Picking actively managed mutual funds is no mean challenge. And as the recent era underscores, past performance is of little help. The Morningstar Guide to Mutual Funds helps cut through the fog with a solid volume of constructive information. The central message--'truly diversify, keep it simple, focus on costs, and stick with it'--is not only timeless, it is priceless.

Successful investors know they must do their own due diligence. Morningstar has done much of that homework in this guide. Leave it to Morningstar to get it right, offering smart ways to pick, build and monitor a portfolio. It's a commonsense guide that should grace every investor's shelf.

There's nothing Morningstar doesn't know about mutual funds. And at last, for ready reference, there's a book. You'll find everything here you need to know about managing fund investments, inside or outside a 401(k).

Mutual fund investing requires the same careful investigation. You need to give a fund more than a surface-level once-over before investing in it. Knowing that the fund has been a good performer in the past isn't enough to warrant risking your money. You need to understand what's inside its portfolio-or how it invests. You must find out what a fund owns to know if it's right for you.

At the most basic level, a fund can own stocks, bonds, cash (usually money market securities), or a combination of the three. (Funds might alsoown other securities, including other funds and stock/bond hybrid securities, but let's stick with the basics for now.) If it invests in stocks, it could focus on U.S. companies or venture abroad. If the fund owns U.S. companies, it might invest in giants such as General Electric or Microsoft or seek out tiny companies that most of us have never heard of. If a fund invests in bonds, it could focus only on those issued by companies with rock-solid finances and a high probability that they'll make good on their debts or it could venture into higher-yielding bonds issued by firms with shaky future prospects. How a manager chooses to invest your money has a big impact on performance. For example, if your manager devotes much of the portfolio to a single volatile area such as technology stocks, your fund may generate high returns at times, but there's also a greater likelihood that you'll lose money at other times. Stocks have historically generated higher returns than cash or bonds. Because you take the least risk when you invest in cash, those securities also tend to generate lower returns than you'd get with stocks or bonds.

A fund's name doesn't always reveal what a fund owns because funds often have generic handles. Take the intriguingly named Janus Olympus and American Century Veedot funds. If you were to skim over only their names, you would be hard-pressed to glean that the former focuses on mid- and large-sized companies that are growing quickly (think Yahoo! and eBay), whereas the latter is a fund that uses computer models to help direct investments to whatever type of stocks look like they could be strong performers in the future.

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