The 5 criteria you should know

Looking for a sound philosophy, a proven investment record, decent tenure, low turnover, and low expenses are the key elements to use as screens to find a quality managed fund. Bonus points should be awarded to any manager who "eats his own cooking" by investing his money along with yours in the fund, although such information will be hard to determine without talking to the manager directly.

Outstanding fund managers are outliers by definition.

Here's how Robert Torray, an actual fund manager, puts it: "As far as conventional thinking is concerned, it produces conventional results." Thus, a good fund manager's portfolios will need to look quite a bit different than an index fund's holdings in order to have a chance at outperforming it over time. Keep that thought in mind if you ultimately decide to go with a managed mutual fund instead of an index fund.

You should start by narrowing down the field by only looking closely at funds that have the following:

• high performance
• turnover no higher than 50%
• expense ratio below 1.75%
• no loads

If your fund passes this test, it's time to dig deeper. Use the Foolish Fund Report Card to help you measure a mutual fund's worthiness:

NOTE: If you have a mutual fund already, the odds are good that it does not meet our critieria -- very few funds do. That does not mean that you should sell immediately. There are a lot of factors that must go into that decision. (We'll cover some of them in Step 7 in the How To Pick the Best Mutual Funds Guide.)

It's important to be aware not only of expenses and performance, but also the quality of the managers. In the end, your returns from a fund come from the manager's ability to allocate profitably the assets under his charge.

Now to the more hands-on analysis. . .