(MONEY Magazine) – Here's an investing fable: Imagine that you're about to mail a check to your money-market fund, when a genie suddenly appears. In a voice that sounds remarkably like Robin Williams' (hey, it's just a fable), the spirit makes you this offer: ''Give it to me instead for at least 10 years, and I'll make it grow much faster than your money fund could. But if you need your money back sooner, you may not get it all.'' Do you take him up on it, or do you just tell him to lamp it? Okay, so maybe we've taken the kids to one too many Disney films. But the genie's challenge isn't all that fantastical: You face a similar dilemma any time you invest in equity mutual funds. History shows that the stock market returns about 2.7 times as much as money markets and twice as much as bonds in the long term, but from one month or one year to the next you can lose serious money -- as anyone who owned a stock fund in October 1987 can tell you. That month the average equity fund dropped 21.9%. That fear of losing so much dough is understandable. But if your financial goals are five years or more away -- goals like your children's college tuition or your own retirement -- it is exactly the wrong worry. ''Too many people focus on short-term risk and don't own enough stock funds,'' says research editor Lori Lucas of the fund analysis firm Morningstar Inc. ''When they are investing for long-term goals, their biggest risk is inflation.'' Over the long run, only the stock market has provided returns high enough to keep you advancing against the head wind of rising prices. Bob and Kris Mahre of Lakeville, Minn., for example, recognized the need for stock market returns half a year into their marriage. They started by putting $1,000 away in their first stock fund, Scudder International. They've since added other stock funds and faithfully contribute $300 a month to three of them. ''We're picking the most aggressive funds we can find,'' says Bob, ''because we're young enough to ride out the dips in the market.'' Steeling yourself for market risk is only the first challenge of investing in stock funds. The second is choosing the right fund. Simply being in equities is no guarantee of strong returns. For example, in 1992, a generally uneventful year for stocks, the average equity portfolio rose 9%. But shareholders of Oppenheimer Global Bio-Tech lost 22.9%, while those in Heartland Value made 42.5%. Compare that disparity with the far more uniform returns among, say, Ginnie Mae funds. There the gap between the best fund and the worst was only 6.4 percentage points. That means that the thought you put into fund selection has a bigger payoff with equity funds than with any other category. Now no amount of analysis can help you identify next year's No. 1 fund -- that power is beyond mere mortals (or even genies). But by grasping the key elements about a fund manager's approach to picking stocks -- what investment theorists refer to as investment style -- you can understand why a fund is currently a leader or a has-been and how it is likely to behave in the future. ''Understanding a fund's style can help you gauge its risks vs. its possible gains and lets you compare it with its true competitors -- funds of the same style,'' says editor Ken Gregory of the newsletter No-Load Fund Analyst. We've done much of the groundwork for you, by screening more than 1,000 gains-oriented funds to identify the 100 most consistent performers within a variety of different investment styles. You'll find their names and a multitude of detail about them in the four pages of tables beginning on page 62.

First, one more word about risk The possibility of sharp short-term losses is a constant in the stock market -- never more so than at times like the present, when many equity indexes are within 5% of their all-time highs. So a prudent investor will take some elementary precautions. For starters, don't even consider investing any money in stock funds unless you are reasonably sure you won't need it within five years. That's about the length of the typical economic cycle; if you were unlucky enough to put your money in at a market peak, you may need the full cycle to recover your losses and make a profit. ''If you suffer a 30% loss in your first-year investing, it will take you almost four years at a 10% annual gain to get even,'' says New York City investment adviser Michael Hirsch. The best way to avoid that sort of unlucky timing is to follow the Mahres' example and ease into your fund by making equal payments over a matter of months or years, whether the market is rising or falling. For details about this solid investment technique, known as dollar-cost averaging, and about its more sophisticated cousin, called value averaging, see the box on page 53.

Analyzing a stock fund Investment professionals have begun to focus on investing style only in recent years. But it describes a phenomenon as old as the financial markets: People simply differ on what makes a stock appealing. By training or temperament they gravitate toward stocks that meet certain criteria. Some favor the stocks of small companies (those with market values under $500 million); others like large, blue-chip firms (over $2 billion); and still others prefer companies in the middle. Additionally, within those sizes, managers may seek out either fast-growing firms or seeming bargains. Learning where your fund fits in is more than just pigeonholing: Academic studies show that investment style accounts for at least 75% of a typical stock fund's return. Each of these approaches has its own investment logic and its own roster of successful practitioners. So-called small-cap or midcap managers such as John Laporte of T. Rowe Price New Horizons and T. Rowe Price New America Growth, for instance, specialize in the stocks of small and medium-size companies on the theory that young, entrepreneurial firms have the most explosive growth potential. The downside, however, is that small-stock funds are prone to unpredictable downturns that can swiftly wipe out 10% to 20% of their value. A fund such as Fidelity Blue Chip Growth, on the other hand, prefers the stocks of corporate giants. The argument for such issues is that they are Wall Street's best source of stable profits. The problem is that it's hard for even the shrewdest managers to uncover hidden opportunities among the best-known, most widely followed stocks. * After size, the main style distinction is between so-called growth and value funds. Growth investors, like Roger Engemann of Pasadena Growth, like to own the fastest-growing, most successful corporations on the market -- the Microsofts, Wal-Marts and Home Depots or their successors -- where earnings are expanding in excess of 15% a year. Well, who wouldn't? The only problem is that such premium companies trade at fancy prices relative to their earnings and assets, and if they ever fall short of investors' lofty expectations, they come down hard. For instance, surgical equipment supplier U.S. Surgical, where the earnings had been growing at 35% annually, fell from nearly $53 a share to just above $31 in one April week after the company said earnings would fall below analysts' predictions. In contrast, value managers such as Kent Simons and Larry Marx of Neuberger & Berman Guardian are the stock market's equivalent of flea market browsers. They're looking for cast-aside companies trading at prices that may not reflect the true value of their assets or future earnings and dividends. ''We are looking for strong companies where we think bad news has knocked the price down unfairly,'' says Simons. Automakers and regional banks, for example, were much disdained by Wall Street in the late 1980s and into 1990, but value investors who picked them up in November 1990 could have cashed out last year at profits of 58% to 203%. A few managers, including Mark Tincher of Vista Capital Growth and Vista Growth & Income, straddle the growth and value divide. Like a value manager, Tincher looks for stocks with low price/earnings ratios; and like a growth disciple, he also likes to see high and accelerating earnings growth rates. ''Our system focuses on stocks that look cheap but where something about the company is about to change for the better,'' Tincher says. Ideally, his approach spares him both the risks of growth investing and the doldrums that can bedevil value investors whose unrecognized values remain unrecognized. How do you discern a manager's style? For size distinctions, simply call the fund sponsor and ask for the fund's median market capitalization, or the total market value of the fund's median stock. To tell whether the manager is a growth getter or value seeker, look at yield and price/earnings ratio: A value fund generally will have a higher than average yield and a lower than average P/E; a growth fund will be the opposite.

Choosing a winning style % Is one style or size best? Over the long, long term -- like 20 years or more -- yes: Value has the edge over growth, and small-company stocks beat out big ones. Trinity Investment Management in Cambridge, Mass. studied growth vs. value stocks for the 24 years from 1969 through 1992 and found that value outperformed growth stocks by a compounded annual return of 11.7% to 9.1%. One reason: Since value stocks already trade at depressed prices, they tend to fall less far in bear markets. In the five losing markets included in the Trinity study, value stocks dropped an average of about 17%, while the typical growth stock lost 25%. As for small-caps, Trinity's calculations show that small-company issues outperform large-company stocks by nearly one percentage point a year (or 10.4% to 9.6%). Over shorter periods, however, it's much more of a see-saw race, with each of the different styles taking its turn in the lead for periods that generally last two to five years. The charts on pages 54 and 55 show how the various styles have alternately led and lagged one another over the past 15 years. Trying to predict precisely when the cycle is going to shift is as futile as any other kind of market timing. That's why discerning among investment styles is primarily a tool of diversification: By owning some funds of every style, you'll smooth out the inevitable ups and downs of stock market fashions. Equally important, you'll be able to distinguish between fund managers who are lagging merely because their investment approach is out of vogue and those who have truly lost their touch. That said, you can still use your knowledge of the style cycle to angle for extra return at the margin by tilting your portfolio toward the favored group. For example, over the past 2 1/2 years, small and midcap stocks have had the edge on the big fellas, outpacing them since Nov. 1, 1990. From then until April 1, the small-company Russell 2000 is up 101.7% and the Russell midcap 98.5%, compared with 60.4% for the S&P 500. Most analysts believe that the little guys still have plenty of wind left. ''I think we are just about halfway through the current period of small-company outperformance,'' says T. Rowe Price's John Laporte. Other analysts argue that midcaps could be the biggest winners of all. They note that it is easier for large institutions to take positions in midcaps than in truly small stocks. Says editor Norman Fosback of the newsletter Mutual Fund Forecaster ($49 a year; 800-442-9000): ''As pension funds and other institutions switch from large-company stocks to smaller ones, midcaps could get the biggest kick.'' By the same token, many analysts believe that value funds -- especially those that invest in cyclical industries such as autos and paper, which get a strong kick from a growing economy -- will hold their current lead over growth funds until at least about midyear. After that, the advantage could move toward growth stocks. ''If the economic recovery continues at a slow rate, fast-growth companies will be in demand,'' predicts editor Gregory.

How to choose the right fund Once you've identified the investment style that you want to add to your portfolio, your next job is to find a fund that executes that approach with aplomb. Style may account for about three-quarters of a typical fund's return, but that could leave 25% or more that can be explained only by the manager's skill. Here's what to look for: -- Consistency. A strong past performance record is more sustainable if it was built on consistent sturdy returns, rather than erratic flashes of brilliance. ''No. 1 funds rarely repeat,'' says Christopher Poll, chairman of the Boston fund ranking service Micropal Inc. ''But a fund that consistently ranks in the top half of its category will have superior long-term returns.'' More often than not, a string of workmanlike above-average returns makes for higher long-term gains. Columbia Growth, for example, never rose into the top 25% among growth funds in any single calendar year of the past five. But its steady performance would have more than doubled your money for the half-decade through 1992. That beats 59% of its peers.

-- Bearable risk. Volatility goes with the territory when you are investing in gains-oriented stock mutual funds. But you want to make sure that your fund gives you a return at least commensurate with the risks that it takes. For the funds in our table, you'll get that information from the MONEY risk-adjusted grade. An A or a B tells you that the fund scored in the top two-fifths of its class after adjusting its performance for volatility over the past five years. For instance, the small-company Kaufmann fund is 20% riskier than the average equity fund, but it rated an A by chalking up returns that more than doubled the returns of the average stock fund. Fancy risk calculations aside, you also want to make sure that your fund doesn't dish out more pain during market downturns than you can take. So be sure to check the fund's return during falling markets. Could you sit through a 32.8% swan dive, for example, such as John Hancock Special Equities took during the last bear market? If not, you might prefer a fund like Aim Charter, which achieved a less Olympian five-year annual gain (17.7%, vs. 24.1%) but absorbed a more bearable 11.2 % downmarket loss. -- Low expenses. All else being equal, a no-load fund with annual expenses below the equity fund average of 1.3% will always outperform a more costly load fund. But all else is rarely equal among equity funds, where a shrewd call can make up for a 5% load in a week. (For example, all of the load funds on our table earned top consistency ratings even after taking the load into account.) So don't necessarily rule out a promising equity fund because of its load, but be satisfied that its prospects -- based on consistency, risk and your read of the market -- are far superior to those of comparable no-loads. If there's any doubt, go with the no-load. -- Manageable asset size. As fund popularity continues to boom, funds that come into the public eye can balloon by hundreds of millions of dollars in a few months. For example, after winding up atop the performance charts last summer, Monetta Fund went from $150 million to more than $400 million. That kind of cash flow can be particularly hard on small-company funds, some of whose holdings may have only $50,000 worth of shares change hands daily. As a rule, you should think twice about hanging on to small-cap funds with assets of more than $500 million. Shareholders in blue-chip stock funds don't have to worry about asset size. That's some consolation for holding funds in an investment style that is currently on the slower track. Of course, big-cap stocks still have a role in your portfolio, as a more stable counterpoint to riskier small-stock funds and midcaps. And as the rise and fall of investment styles over the past 25 years has shown, one thing you can be sure of is that one day their chance will come -- again.