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By Kevin Lim

SINGAPORE, July 10 (Reuters) - The world's sovereign funds, which control an estimated $3 trillion in assets, are on track to agree on a code of conduct by October, but the rules won't be binding, an International Monetary Fund working group said on Thursday.

The IMF also said at the end of a two-day meeting in Singapore, involving 23 investing and recipient countries, that sovereign funds have contributed to financial stability.

"There was a broad agreement on the stability function that sovereign funds have brought to the financial system and the capacity that they have to bring," said Jaime Caruana, director of the IMF's monetary policy and capital markets department. Sovereign wealth funds, or SWFs, from Asia and the Middle East have gained prominence in recent months following their multi-billion-dollar bailouts of Western banks such as Citigroup (C.N: Quote, Profile, Research) and UBS (UBSN.VX: Quote, Profile, Research) during the ongoing financial crisis.

The funds are flush with cash for investments because of high oil prices and large trade surpluses.

The huge investments by SWFs, which tend to be secretive like private equity and hedge funds, have however raised concerns in the West that strategic assets such as banks and energy firms may end up in the hands of foreign governments.

The critical element during the Singapore meeting was to have a better understanding of how sovereign funds are structured, the intentions of their investments and how they invest, Caruana said.

"The rise of SWFs in a broader range of oil exporters heightens this concern because some have a history of mixing politics with business," U.S. management consultants McKinsey said in a report on Thursday.