Sovereign Wealth Funds

Sovereign wealth fund is a state-owned investment fund that invests in financial and real assets, such as stocks, bonds, and precious metals.
Sovereign Wealth Funds
3 min

With the increasing volatility in the global economy, driven by the increasing frequency and intensity of negative externalities (such as climate change), the demand for robust economic support systems has grown rapidly over the past few decades. In response, governments have started focusing on building state-backed financial cushions to safeguard their countries from economic shocks. Sovereign wealth funds (SWFs), have been one of the most significant developments as a result of these mounting concerns that countries have had to face in the past two decades. The first SWF was established in Kuwait in 1953 called the Kuwait Investment Authority, with the sole purpose of investing the surplus revenues from oil exports.

What are sovereign wealth funds?

A Sovereign wealth fund, also known as a social wealth fund, refers to the pool of money that a country has accumulated over a period of time through surplus revenues. Whenever a country is in a situation where it has excess revenues, it uses the SWF mechanism to channelise the money into areas where it is needed the most and invest some portion of it.

The primary motive behind the creation of an SWF is to protect the country’s economy from unforeseen or unpredictable events, such as the COVID pandemic. However, even though the broad objective is the same, the reasons for establishing sovereign wealth funds vary from country to country. For example, for oil-rich countries, the surplus revenues generated by their oil export activities become the key input for their respective SWFs; in turn, these state-supported pools of money help protect these countries’ economies from external shocks that may have a direct or an indirect bearing on the global oil industry.

Types of sovereign wealth funds

Social wealth funds can exist in different forms and sizes. Some funds are created with a specific purpose, while others can be set up to serve as general contingencies in times of crises. Broadly, SWFs can be categorised as follows:

  1. Stabilisation funds - True to their name, these funds are established to simply stabilise the economy in case of any negative external events, such as extreme weather events, outbreak of war, or a sudden and sharp decline in oil and gas prices. These types of funds ensure that during crisis times, the damage to national economic growth is minimal and the recovery is quick.
  2. Pension reserve fund - This kind of a fund is used by the government to finance its pension system, without taking on too much of the burden on itself. Unfortunately, a large number of countries do not have such funds and those that do are usually rich countries with a sizable geriatric population.
  3. Future generation fund - Such sovereign wealth funds are created to cater to the needs of the current and the future elderly population in the country. They also ease the pressure on government budgets in the forthcoming years.
  4. Reserve investment funds - As the name suggests, these funds are established primarily for investment purposes. Governments set up such SWFs with a view to tap investment opportunities and generate long-term revenue for the country.
  5. Commodity funds - Another category of social wealth funds is commodity SWFs, which are replenished through the export of commodities. For instance, if Country A specialises in the production and export of semiconductors and the price of chips rises in the global market, then this country stands to make enormous surpluses. On the other hand, a fall in global chip prices will lead to a deficit for Country A.
  6. Non-commodity funds - These funds are mainly financed by a country’s foreign exchange reserves. To maintain these SWFs, a country will need to have a current account surplus, which is a complex undertaking.

Top Sovereign wealth funds in the world

Sovereign wealth funds hold massive sums of money, and some of these have grown exponentially since their inception. Today, the three largest SWFs are:

  1. Government Pension Fund Global - This was set up by the Norwegian government in 1990 and currently, it owns assets worth US$ 1 trillion or more.
  2. Abu Dhabi Investment Authority - Created in 1976, this body holds nearly US$ 900 billion in assets
  3. China Investment Corporation - It was established to direct China’s excess foreign exchange reserves into different investment areas. At present, it holds assets worth US$ 800 billion or thereabouts.

Investment areas for sovereign funds

Operating as wealth funds, it is very natural to question where the money in the SWFs actually goes. The most preferred investment areas for governments include foreign direct investment (FDI), bonds, and equities. Within these broad categories, SWFs funnel large amounts of money into more specific asset classes and financial assets. In recent times, a significant number of sovereign wealth funds have been exhibiting a proclivity toward alternative investment channels, such as private equity and hedge funds. Furthermore, state-backed funds that invest in private corporations can also assume a greater degree of control over the entities’ investment strategies, pushing them to direct capital responsibly or in the social welfare sector.

Risks involved in Sovereign Wealth Funds

While SWFs have obvious economic benefits, they also entail risks. According to a report by the International Monetary Fund (IMF), central banks are likely to increase the allocation of their excess reserves to higher risk-higher return markets, risking the stability of the SWFs in the process. Sovereign wealth funds are also playing an essential role in the aftermath of global financial crises, such as the 2007-08 subprime crisis in the US. SWFs helped the US government rescue several of the so-called “too big to fail” financial institutions, such as Morgan Stanley, from imminent bankruptcy. Experts believe that these funds are now having way too much control over domestic economies, which, if left unregulated, can result in long-term economic damage and political turmoil.

Key Takeaways

Social wealth funds provide governments opportunities to diversify their investments and explore and open new revenue channels to boost economic activity. As they are backed by the government, SWFs are also highly attractive investment areas for large investors, such as MNCs and foreign governments. However, the dangers posed by SWFs to the international trade system are palpable and policymakers need to take a cautious approach toward these funds to ensure that they do not harm domestic economies.

For individual investors looking to grow their wealth, the Bajaj Finserv Mutual Fund Platform offers access to over 1000 mutual funds, catering to various financial goals and risk preferences. The platform is known for its intuitive interface and a wide range of investment options, where you can also compare mutual funds service makes it easy for both novice and experienced investors to manage their investments effectively. The Bajaj Finserv Platform is an ideal choice for those seeking a comprehensive and user-friendly solution for lumpsum investment.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Step Up SIP Calculator

Mutual Fund Calculator

Brokerage Calculator

FD calculator

Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more


Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.