is voluntary.

India and SWFs

India does not have a classic SWF, because it does not run large, steady surpluses from oil or trade. But it has created an SWF-like body and actively invites foreign SWFs:

• National Investment and Infrastructure Fund (NIIF): set up in 2015. The Government of India holds a 49% stake, and it is registered with SEBI as a Category II Alternative Investment Fund. It is often called India's quasi-sovereign wealth fund. In October 2017, ADIA became the first international investor in NIIF's Master Fund, with a commitment of USD 1 billion.
• Tax exemption under Section 10(23FE) of the Income-tax Act: effective from 1 April 2020, it exempts notified SWFs and pension funds from tax on dividends, interest and long-term capital gains from qualifying infrastructure investments in India. The deadline for making such investments has been extended to 31 March 2030.
• Gulf SWFs such as ADIA, Mubadala and ADQ, along with Singapore's GIC and Temasek, have invested heavily in Indian infrastructure, renewable energy, telecom, retail and digital companies.

Commonly confused concepts

• SWF vs foreign exchange reserves: Forex reserves (like those held by the RBI) are kept in very safe, easy-to-sell assets to defend the currency and pay for imports. An SWF takes more risk for higher long-term returns. The RBI's reserves are not an SWF.
• SWF vs FDI vs FPI: An SWF is a type of investor. When it buys 10% or more of a listed Indian company, or invests in an unlisted one, it counts as FDI. When it buys smaller stakes in listed shares or bonds, it counts as foreign portfolio investment (FPI).
• SWF vs pension fund: A pension fund invests workers' contributions to pay their pensions. A standard SWF invests national surplus money. Norway's fund carries "Pension" in its name but is really a savings fund from oil income.
• SWF vs state-owned enterprise: A state-owned company (like a public sector oil firm) runs a business. An SWF mainly invests money in other businesses.

Issues, criticism and the way forward

• Transparency: Some SWFs reveal little about their holdings or decisions, which fuels suspicion.
• Political motives: Host countries worry that a foreign government could use an SWF to gain control of sensitive sectors like ports, telecom or defence supply chains. Many countries now screen such investments. India's Press Note 3 of April 2020 requires government approval for FDI from countries that share a land border with India.
• Good governance at home: Critics point out that poorly run SWFs can be misused by insiders or used to hide public money, so strong rules and audits matter.
• Way forward for India: Keep a stable tax and legal regime, build a pipeline of bankable infrastructure projects, use platforms like NIIF to co-invest, and keep screening only where security is at stake, so that patient long-term money keeps flowing in.

Concepts to Know

• Surplus: Money left over after all spending. A trade surplus means a country sells more to the world than it buys.
• Patient capital: Money invested for a long time without expecting quick returns, useful for projects like roads and ports that take years to pay back.
• Infrastructure: Basic physical systems a country needs: roads, railways, ports, power, water and telecom networks.
• Alternative Investment Fund (AIF): A privately pooled investment fund registered with SEBI that invests in things like infrastructure, startups or private companies, rather than only in ordinary listed shares and bonds.
• Long-term capital gains: Profit made when you sell an investment you held for a long period.