You put $10,000 in Access Pharmaceuticals just one year ago, but you ended up losing your whole investment. You rode the tech bubble to the top a few years ago, but lost your savings when it popped. Try and try as you might, you just can't seem to get lucky when it comes to risking your money. So now you refuse to invest in anything but Treasuries or money market accounts, earning a laughable return for your long-term investment. You wanted to get in on Google right after its IPO. You wished you had thought to invest in Apple when you bought that first-generation iPod. But you didn't. You're afraid of getting burned again.

But wait -- all is not doom and gloom. There's a low-risk, high-reward way to invest your money without fear. It's called mutual funds, and the best ones are still waiting to be explored. Fund categories range from small-cap to international, growth to blue chip, health sciences to emerging markets. Whatever you're looking for, you can find it in the mutual fund world. Although you might not think of funds as high-reward, by focusing on the best of the best, you can earn phenomenal returns that beat the market on a consistent basis.

What to look for
But just as you can get burned by investing in stocks, mutual funds have their own hidden sparks. To know which actively managed funds are the best, look for three important criteria: management tenure, whether the manager is investing in his or her own fund, and the fees you're paying for performance.

  • Management tenure is the amount of time the manager has been with the fund. Has he or she stuck with the fund through bull and bear markets and various business cycles? Take Dodge & Cox International Stock (FUND:DODFX), for example. Its management team has been on board for an average of 17 years. Even though the fund itself is relatively new, the people at the helm have vast experience at the firm.

  • You also want to know whether the managers are invested in their own fund -- whether they "eat their own cooking." These managers are obviously personally invested in the performance of the fund, and this measure is similar to tracking insider ownership for an an individual stock.

The SEC requires mutual fund families to disclose each portfolio manager's ownership of securities in the fund. You can usually find this information in the "Statement of Additional Information." At Dodge & Cox, every one of the international fund's portfolio managers owns significant amounts of the fund. That should be reassuring to investors, since it is proof of the managers' confidence in the fund's abilities and management.

  • The third metric is the fees and expense ratio associated with the fund. Many emerging-markets funds or other types of specialized funds (health sciences, technology, etc.) perform very well, but most fund families charge a high expense ratio to invest in them, due to the increased costs of finding higher-yielding companies in which to invest. In addition, many funds charge a load commission when you initially purchase their shares, siphoning your cash even before you reap the fund's benefits.

For an example, look at the Legg Mason Value Trust, managed by investing legend Bill Miller. According to Lipper, at the end of 2005, this fund was the only fund to outperform the S&P 500 in each of the past 15 years, averaging 16.5% annual returns since its inception. These returns were garnered from solid but growing stocks such as Sprint Nextel (NYSE:S), UnitedHealthGroup (NYSE:UNH), and (NASDAQ:AMZN). Those returns are comparable to what most of us look for in our long-term investments. But although the performance is excellent, you're paying a premium for it: an expense ratio of 1.68%. Yes, the fund is great, but there are other funds out there that offer better values for an individual investor's money.

Great funds are anchored in great businesses
Although there might be a few growth stocks in a fund that could give your heart some flutters, the best funds have their investments anchored in sound businesses. As of Dec. 31, 2005, holdings of the Dodge & Cox fund included Canon (NYSE:CAJ), GlaxoSmithKline (NYSE:GSK), and Royal Dutch Shell (NYSE:RDS-A). Those are solid companies with extraordinary international potential. Across the board, this fund has exposure to the booming emerging markets of Latin America, Africa, and Asia. Its three-year return as of Dec. 31, 2005, was 32.2%. And with an expense ratio of 0.70%, with no load and no distribution fees, you're getting those phenomenal returns for minimal expense, with minimal stress. That's much better than what most of us average in the stock market.

Don't get burned
If you're interested in high-reward funds with great management and performance, our very own resident fund geek Shannon Zimmerman can take excellent care of you. He only recommends funds whose management and performance have earned his confidence, and he grades each one relative to other opportunities in the marketplace. He recommended the Dodge & Cox International fund to subscribers, and it's trounced the market thus far with a 67% return. By taking a free 30-day guest pass to the Motley Fool Champion Funds investment newsletter, you'll get the benefit of his knowledge and experience in the mutual fund world.

Let the rest of the world worry about getting burned. With a free trial to Champion Funds, you can discover great returns without facing the fire.

Fool research analyst Shruti Basavaraj owns no shares of any company mentioned above. UnitedHealth Group and are Stock Advisor recommendations. GlaxoSmithKline is an Income Investor pick. The Fool has a disclosure policy.