Over the next few weeks, most mutual-fund investors will receive — and ignore — important documents. They'll focus on their...

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Over the next few weeks, most mutual-fund investors will receive — and ignore — important documents.

They’ll focus on their annual statement — the one showing how well or poorly they did in 2007 — without bothering to look at the annual report or their tax paperwork. They’re missing out on a resource, particularly after a year like 2007 when many performance trends took a turn for the worse and left shareholders nervous about the future.

Going through fund paperwork doesn’t have to be a big chore. It can take a few minutes if you know what to look for, and you examine those items with the following question in mind: “Did my fund and my manager do what I would have expected them to do in this kind of investment environment?”

Armed with that question, look through the annual report (and any proxies or tax forms) for these items:

Performance. Funds must compare returns with at least one benchmark, either the particular market index they try to beat or the average performance of the asset class. Good annual reports show both.

Statements from management.

Funds should provide candid, clear explanations of what happened, what to expect and why. If management says “Don’t worry, be happy,” you should “Get nervous, be angry.”

Look, too, for changes in management; most funds don’t notify shareholders, and simply put it in the next report. If there’s a new manager, make sure you are comfortable that the fund will not change its character, pursuing a discipline or assets favored by the new manager.

The fund’s portfolio. While it’s out-of-date by the time the semiannual report is printed, a fund’s holdings give a glimpse of strategy and performance.

Look for a portfolio that is consistent with your expectations in terms of diversification, international exposure and size of companies.

Expenses and portfolio turnover. Dig into the “financial highlights” to get these telling numbers. A fund with high or rising expense ratios is not maximizing your returns. High turnover can lead to big capital-gains tax liabilities, which you end up paying.

Asset growth. A fund that is shrinking or standing still is losing either money, investors or both.

The auditor’s report. Don’t bother reading it, just count the paragraphs. If there are more than three, there could be trouble.

Taxable gains. Most people pass their 1099-DIV to the tax preparer or extract the numbers for their return without considering their impact. Investors in taxable accounts must pay the taxes due on any capital gains they receive from the fund, even if they reinvest the proceeds.

A fund that is tax inefficient — where the bulk of its returns come from trading profits and dividends rather than long-term buy-and-hold investing — forces an investor to pay taxes for big chunks of their gains annually, while a fund that is tax-efficient can delay those taxes indefinitely.

Chuck Jaffe is senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.