What is asset and liability management and what methods do they follow?

What is asset and liability management and what methods do they follow?

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Asset and liability management It is very important for a business to take certain amount of risks from time to time in order to be able to grow. These risks can be in terms of many different things. This could be about launching a new product, investing in a new work space or acquiring some other business. But to be able to confidently do that, you need to have a good backup of funds in your portfolio. For this, there is the asset and liability management in place. To put it in simple terms, it is the balancing of assets and liability on the balance sheet. www.avendus.com/india

Focus on interest margin The main focus definitely lies in the management of the overall interest margin however, here, it is very crucial that it should be a very integrated approach followed by deciding the kind of assets that should be invested in, the monetary size of the asset and so on. One of the core factors that you have to take into consideration is about investing in the right kind of asset mix also which are available. In asset and liability management the rate and maturity time of the asset is what decides the yield.

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Different methods When you visit an asset management firm, you will also get information about the different kinds of funds that you can invest into. There are mutual funds, ESG funds in India and rest of the world, there are SIPs as well. the different ways in which the credibility of the funds is judged is by gap analysis, analysis of duration, value-at-risk method, and of course, the risk management. These tools basically help the designated wealth managers in addressing risk factors that are caused due to a mismatch in liabilities and assets. www.avendus.com/india

Gap analysis and duration method In asset and liability management, the gap that we are referring to here in gap analysis is actually the excess of assets which are interest sensitive over liabilities that are interest sensitive or vice versa. The gap amounts to zero when these asset and liabilities become equal. In the duration analysis, the result of the changes in the rate of interest over the values of assets and liabilities is scrutinized. This is done in terms of flow of cash and average maturity.

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Value at risk and risk management In this method, the concept of market to market selling is given a go-ahead.

How is this approval give? Well, on the basis of the yield and maturity ratio. When it comes to risk management, the risk profile related to all the discussed assets and liabilities are scrutanised in order to make sure that they come under proper risk levels. Risk management is made possible with the aiding of certain hedging mechanisms.

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Thank You

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