(MONEY Magazine) – If you're a stock fund investor, you may feel like 1995's dance party has stretched into a joyous marathon, albeit one whose music has slowed from hip-hop to a slightly gentler tempo. The average diversified U.S. equity fund waltzed to a 10.8% gain for the first six months of 1996, according to Morningstar Inc. of Chicago, data supplier for the exclusive rankings that begin on page 92. That fell short of 1995's jazzy first half, when equity funds rose 14.5%, but it topped this year's 10.1% rise of Standard & Poor's 500-stock index. Aggressive growth funds, which specialize in stocks smaller than those in the S&P, fared especially well, rising 13.2%. A group of high- powered portfolios rode Internet issues and other hot stocks to blistering first-half profits of 30%, 40% and more (see page 78).

Bond investors, though, probably wish they had gone home to soak their feet. On Jan. 1, long-term interest rates stood at 5.96%, and many forecasters expected them to drift down toward 5% by summer. Instead, a stronger than expected economy sparked inflation fears, and rates spiked as high as 7.19% before dipping to 6.89% by the end of June. As a result, the typical taxable bond fund managed to earn a mere 0.1% to July 1, while its tax-free counterpart fell 0.7% (bond prices fall when rates rise, and vice versa). But high-yield funds managed a respectable 4.8% gain; that's because junk bonds often rise in value when the economy heats up.

Although the average diversified stock fund beat the S&P, most fund managers nevertheless fell short of their relevant market benchmarks. (For a list of the indexes we employ, see "How to Read the Tables in Our Comprehensive Midyear Report" at right.) In the first half of 1996, 53% of funds failed to beat their bogeys. But that was a welcome improvement over 1995, when 76% of all stock and bond funds lagged. To see whether your funds were among the minority of high achievers, simply scan the left-hand column on each page. We use a half-diamond symbol (ÿ) to indicate funds that exceeded their relevant index over the past six months. The other half of the diamond (÷ ) notes funds that bettered their benchmark over the past three years. Finally, the scant 424 funds that accomplished the feat in both periods receive a full diamond [diamond].

The first half's top stock fund overall was a sector entry, $1.4 million Monitrend Gold, which climbed 53.4%. The best diversified performer we track was $18.5 million Landmark Small Cap Equity, up 37.9%. (Yes, a few brand-new funds did even better, as our cover story details. But a fund must be at least one year old to be included among the 3,336 funds in our rankings.) The premier foreign fund, $13.8 million Morgan Stanley Latin America, owed its 34.1% advance to that region's rebound.

The Latin recovery also contributed to the 18.9% return of the No. 1 bond fund, $29 million Bear Stearns Emerging Market Debt. The domestic winner: $28 million Summit High-Yield, a junk bond fund that jumped 11.1%. But rising interest rates pummeled last year's champ: $841 million zero-coupon bond fund Benham Target Maturity 2020, which led the 1995 list with an outlandish 61.3% gain, plunged 17.1% during the first half.

While many funds posted impressive profits, the first half of 1996 may be remembered even more for an outbreak of fund lust. Suddenly, it seemed, every baby boomer in America was ready to save for retirement: Investors poured an astonishing $125.4 billion into stock funds in the first six months of the year and were poised to shatter the full-year record of $129.6 billion set in 1993.

That flood of cash meant fat profits for fund companies and helped fuel the industry's merger-and-acquisition boom. In the month of June alone, famed value investor Michael Price sold $17 billion Heine Securities, which manages the Mutual Series funds, to $145 billion Franklin Resources for $610 million; $100 billion Morgan Stanley snapped up $57 billion Van Kampen/American Capital for $745 million; and industry giant $208 billion (fund assets) Merrill Lynch paid about $200 million to add $10 billion Hotchkis & Wiley to its portfolio. What should you do if your fund changes hands? "When the dust settles, investors should make sure the investment policy of the fund you bought is still in place," says Catherine Voss Sanders, senior editor at Morningstar.

To get the latest news on your funds and any funds you are interested in, turn first to page 92, where we give you a rundown of the 25 top-performing funds in six major categories. That's followed by midyear results for 3,336 stock and bond funds; in addition to having passed their first birthday, all are open to all retail investors in most states for an initial investment of $25,000 or less. Starting on page 145, we list 638 single-state municipal bond funds from 44 states and Puerto Rico.

So what's in store for the second half of 1996? Michael Sivy, MONEY's investment strategist, believes the Dow could reach 6000 by fall but will likely start a 15% decline by year-end. On the bond side, despite market jitters that sent rates up a quarter point in early July, he predicts interest rates could fall a full point over the next year, fueling 20% returns (see Forecast, page 162). As always, the best way to achieve long-term goals is to diversify, spreading your money among several different types of funds. And review all your fundholdings at least once a year to ensure that the manager is still around and living up to your expectations.