Dubai, Saudi Arabia and China are among the nations that have employed the use of sovereign wealth funds (SWFs) to turn their massive cash surpluses into major league investments.

Now India and Japan appear poised to take up the aggressive pursuit for high returns with SWFs of their own.

India is considering a fund that would seek a higher return on $300 billion in foreign reserves that is currently tied up in U.S. Treasuries and government bonds, the Financial Times reported.

“It may be possible to argue that a part of the reserves, which may be considered in excess of usual requirements, be managed with the primary objective of earning higher returns,” Palaniappan Chidambaram, India’s finance minister, said in a written reply to Parliament.

According to Chidambaram, the Council on Trade and Industry recommended to Prime Minister Manmohan Singh in a Dec. 18 meeting that the government “create a sovereign wealth fund of $5 billion to begin with, for financing acquisition of companies abroad.”

India’s foreign exchange reserves, the third-largest holdings in Asia, stood at a record $311.89 billion as of April 4, compared with China’s record $1.68 trillion, Japan’s $987.7 billion and Russia’s $508 billion.

However, analysts say that while the formation of an Indian SWF is likely, it will be significantly smaller than other funds of the same nature. As one of the world’s leading oil importers, India has not enjoyed the large trade surpluses delivered to other developing economies on the back of a commodities boom. India also maintains sizeable account and fiscal deficits.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger.

Meanwhile, Japan may establish a sovereign wealth fund to boost returns on some of its state assets as early as 2009, according to UBS Securities Japan Ltd.

“As cases of inefficient use of the road-specific budget have been disclosed in Diet discussions, the argument that public funds should not be managed by bureaucrats has become convincing,” Takashi Omori, chief Japan economist at UBS AG (UBS) in Tokyo, told Bloomberg News.

A relatively small state fund of between $98 billion (10 trillion yen) and $196 billion (20 trillion yen) may be created, he said.

Sovereign wealth funds currently control an estimated $3 trillion. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].