There is a neutral position just past second. It is there to disengage the cluster in the 4-5 speed versions.

If the correct indicator chain is in there the adjustment is correct when the end of the rod is even with the end of the axle with the shift trigger in second gear. That is what the holes in the nut are for, so you can see the end of the axle for this adjustment.

The hub uses SAE 20 oil, it takes about 5ml if it is dry, otherwise a squirt or so a week is about right. There is no problem with too much oil other than it leaks out all over everything.

Only after oiling and properly adjusting the shift cable should you worry about it needing repairs. About the only way an AW hub wears out is from running without oil. Something broken inside is usually obvious.