New York (CNN/Money) - If you're wondering which emotion is guiding investors these days, greed or fear, consider the current fascination with investing in China.

Lured by a good growth story (China's ecomony is modernizing and growing 9 percent a year) and big returns (the Hang Seng index rose 42 percent in 2003), U.S. investors are angling for a way in.

They sank $840 million into China portfolios in 2003, according to Lipper Analytical Services, nine times as much as in 2002, and another $240 million in just the first two months of this year. A recent Wall Street Journal article told of one man putting 50 percent of his portfolio in China, and noted many retirees with an allocation of as much as 15 percent.

"A lot of people have caught the China bug," said Willian Samuel Rocco, senior analyst for Morningstar.

But Rocco's advice is to go slow. "Virtually no one should invest in China right now," he says, citing several reasons.

• After last year's rapid run-up in Chinese stocks, there's less upside potential. Many people, "Buy at the wrong time -- when the news trickles down to them, an investment is already up big."
• China stocks are volatile. Most China funds lost money in the three years, from 2000 through 2002 – some funds lost more than 50 percent of their value – before 2003's big upswing. There remains "potential for sharp and considerable losses," according to Rocco.
• There are many regional uncertainties. China remains a communist nation and conflicts with Taiwan and over limited self rule for Hong Kong could yet trigger economic upheaval. And structural problems, such as power shortfalls, could yet derail growth.
• In addition, while they may not realize it, many investors already have exposure to China, since U.S. companies are increasingly doing business there.

Getting in on China There's no shortage of mutual funds investing in China and most have put up big numbers. They do vary in how much they concentrate their assets directly in China. Fund (Ticker)  Assets in China  One-Year Return  Matthews China Region (MCHFX)  75.5%  71.2%  Guinness Atkinson China & Hong Kong (ICHKX)  65.2%  77.8%  Columbia Newport Greater China (LNGZX)  65.2  72.0%  U.S. Global Investors China Region (USCOX)  59.2%  91.8%  AllianceBernstein Greater China '97 (GCHYX)  58.8%  84.0%  Dreyfus Premier Greater China  47.0%  74.7%  Fidelity China Region (FHKCX)  45.0%  58.2%  Alger China U.S. Growth (CHUSX)  24.0%  n/a  Templeton Global Opportunities (TEGOX)  5.2%  52.3%   Source:  Morningstar

Despite the risks, Guang Yang, a manager for Templeton Global Opportunities fund, says investors can't ignore China.

"Last year China became the second largest exporter to the United States. It's also the third largest importer in the world." As such, "China's either a growth market for the S&P companies you invest in – or a competitor. Either way, what happens in China has an impact on your portfolio," Yang says.

Yang also points out that the country is undergoing an era of profound change, a "huge reorganization" of the kind that the United States and other modern countries went through long ago.

A mass movement from the countryside to cities will create demand for consumer goods, gas, oil, and other commodities as well as a need for more infrastructure – office space, apartment buildings, telecom facilities, and train stations. The new national bird, they say, is the construction crane.

As Yang points out, "China is not just an export economy, it's a domestic consumption story as well."

Buying individual Chinese stocks is difficult, although there are a handful of Chinese companies, such as China Life Insurance (LFC: Research, Estimates), available on American exchanges as American Depository Receipts.

For most investors, the best way to play China is via mutual funds. The average China fund gained 63 percent in 2003.

For investors with long time horizons and willingness to accept risk, highly concentrated funds that specialize in China might be attractive.

One, the Matthews China Fund (MCHFX), puts about 75 percent of its assets in the country, with most of the rest in Bermuda. It returned 65 percent last year and averaged 24.5 percent over the past five years.

The Templeton Dragon Fund (TDF), a closed-end fund, did even better last year, returning 108.7 percent, and has an average annual return of 23.2 percent over the past five years.

One variation pointed out by Rocco is the Alger China U.S. Growth Fund (CHUSX). This new fund has only 24 percent of its assets invested directly in China stocks. The rest is in companies that the fund's management thinks will benefit from increased trade with China, Nike being one example.

Older or more risk-averse investors should concentrate on global funds. These typically have about 10 to 15 percent of their holdings in emerging markets, according to Morningstar's Rocco, with a good part of that in China. They can give your portfolio a lift while smoothing out the rough edges.

One such fund, managed by Guang Yang, Templeton Global Opportunities (TEGOX), recorded a 36.7 percent gain last year.

If you do choose to invest in China, the experts say don't go overboard. Matthews China Fund co-manager Mark Headley in a May MONEY magazine article advised that investors shouldn't touch a China fund unless they can stomach a 20 percent to 30 percent correction – or more.

"Even if you think it's a big opportunity," says Rocco, "You shouldn't have more than 2 or 3 percent, at most 5 percent," of your portfolio allocated to China.