What is Asset Management?
Asset management is the management of the funds of the clients in the financial market in line with the agreed-upon investment mandate, usually by a brokerage firm or an investment firm for which these firms charge the significant amount of fees for managing the assets properly. The client who allows the asset management company to manage the funds on their behalf expects a good amount of return on their money invested. All the investment activities by the asset management companiesAsset Management Companiesset Management Company is a company that takes the financial assets of a person, company or another asset management company (generally this will be high net worth individuals) and use the assets to invest in companies that use those as a operational investment, financial investment or any other investment in order to grow the investment. are driven by the investment mandate i.e., mandate that contains instructions to manage a certain pool of the assets in a specific way. These mandates also include information regarding the risk parameters within which the investment is to be made and the strategy that will be used.
Example of Asset Management
Let’s take an example of asset management.
Mr. X is holding the position of the assets management in one of the investment banking company investing in the equity marketInvesting In The Equity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).. He is given the responsibility of managing the assets of the 10 clients of the company. Now, the duties of Mr. X include the research of the financial marketFinancial MarketThere are different functions that the financial markets perform, which includes price determination, price discovery of various financial instruments, fund mobilization, allowing investor opportunity, providing multiple types of information to traders, and sharing risk. and conducting the statistical analysis for studying the trends on the basis of the different varieties available like the condition of the market, the performance of the different companies, relationship of the country with the foreign countries, the economic condition of the country, etc.
After that, he has to make the time investment decisions on the behalf of his clients with the main goal of maximizing the performance of the investment portfolio of each of the clients as the clients have invested their money with the expectation of earning maximum possible returns. For this asset management, the company of Mr. X will also charge the fees from their clients.
There are several different advantages of asset management providing the opportunity for the international investors and the issuer of the ADRsThe Issuer Of The ADRsAmerican Depositary Receipts (ADR) refer to negotiable certificate released by the US depository bank and comprise a certain number of stocks with atleast one foreign company's shares. It is freely traded on the US stock markets, just like the other domestic stocks.. Some of the advantages are as follows:
- There are many of the products that are not available for individual investors, so with asset management, investing in those wide ranges of financial products is possible.
- Under asset management, entities providing these services takes the burden of managing the assets of the clients by carrying out all types of activities related to asset management.
- Before investing the funds of the client, asset managers conduct different research, and statistical analyses of the different companies, trends, and the markets on the behalf of their clients for the purpose of determining that which are the areas where the investments should be made and which are the areas that should be avoided.
- The process of asset management essentially has the dual mandate that includes the appreciation of the assets of the client assets over the period of time while mitigating the risk that comes in between the time during which the portfolio is to be managed by the asset manager.
- Assets management services offered by the financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. include both the traditional as well as the alternative investment vehicles like brokerage services, credit cards, money market funds, debit cards, etc. So, along with the management of the assets of the client, these financial institutions provide alternative investment vehicles that are advantageous for the clients as they can get all the services in one place.
The different limitations and drawbacks include the following:
- There are many of the asset management companies which restrict their services to only the wealthy persons like individuals having the high net worth, government entities, financial intermediaries and the different corporations and don’t manage the portfolio of the persons not fulfilling the prescribed wealth criteria of the company.
- A significant amount of fees being charged by these firms for managing the assets properly which sometimes proves to be an extra burden on the clients.
- If the assets are not managed properly or the asset manager is unable to mitigate the risk then this could result in the loss to the clients.
Important Points of Asset Management
- When there is the management of the investments on behalf of the others than it is known as asset management.
- The goal is to grow the portfolio of the clients over the period of the time while mitigating risk.
- These firms charge a significant amount of fees for managing the assets of the clients properly.
- There are certain investment minimums according to which the asset management services are generally available to the individuals having a high net worth, government entities, financial intermediaries and the different corporations. So, there are many of the asset management companies which restrict their services to only the wealthy persons and don’t manage the portfolio of the persons not fulfilling the prescribed wealth criteria of the company.
- Along with the management of the assets of the client these financial institutions provide alternative investment vehicles that are advantageous for the clients as they can get all the services in one place.
The main role of the asset management company or the asset manager is to determining that what investments to be done, or to be avoided, with the main aim of growing the portfolio of the client by providing a maximum possible return over the period of time with mitigating the risk. Before investing in the funds of the client, asset managers conduct different research. In recent years, the facility of asset management became more accessible to the persons who are having fewer resources which earlier was difficult to use for those persons.
The main reason for such a change in the digital transformation, which has opened up different investment opportunities for all types of persons. The products of the investment like mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks. are gaining more and more popularity with the time as it is easy to use by the persons and along with that, it may deliver a high level of performance to the person making the investments.
This has been a guide to what is asset management and it’s a definition. Here we discuss the example of asset management along with advantages and disadvantages. You can learn more about financing from the following articles –