The Hindu Business Line : A Sovereign route

Sovereign Balanced Funds are not a new kind of scheme on offer by mutual funds. Instead, they are what countries sitting on a pile of foreign exchange reserves must set up and operate. China has built a staggering forex reserve of about $1,700 billion and India a modest $270 billion or so.

China must be ruing its decision to have parked the bulk of these reserves, arduously and assiduously built over the years, in dollar-denominated securities in the US financial markets, what with the currency registering a steep, precipitous and free fall in recent times in relation to most of the currencies of the world — free floating and others. Lest its efforts and resources go up in smoke, the Chinese Government has a vested interest in seeing the dollar stage a comeback.

Forex reserves

The Indian authorities too are guilty of putting all their eggs substantially in one basket — US dollar-denominated securities. While as a rearguard, the Chinese government has set up a Sovereign Wealth Fund (SWF) with a modest corpus of $200 billion to invest specially in equities across the world, there is no imminent move by India to follow China in this regard, and wisely so, given the relatively fragile nature of its forex reserves vis-À-vis China’s.

India may, however, do well to create a sui generis SWF and christen it Sovereign Balanced Fund (SBF). The SBF should be structured on the lines of mutual funds with a wide portfolio, including hard currencies such as the euro, the Japanese yen, the Swiss Franc and the British pound, precious metals such as gold, and shares of well-managed or potentially successful foreign companies. Shares of Indian companies should be out of bounds for it, lest the government faces the charge of backdoor nationalisation. It should be managed by nimble-footed fund managers, not hamstrung by short-term considerations.

A mutual fund by definition is risk-averse which is why diversification is its leitmotif. So should be the SBF. Not for it the evanescent achievement of taking up equity positions in a leading private equity outfit or bailing out a sinking bank. By doing this, the Indian Government would be leading from the front and practising what it presumably approves of — that mutual fund investments are beset with market risks all right, but infinitely safer than betting on a single horse. Having choked off the ECB route for corporates, the government may in addition allow SBF to provide an alternative route to them in the form of forex loans.

Striving for balance

Sometimes, there is merit in not clambering onto the bandwagon and not being a me-too. The Indian government finds itself in the same position where an upwardly mobile middle-class Indian finds himself — having just enough resources to launch himself on the fast track. His resources are limited and fragile. So are the government’s. Both, therefore, should strive for balance. If mutual fund investment is what the doctor has ordered for the retail investor, a sui generis SBF, with just the trappings and no more of an SWF, is what the Indian government should pioneer. A balanced fund invests almost equally in debt and equity instruments. An SBF, on the other hand, should find its balance in a wider range of avenues at the international level. Both, however, share a common objective — optimising the returns for investors without unduly exposing them to risks.

(The author is a Delhi-based chartered accountant.)

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