The Investment Company Institute, the fund industry's research and lobbying arm, reports that approximately 7,100 stock and bond funds are currently vying for your hard-earned investment dollars. The vast majority of these are market-lagging duds, funds that make you pay for the "privilege" of long-term underperformance.

There are diamonds among the dross, however, and I've spent most of the past two years uncovering these gems for subscribers to the Fool's Champion Funds newsletter service.

At the risk of sounding immodest, we've had a fair amount of success. Our complete lineup of Champs has trumped the market by 9.5 percentage points, and our three model portfolios are beating their benchmarks, too.

So what's the secret of the newsletter's success? Here are three key factors.

1. We don't overpay.
For starters, I don't recommend funds with luxury-item price tags. The typical domestic-stock fund will ding you roughly 1.4% each year; our average Champ charges less than 1%.

Moreover, these funds cover all corners of the market. Whether you're a growth-oriented investor with a hankering for the likes of Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), eBay (NASDAQ:EBAY), and Intel (NASDAQ:INTC), or a value hound with a preference for cheaper stocks like Pfizer (NYSE:PFE), ExxonMobil (NYSE:XOM), and Merck (NYSE:MRK), we have Champs for you -- and you won't have to pay an arm and a leg (and perhaps some other bodily part) for the sake of investing in them.

2. We invest in the manager, not the fund.
All too often, prospective investors make decisions based on a fund's lofty star rating or Lipper leader score. Don't do it. Those are helpful tools, but they're purely backward-looking measures, and they may not reflect the performance of the fund on the current manager's watch. A fund can only be as strong as its stock-picker-in-chief, of course, and as I go about the business of finding tomorrow's mutual fund winners today, it's the manager's track record I focus on, not that of the fund itself.

3. We conduct ongoing due diligence.
Funds have it all over stocks when it comes to peace-of-mind investing, but that doesn't mean you can set 'em and forget 'em. Since the newsletter opened for business back in March 2004, three of our picks have closed to new money and two have received management makeovers. Whenever such events occur, I examine the facts with a proverbial fine-tooth comb and make timely recommendations to subscribers about how to proceed.

Beyond that, ongoing annual rebalancing of your fund portfolio is a must. The market has a habit of throwing carefully calibrated asset-allocation game plans (and you do have one of those, right?) off kilter. Your mission as a savvy fund investor is to ensure that your portfolio remains tailored to your investing timeline and tolerance for risk -- no matter which way the market's wind blows.

The Foolish bottom line
We'll begin rebalancing the Champion Funds model portfolios with the issue that hits the streets in March, and I think you'll find that process instructive. Between now and then, we'll offer a review of every recommendation I've made and, of course, continue to highlight the best and brightest funds the money-management biz has to offer.

Sound useful to you? Excellent. Just click here for an absolutely risk-free trial of the newsletter, which will provide access to our complete list of Champs, back-issue archives, and top-shelf, members-only discussion boards. I have a hunch you'll like what you see. But if not, you're free to cancel, no questions asked.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service. He does not own shares of any stock mentioned in this article. eBay is a Motley Fool Stock Advisor pick. Merck is a Motley Fool Income Investor pick. Pfizer is a Motley Fool Inside Value pick. The Motley Fool has adisclosure policy.