Sovereign Wealth Fund (SWF)
What is a sovereign wealth fund?
A sovereign wealth fund is a pool of money set to the side by a government to benefit its economies and residents. The money from a sovereign wealth fund comes from the country's reserves that have become due to budget overflows, trade excesses and revenue acquired from exporting natural resources.
More profound definition
The objectives of sovereign wealth funds are to safeguard and add stability to the country's budget, earn greater returns on foreign investments, enhance from non-inexhaustible exports, increase savings for people in the future, play a job in political strategy and make sustainable long-term capital growth.
A few countries foster sovereign wealth funds to broaden their sources of revenue. For instance, countries that depend on oil exports as their primary source of wealth might invest a portion of their reserves in securities or assets to broaden against a sensational lessening in oil production or oil demand.
Sovereign wealth funds are classified by two categories, commodity and non-commodity. Commodity sovereign wealth funds are funded by exporting commodities. As the price of the commodity rises, the sovereign wealth fund develops at an increased rate. At the point when the price of the commodity falls, this could negatively impact the sovereign wealth fund, and consequently the country it upholds.
The investments that develop non-commodity can change by country. These investments are typically long-term, passive investments. Sovereign wealth funds could invest in traditional investments, for example, government bonds, equities and foreign direct investments. Alternative sovereign wealth funds investments are developing and incorporate hedge funds and private equity investments.
As per the International Monetary Fund, sovereign wealth funds harbor a higher degree of risk than traditional portfolios as they hold bigger stakes in emerging markets, which are more unstable.
Sovereign wealth fund model
Sovereign wealth funds are generally new. The primary fund was developed by Kuwait in 1953. The Kuwait Investment Authority was made to invest the country's excess oil revenues. Be that as it may, since this time, the size and number of sovereign wealth funds has increased substantially. In 2012, there were in excess of 50 sovereign wealth funds. These funds' combined value was estimated at more than $5 trillion.
Features
- Sovereign wealth funds can be derived from different sources and utilized for various purposes.
- Acceptable investments in each SWF change from one fund to another and country to country.
- A sovereign wealth fund is a state-owned investment fund.
