Financial Statements

A mutual fund's annual report concludes with its financial statements. Brace yourself: there's a lot of data here. In fact, this is where investment research sites get a lot of the data for their fund data reports.

Where to look closer

However, if raw numbers are your thing, you should take a look at the following: First, examine what's known as the fund's selected per-share data. This is usually the last page of actual information, located just before the legal discussion of accounting practices. Here you'll find the fund's net asset values, expense ratios, and portfolio turnover ratios for each of the past five years (or more). Check to see if the fund's expense ratio has gone down over time (one hopes it has) and whether its turnover rate has changed much (if so, you may want to find out why).

Cost-conscious investors can check out the breakdown of the fund's expenses, including management fees, under the statement of operations. In addition, you can find out how much in unrealized or undistributed capital gains you're facing, using the statement of assets and liabilities. (A gain is unrealized when a stock has gone up but the fund hasn't sold it. As soon as the fund sells the stock, it becomes a "realized" gain, which has to be distributed to shareholders.)

Statement of Additional Information

While the prospectus is packed with great information, it shouldn't be your sole source of data on a fund. A fund's Statement of Additional Information (SAI) contains more great tidbits about the fund's inner workings. You'll generally have to request this document by calling the fund company: Funds send out prospectuses and annual reports as a matter of routine, but SAIs are often considered second-tier documents.

Fund families may consider SAIs secondary, but these statements usually provide far more detail than the prospectus about what the fund can and cannot invest in. Further, this document usually identifies just who represents your interests on the fund's board of directors and just how much you pay them for their efforts and how much these directors own of the fund.

Finally, you can find more details about your fund's expenses here. SAIs also break down where 12b-1 fees go, if the fund charges them. (These are fees that the fund can use for marketing, rewarding brokers, and attracting more investors.) It's your money; you should know where it's going.

What to do next

You can request a prospectus, an SAI, or annual report by phone, by direct mail, and sometimes by e-mail. Many funds also make this literature available for download at their Websites. All mutual funds file their prospectuses, shareholder reports, and SAIs with the Securities and Exchange Commission. You can view these at the SEC's Website: www.sec.gov.

While we suggest that you begin your fund evaluation with these documents, we don't think you should stop there. Seek out third-party sources to help put your fund into context. Compare it with other funds that have similar investment approaches. You should evaluate how its costs stack up, if its performance is competitive, and if it compensates for the risks it is taking on.