Information you need

There are three key pieces of information that help you evaluate a mutual fund.

Past performance measures the fund's historical returns, whether the returns are consistent, and how they stack up against the returns of comparable funds. You'll want to be wary of any fund whose high long-term returns are based on one or two stellar years and eight or nine below-average ones.

While there's no guarantee that a fund's future performance will equal its current or past record, many experts point to a strong performance history as one basis on which to make an investment decision.

Risk measures how likely you are to earn money or lose it. Risk isn't bad if you're investing for the long term and you can tolerate some setbacks without selling in a panic if the fund drops in value. But if you're investing to meet short-term goals or preserve capital, you may want a fund that poses less risk to principal.

Cost measures how much you pay in sales charges, or commissions, fees, and annual asset-based expenses.

Since these costs directly affect your return, you may want to compare the expense ratios and sales charges of various funds as part of your evaluation process. Higher fees may correlate with higher risk if the fund manager takes added risk to help reduce the impact of fees on return.

Transparent or opaque
When mutual fund information is, it's clear and usable. You can compare the performance history of different funds or their expense ratios. In contrast, when information is opaque, you're in the dark.

Transaction fees, which aren't part of a mutual fund's expense ratio, are opaque if the actual cost per trade isn't provided separately but is combined with other services a brokerage firm provides to a mutual fund.

Critics say these soft dollar transactions result in higher trading costs than the fund might be able to negotiate and therefore in lower returns. Proponents say soft dollar arrangements benefit investors by providing additional independent research.

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