Does India need a sovereign wealth fund?
Thursday 24 November 2011 - by Kavaljit Singh
New Delhi will soon take a final call on the issue of setting up of a sovereign wealth fund. The idea of setting up an Indian SWF has been going around since 2007 when China established its major sovereign wealth fund, China Investment Corporation, with an initial capital fund of $200bn.
SWFs help in diversifying and improving the return on a country's foreign exchange reserves or commodity revenues. Like central banks, SWFs deploy surplus forex reserves; but since SWFs are set up to diversify investment, they undertake long-term investments in illiquid and risky assets, whereas central banks typically undertake short-term investments in low-yielding liquid assets, such as government securities and money market instruments.
SWFs are typically patient investors with long-term investment horizons. Since they have no explicit liabilities, they can remain committed to their investments in the hope of booking higher returns in the future. Also their funding sources tend to be fairly stable, which makes them less sensitive to market volatility. Unlike hedge funds and private equity funds, SWFs are not prone to withdrawals by investors that could force them to liquidate their market positions quickly.
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