Down but not out: beaten up by the market, mutual funds are still the best investment in town.

WHEN YOU FINALLY START TO DO your spring cleaning, don't throw out your mutual funds. Despite a downturn in their performance last year, mutual funds are still the best way for investors to be active in the market.

Yeah, yeah. We know that seven interest rate hikes in less than a year panicked skittish investors.

"But you've got to look at the long term," says Sheldon Jacobs, president and editor of the No-Load Investor newsletter. "Investors may not know what the market or Fed is going to do, but over the long term, mutual funds are the best way to diversify and reduce risk."

Benay Curtis-Bauer, an account executive with Dean Witter, agrees. "If you are a long-term investor, what happens year to year is neither here nor there," she says. But if your risk threshold is so low that you can't take one year of negative returns, she cautions, you shouldn't be in the market.

Speaking of risk, you should know that--unlike CDs, savings accounts or money market accounts--mutual funds are not insured by the federal government. Instead, the Securities and Exchange Commission has levied a list of strict regulatory constraints on mutual fund trading. Those rules limit the extent to which a mutual fund can invest in any one company or borrower, and the kinds of promises the manager of a fund can make to potential investors. They also force each fund to provide potential investors with a written prospectus.

Also, mutual funds are vehicles, not investments themselves. You buy shares in a company's ability to pick and manage the investments in real providers of goods and services. Mutual funds diversify (not eliminate) risk because they are not allowed to put all of their eggs in one basket.

While a fund's past performance is no guarantee of future success, a look at the five-year performance of the funds listed in our chart will illustrate a good argument for relatively safe investing. "The smart people are the ones who don't panic; they stay calm and ride out the short tough times," says Curtis-Bauer.

In fact, while times were tough all along the spectrum last year, specific investment sectors flourished.

Science and technology funds have soared as many investors expect some securities of the computer industry to continue to throw off big profits. Most notably, Seligman Communication Information, a mutual fund family that invests in science and technology companies, posted a 35.3% gain last year, and a 200.07% cumulative total return over the last five years. If you had invested $1,000 in Seligman five years ago, you would have tripled your money.

In the health/biotechnology area, Fidelity's Select Health Care Fund gained an impressive 21.43% last year. With a net asset value (NAV) of $70.8 million, last year's return was in line with its cumulative five-year total return of 134%. Spurred by the demand for alternative health care, this sector's top funds posted an average total return of 16.98%. Be's annual top mutual fund list makes it easier to choose winners like these. To give readers a window to the funds' true performance, we show total returns for one-, three- and five-year periods.

The basic rankings are provided by Lipper Analytical Securities in New York, which tracks the performance of mutual funds. To reflect a fund's investment objective, each is listed under one of 10 separate categories (i.e., balanced, growth and income, maximum capital gains, etc.). Morningstar Inc. of Chicago assessed the funds in our listing according to risk.

From a pool of more than 5,000 funds, BE lists the top five in each category. This objective ranking is based on each fund's five-year total return compared with similar funds.

To tell you how much it costs to own a mutual fund, we've listed the initial minimum investment, the maximum sales charge and the annual fee. Listed on our chart as a percentage, the sales fee (or load) can be as much as 5.75% of the amount you're investing. Many funds don't charge any load, while some others tack on lower fees of between 1% to 4%.

Another reason that we list the initial minimum investment is the wide range in price. Some funds require just $250 to get in, and others as much as $2,500. The lower the entry price for the fund, the quicker you'll be able to diversify.

Patience, combined with the power of compounding interest, can help you amass a comfortable nest egg. For example, next to each mutual fund we show you what would be the value today of 1,000 that was invested five years ago.

Even if you know the funds you want to buy, your analysis shouldn't stop here. Make sure to read the fund's prospectus, which spells out the fund's investment objective, management fees, shareholder services and past performance.

If you've already bought shares in a mutual fund and you want to know how you're doing, there are two easy ways to find out. You could wait until you get your statement in the mail. Or you can calculate the performance yourself.

To do the latter, you first have to determine how many shares in the fund you actually own. You bought a specific number of shares with your initial investment, but because you have a dividend reinvestment plan in force, the number of shares you own has grown.

After you determine the actual number of shares that you own, check the latest NAV that's listed in the fund (or call the manager). Multiply that figure by the number of shares that you own and you'll get the value of your holdings at that time. To find out how much money you've actually made (or lost), go through the same procedure, only this time figure out the value according to the time when you made your initial investment. Compare then and now, and voila--profit or loss.

Two families of funds are black-owned and managed, but because of their fledgling status, total returns for the past five years stopped them from making our list.

In Chicago, Ariel Appreciation has assets of $148.2 million. Last year the fund lost 8.39%, but its three-year return posted a 3.85% average increase. Its sister fund, Ariel Growth, has assets of $138.1 million. It also showed a 4.22% loss last year, but the three-year figure is up an average of 5.19%.

In Baltimore, Brown Capital Management Balanced Fund has assets of $2.1 million with a negative one-year total return of 1.2%. Brown's funds are entering their third year of operation, so historical data aren't available. Brown also manages Brown Capital Management Equity, a fund with $1 million in assets and a one-year return of -0.8%. Finally, there is Brown Capital Management Small Company Fund, which actually beat the odds and posted a 4.7% increase. It has assets of $2.3 million.