Financial planning simply means planning finances to meet your future needs. There has been a lot of material based on academic research on the subject, developed over the last few decades and being used by individuals now.

The most popular and followed approach is goal-based financial planning. This simply means:

IDENTIFY A FUTURE NEED: It could be buying a house, planning a vacation, children's education, retirement, etc.

MEASURE THE TIME: Determine how much time will be required to fulfil the need. Will it take six months, 1 year, 3 years, 5 years or 20 years?

DIVERSIFICATION: For every need, the portfolio constructed should be diversified. This probably remains the most important aspect while investing and has been proven to be right way of investing for ages. Diversification can be achieved by holding different Asset classes, like equity, fixed income, real estate, gold/commodities, property, etc. One should avoid holding a single Asset Class portfolio as much as possible.

LIQUIDITY: This is an important aspect one should consider while investing. A few pitfalls of not considering this: not being able to exit while the market is in for a serious fall (eg, the fall of equities in 2008), the investment portfolio is illiquid and the invested paper is not saleable (FMPs holding real estate papers in 2008), etc.

EXPENSES: This is an important aspect an investor should consider. Many products would look very attractive before the Expenses are taken into account. But once you add entry and exit loads, management fee, back office expenses and profit share (if applicable), these products would not look all that good.

TAXATION: Not many investors calculate how much short-term taxes could eat into the returns on their investments.

AUTHENTIC SOURCES OF DATA: If possible, an investor should verify the accuracy of the data presented about the performance of a product. Normally, it is difficult to do, otherwise the investor should ask for audited numbers.

For a retail investor, mutual funds are good options for investing in equities, fixed income, and gold/commodities. Unless one is very good in stock-picking and has a proven track record, mutual Fund is a very good way to hold diversified portfolios. One could go a step further by investing through multi-asset, multi-manager fund of funds, where asset rebalancing and fund selection are done by a fund manager on behalf of the investor at a negligible additional cost.

Once an investor has constructed the portfolio, he/she should rebalance it on a regular basis. Rebalancing means analysing the market values of each asset class in the portfolio and checking whether they are still in line with expectations. For example, if the equity holding, intended to be 50% of the portfolio, has increased to 60%, the investor should redeem 10% and put it into another asset class. In this case, the investor should be guard against rebalancing the portfolio as this could entail Higher Transaction Expenses and realisation of Capital Gains Tax. Investors should look for vehicles, such as multi-asset fund of fund in case of mutual funds to minimise such expenses.

Second, an investor should analyse whether the individual instruments he or she is holding in each asset class are performing well. If not, a change may be required. In this case, too, frequent changes could Entail Higher Transaction expenses and realisation of capital gains tax.