There are several independent rating firms that analyze and rank mutual funds based on their performance, risk and other factors.

One of the most respected independent rating firms is Morningstar. Morningstar's rating analysis takes into account both a mutual fund's performance and risk and assigns a rating from one to five stars. To determine a fund's star rating for a given period (three, five, or 10 years), the fund's Morningstar Risk score is subtracted from its Morningstar Return score. If the fund scores in the top 10% of its broad investment category (equity, hybrid, taxable bond or municipal bond), it receives 5 stars (highest); if it scores in the next 22.5%, it receives 4 stars (above average); if it scores in the middle 35%, it receives 3 stars (neutral or average); if it scores in the next 22.5% it receives 2 stars (below average); and if it scores in the bottom 10%, it receives 1 star (lowest). Star ratings are recalculated monthly.

A prospectus is a printed summary of information that a company must file with the Securities and Exchange Commission(SEC) in conjunction with a public offering of securities, including mutual funds. It contains information about the company and its business that helps investors to decide whether to invest. SEC regulations determine what must be included in the prospectus. It typically contains information about the company's products, services, management and financial history. It must also discuss the risks involved. If the security is a new mutual fund, the company will discuss the types of investments that the fund will make. The SEC does not endorse the security nor the information presented in the prospectus.

Like a blueprint, the prospectus tells you everything about the fund, such as the investment objective(s), risk considerations, the investment manager, the portfolio manager, securities that the fund can purchase, investment restrictions, sales charges, management fees, expenses, procedures for buying and selling shares, shareholder services, dividend and distribution policies and past financial information.

The best measure of performance is called total return. This combines all interest, dividends, and capital gains distributions with changes in the market price of your investments. It is a far better yardstick to use than just the change in price over a period of time. To see how well your investments are doing, start a quarterly performance record. List all your investments and their current value. Then list their value at the end of the quarter. Each quarter's ending values should include all reinvested interest and dividends. Add any interest and dividends received during the quarter to the ending value and subtract any contributions made during the quarter. From this total ending value, subtract the total value at the beginning of the quarter and divide the result by the beginning balance. This gives you the total percentage return for the quarter, which may be positive or negative. Use the same approach for determining an annual return. Your online 403(b) account keeps a running tally of your mutual fund returns, which allows users to track dividend payments as well as daily price fluctuations.

Once you have done all your research and invested in a mutual fund, it's time to sit back and leave the rest of the work to the fund's manager. You can check on the fund's performance daily, but once a week or even once a month is probably enough -- especially if you're saving for a retirement that is years away.

Even the best-performing mutual funds can fall on hard times. But usually, sharp investors can spot potential problems and take evasive action before their mutual fund sinks in value. Here are some red flags that signal a mutual fund could be in for some rough sailing, from the National Network of Estate Planners in Denver:

1. The fund's management changes.
2. Its performance slips compared to similar funds.
3. The fund's expense ratio climbs.
4. Its beta, a technical measure of risk, increases.
5. Independent rating services reduce their ratings of the fund.
6. It merges into another fund.
7. There's a change in management style or a change in the objective of the fund.

No single one of these red flags automatically means a fund is slipping. But a combination of these factors should at least cause you to take a closer look and consider a switch.

Because investments can rise or fall unexpectedly, the primary risk associated with an investment (the market risk) is characterized by the variability of returns produced by that investment. For example, an investment with a low variability of return is a savings account with a bank (low market risk). The bank pays a highly predictable interest rate. That interest rate also happens to be quite low. An internet stock is an investment with a high variability of return; it might quintuple, and it might fall 50% (high market risk). The standard way to calculate the market risk of investing in a particular security is to calculate the standard deviation of its past prices.

Risk tolerance basically is the amount of psychological pain you're willing to suffer from your investments. For example, if your risk tolerance is high, you might feel fairly comfortable investing in futures contracts or other types of securities that can go up and down like a roller-coaster. But if your tolerance for risk is low, you should stick to more conservative investments that aren't subject to wild swings in value. No investment is worth losing sleep over.

Portfolio risk can be reduced by diversification. The components of total risk are company risk (also called unsystematic risk), which can be reduced through diversification, and market risk (also called systematic risk), which can't. To illustrate, say all of your money was wrapped up in the stock of XYZ Corp., the largest widget maker in the world. XYZ is a fine firm, but this is still a risky proposition. First, XYZ's stock could be adversely affected by weakness in the overall stock market. This is market risk. Second, the stock could suffer if the widget industry falls on hard times. This is industry risk (unique to the industry, not the market as a whole). And third, XYZ stock could tumble for reasons unique to the company -- an unexpected shutdown of its plants, the loss of a key customer, or even the death of one of its key executives. This is company risk. About 70% of the risk you face as an investor is company risk.

If you instead had a little of your money in XYZ Corp.'s stock, a little money in a diversified mutual fund that owns several stocks, a little money in bonds and a little in real estate, the chances of your portfolio plunging suddenly would be greatly reduced.

It's difficult to lump different types of investments into broad risk categories, in part because the way you invest in them could increase or decrease your risk. For example, buying futures contracts on commodities is generally considered one of the riskiest investments you can make. But that risk is greatly reduced if you instead purchase options on those futures or you use derivatives to completely hedge spot (cash) positions. Since risk is based on volatility and uncertainty, buying futures contracts themselves would certainly be included in anyone's definition of high-risk investing. Other investments that should be left generally to risk-oriented traders include financial derivatives, junk bonds, speculative stocks and the mutual funds that buy them. Precious metals have traditionally been considered high-risk investments, although the value of gold and silver has traded in a fairly narrow range over the past couple of years.

Virtually risk-free investments include U.S. Treasury bonds, bills and notes, which are backed by the full faith and credit of the U.S. government, and deposits at banks where accounts are insured for up to $100,000 by the Federal Deposit Insurance Corp(FDIC). But these investments protect only against the risk you won't get your money back. There's also inflation risk to consider. For example, if you buy a five-year, 5% certificate of deposit covered by FDIC insurance, and inflation soars to 10% , your principal will be losing 5% of its purchasing power each year. Also, Treasury bonds are risk-free only from a default basis. Treasury bond prices still move inversely to changes in interest rates. So there's really no such thing as a risk-free investment.

There are several risks. The main one is that the companies in which the fund has invested will perform poorly, suffer mismanagement or otherwise meet with misfortune. Another big risk is that some economic, political or other development will cause the overall market to fall, dragging down with it the holdings of your particular fund. These are risks you would face investing in individual stocks as well; at least mutual funds can offer diversification. But some risks are unique to mutual funds. The fund management, for instance, may be doing things you don't know about or wouldn't like if you did. What you think is a plain vanilla domestic equity-income fund might, in order to boost returns, invest in derivatives, invest overseas, or invest in growth companies that pay little or no dividend. In a downturn, you could be in for an unpleasant surprise. There is also the risk that the fund will under perform a benchmark index, which means that management fees aren't buying any added value.

All investors want to make money, but often they have differing financial goals. Whatever your investment objectives, it's imperative that you formulate a plan and stick to it in good times and bad. The four most common objectives are financial security, retirement planning, income to meet living expenses and a child's education. You may be seeking one, a combination or perhaps entirely different ones. Whatever your objectives are, they should establish a destination, as well as a chart for measuring your progress. At times, securities markets will turn, and you will be tempted to change direction abruptly. Your objectives should serve as a road map for managing your investment program.

Dollar-cost averaging involves regularly investing a fixed sum -- say, $100, $300 or $500 a month. Your 403(b) salary deferral contributions automatically transfer into the fund every month. To understand how dollar cost averaging works, consider this example from the Dun & Bradstreet Guide to Your Investments. "You put $100 into a mutual fund every month. The shares fluctuate in price between $5 and $10. The first month you buy 10 shares at $10 each for a total of $100. The second month, because the market dropped, the shares are selling at $5 each, so you buy 20 shares at $5 and so on. At the end of four months you have acquired 60 shares for your $400 at an average cost of $6.67 per share" -- even though the average price of a share for the period was $7.50. In short, dollar-cost averaging commits you to a regular investment program (which is good) and guarantees that over the long haul, you'll buy more shares at lower prices than at higher prices (which is even better). It's an especially easy strategy if most of your money is invested in mutual funds.

Asset allocation is the process of deciding how much of your investment portfolio should go into stocks, bonds or other asset classes (as opposed to picking individual stocks or bonds). Your decision in this respect is perhaps the single biggest factor that will determine your long-term investment outcome, so make it carefully. The basis of your decision is how much risk you are willing to take and your investor life cycle phase. More risk should mean, over the long term, a higher return.

A key factor that determines how well your investment portfolio performs is the way in which you allocate your assets. For example, if every penny you own is invested in high-risk, you have the potential to earn huge profits-or lose everything that you have invested. Conversely, if you have your money allocated among several different kinds investments-stocks, bonds, money market funds and the like-your return is likely to be lower but your chances of losing everything are slim. Younger people can generally afford to take more risks than older people, in part because younger people simply have more working years ahead of them to earn money and bounce back from an investment that turns sour. Older people have to be more conservative, because their highest-earning days are behind them and recouping from a bad investment would be more difficult. An asset allocation strategy can help you to accomplish two important goals: first, it can help you to ride out the ups and downs of the market by diversifying your investments, and second, it lets you adjust your exposure to risk, based on your desired levels of safety and return on investment.

An asset allocation fund, sometimes called a lifestyle fund, is designed to provide you with the diversification needed to weather virtually any market or economic environment. Most of these funds have been created over the past five or six years. They typically invest in a variety of assets -- domestic stocks, foreign stocks, bonds, money market instruments -- that you'd normally buy in separate funds. Many 403(b) plans now offer several asset allocation funds, each with a different investment mix and risks ranging from the very conservative to the very risky. In essence, when you invest in a lifestyle fund, you're hiring a manager to make your asset allocation decisions for you.

You may strategically allocate your portfolio to certain percentages of asset classes. For example, you may allocate 40% of your portfolio to bonds and 60% to stocks. That allocation makes you comfortable and is designed to achieve your investment goals within your risk tolerance and investment horizon. Stocks experienced exceptional growth over the last three years compared to bonds. As a result, you may discover that the value of your portfolio is now 25% attributable to bonds and 75% to stocks. The greater growth in the return on stocks than the return from bonds resulted in this imbalance from the original 40/60 mix. Now, you are underexposed to bonds and overexposed to stocks. A stock market correction would have a greater effect on your portfolio, one you would be less comfortable with than under the original allocation. Therefore, it is time to rebalance your portfolio to reflect your strategic allocation of 40% bonds and 60% stocks. To do this you would sell stock and use the proceeds to buy bonds until the original mix is restored and you are back on track with your investment plan. A rule of thumb is to rebalance your portfolio when the weights deviate from the original by 10 percent or more.

A mutual fund is an investment company created under the Investment Company Act of 1940 that pools the resources of investors to buy a variety of securities, depending on the fund's stated objectives and management style. The investments typically are chosen by a professional manager. Mutual funds offer diversification and convenience even to small investors, and the thousands of mutual funds available today cater to every conceivable investment need and taste.

There are wide variety of mutual funds on the market. These are just some of the categories listed by the fund-trackers at Morningstar.

STOCK FUNDS

Aggressive Growth Funds: These funds seek to maximize growth in capital with little priority given to current income, such as dividends. Both the portfolio itself, such as smaller, new companies, and the investment techniques, may entail extra risk. They are typically considered one of the highest-risk categories of funds.

Growth Funds: Invest in the common stock of well-established companies. These funds seek capital growth with just a small emphasis on current income.

Growth and Income Funds: Invest in companies that can increase in value but also have an established record of paying dividends. Equal emphasis on current income and future growth. Considered moderate-risk funds.

Global Funds: Invest mostly in the stocks of companies that are traded globally, including the United States. Both global and international funds seek capital growth in the value of their investments.

International Funds: Invest in the stocks of companies that are strictly located overseas. Both global and international funds seek capital growth in the value of their investments.

Income-Equity Funds: Invest in companies with high dividend-paying stocks. The primary of these funds is to generate a high level of income.

BOND FUNDS

Balanced Funds: A mixture of stocks and bonds, these funds look to preserve the value of principal, but also earn some current income and achieve some long-term growth.

Global Bond Funds: Invest in debt securities in companies and countries worldwide, including the United States.

Corporate Bond Funds: Invest primarily in the debt of American corporations and seeks a high level of income.

Municipal Bond Funds: Invest in bonds issued by state and municipal governments. This income, unlike regular bond interest income, is exempt from federal taxation.

U.S. Government Income Funds: Invest in a number of government securities including U.S. Treasury bonds and seeks current income through interest payments.

MONEY MARKET FUNDS

Taxable Money Market Funds: Invest in short-term, high quality securities such as certificates of deposit and Treasury bills. It seeks to maintain a stable net asset value, usually $1 a share.

Tax-Exempt Money Market Funds: Invest in securities that are exempt from federal taxes and in special cases state taxes for residents of that state.

When you invest in a mutual fund, your money can be invested in a variety of ways. Some funds invest only in stocks, others only in bonds. Many funds buy both. Some buy securities issued by companies involved in a certain industry, or search out values in stocks and bonds offered overseas.

The net asset value, or NAV, is the price at which you buy or sell shares of a mutual fund. To determine the NAV, a mutual fund computes the value of its assets daily by adding up the market value of all the securities it owns, subtracting all liabilities, and then dividing the balance by the number of shares the fund has outstanding. The NAV is the figure you look at in the newspaper to see how much your mutual fund investment rose or fell the previous day.

No, the FDIC does not insure mutual funds. The FDIC insures deposits of $100,000 or less in banks, credit unions and savings and loans. This sometimes surprises people who purchase mutual funds through their banks.

Here is the overview of fees according to "The Wall Street Journal Guide to Understanding Money & Investing":

Management fees are annual charges to administer the fund. All funds charge this fee, though the amount varies from a fraction of 1% to more than 2%. Distribution fees (known as 12b-1 fees) cover marketing and advertising expenses, and sometimes are used to pay bonuses to employees. About half of all funds charge them. Redemption fees are sometimes assessed when shares are sold to discourage frequent in-and-out trading. In contrast, a deferred sales load, a kind of exit fee, often applies only during a specific period -- say the first five years -- and then disappears. Reinvestment fees are similar to loads; they're charged when distributions are reinvested in a fund. Exchange fees can apply when money is shifted from one fund to another within the same mutual fund company.

It is important to have complete and accurate information when deciding on which mutual funds to invest in. A good place to start is the Market Research section of this site. Here you will be able to access information regarding funds and get an evaluation of its performance. In addition, all mutual funds must publish a prospectus and produce annual reports that discuss how the fund has been faring and provide details about fund holdings.