Asset and liability management

Asset and liability management

Normally, financial risks arise due to the mismatches between the assets and liabilities, which are parts of investment strategy in financial accounting. The management of the financial risk is asset and liability management.

ALM is neither fully risk management nor strategic planning alone, but it’s a mixture of both. When it comes to asset and liability management, only long-term perspectives will be taken into account rather than mitigating immediate risks. It will majorly depend on the changing circumstances.

During the asset and liability management, it includes many huge factors such as assets, risk mitigation, and rejigging of regulatory and capital frameworks. If the assets are managed against liabilities, the financial situation will normally increase because of the maximized investment returns and increased profitability.

The main part of asset and liability management is the understanding side. By finding the risk factors occurring due to the discrepancy between assets and liabilities, the results of financial theme changes. Interest rates and liquidity investments are some of the risk factors.

By long-term focus, they will have sustainability and profitability by maintaining liquid requirements, managing credit quality, and ensuring enough capitals are generated on a regular basis. Besides, utilization of frameworks to oversee an organization’s entire balance sheets will ensure the optimal investment of assets and long-term mitigation of liabilities.

For a long time, ALM has been managing risk based on the expected risk, but that has been termed outdated. Instead, it is important to pay heed to assess management and

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risk mitigation on a macro level, addressing areas such as market, liquidity, and credit risks.

Dissimilar to other risk management practices, ALM continuously monitors risk to ensure that an organization works within risk tolerance and regulatory frameworks.

Asset and liability management is used in various organizations such as banks, pension funds, asset managers, and insurance companies.

ADVANTAGES AND DISADVANTAGES OF ASSET AND LIABILITY MANAGEMENT:

Just like every other risk management and strategic planning, asset and liability management has its advantages and disadvantages.

Some of the cons of ALM is its ability to manage the liabilities to prepare for future uncertainties - which thereby assists to reduce risks from a mismatch of assets and liabilities. By reducing the risk between the matching assets and liabilities, increased efficiency can be achieved at ease.

On the other hand, there is no proper framework that could be applied to all organizations at one place. This is the major issue when it comes to disadvantages of asset and liability management.

Fund management, on the other hand, does not differ much from asset and liability management. In this case, the funds will be used in order to generate a small amount of money held back as profit. Mutual funds, trust funds, pension funds, hedge funds, and equity fund management are some of the types of fund management.

Many finance companies in India will help out with fund management, and asset and liability management. Apart from these two, they will assist with various things like loans and trading as well

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