Have mutual funds become obsolete? Are they going the way of the 8-track and the VCR?

Some on Wall Street would unanimously agree. After all, the industry has taken a beating lately because of sales fees, poor performance and a few (ok, more than a few…) market-timing scandals that made headlines around the world. Not to mention the explosive growth of the ETF industry in the last few years alone. Hey, who doesn't love the ability to buy or sell ETFs anytime throughout the day (not just at the closing bell) and a low expense ratio that keeps more of your own money in your pocket? Given the obvious advantages of ETFs, one may think that the "old-fashioned" mutual fund has become obsolete. But that's hardly the case.

In fact, more than $12 trillion of cash still resides in open-end mutual funds (the kind you buy straight from the fund company itself or through a sponsor). Now, some of that money can be quite lazy or ill-invested, but certainly not all of it. Yes, if you handle them wisely, mutual funds can be a very profitable part of your portfolio. Here are 5 do's and don'ts for the loyal mutual fund investor.

Do Pick a Time-Tested Fund Manager. Steer your money to mangers with proven long-term track records. Now, I bet you've heard cynics say that it's nearly impossible to identify truly superior portfolio managers. That's simply not true. Here's how you can pick a portfolio manger worth his or her weight in gold: Take a look back to see how their funds performed in the "lean" years, like say, investing in the global markets back in 2000 to 2002. If he or she was able to outdistance their peers during this troubled time for internationals (as well as the recent "fat"years) then you've got a pretty good indication of true talent. I list the names of some truly talented fund managers in my March 2008 issue of Profitable Investing.

Don't Trade in and Out. You won't make any more money in mutual funds by trying to time the market. In fact, some mutual funds actually penalize frequent traders by assessing a redemption fee on shares led less than a specified time frame (usually less than 90 or 180 days).

Few fund investors–even with the best technical tools–can consistently beat a simple buy-and-hold strategy. So, sell your mutual funds only when you believe that a major shift in the market is coming; when a fund's performance has deteriorated to an unacceptable degree; or when your life circumstances warrant it (for example, you're about to close on a house and need the cash for a down payment).

Don't Pay Sky-High Sales Loads or Excessive Fees. Front-end sales charges will put a serious dent in your long-term returns. Insist on buying no-load funds, preferably from fund families that charge lower ongoing fees than the industry median (which usually hovers around 1.47% a year for stock funds, and 0.99% for bond funds). Many of the large fund families like T.Rowe Price and Fidelity have made a determined effort to curb their expenses. But without a doubt, the low-cost leader is the Vanguard Group. To get the inside edge on Vanguard funds and the managers that run them, you'll want to read, "Fear, Fodder, Facts and Financials."

Do Keep a Keen Eye on Risk and Reward. One thing that has irritated me over the years about mutual fund advertising is that they tout past performance, but never tell you how much risk they really took to achieve those rewards. Now, keep in mind that there's no perfect measure of risk. I've found that an old maxim usually applies: "Live by the sword, die by the sword." Therefore, funds that rack up extreme gains in bull markets also tend to lose their shirts (and yours) in bear markets.

Hence, you can, more often than not, form a reasonably accurate picture of a fund's risk by looking at what statisticians call standard deviation–a common measure of volatility. Typically, I prefer funds that have generated higher returns than their peers over the past three to five years, with the same or a lower standard deviation (a.k.a. less risk). To find the standard deviation figures for most funds, visit Yahoo Finance and click the Risk link to the left of the fund quote.

Do Buy Funds When They're Beaten Down. Like… now. Over and over, research has shown that the average fund investor captures only a fraction of the profits earned by the funds he or she invests in. How is this remotely possible?

Lured by seductive performance advertising, investors tend to buy heavily after a fund has enjoyed a long, powerful run. It's called missing the boat. Then, when the fund stubs its toe, the same investors bail out–inevitably, close to the bottom. To break the cycle, investors must train themselves to ignore the hype and buy on the dips (and the deeper the dip, the better!)

Follow this simple golden rule (we all love those, don't we?): Wait for a fund's share price to drop 5% from its annual peak before you take the plunge, and you'll outperform the vast majority of investors over the long haul.

Right now, happily, most of the funds on my Profitable Investing shopping list are quoted at least 5% below their 52-week highs. While I can't guarantee they won't slip a bit further in coming weeks, if you buy today, you'll be better off than if you had bought last October or last July! Folks who buy the dips are the first to profit when the market rebounds. So take your time and average your dollars in over the next two or three months. And don't stop there. Whenever the stock market "corrects" itself in the months and years ahead, feed more cash into the kinds of funds I recommend to my subscribers. Money magazine may not flash your mug on its cover as "Market Timer of the Year," but you'll build a fortune steadily and safely over a lifetime!

The smart money has quietly built its holdings on the same stocks Richard Band has been buying at Profitable Investing for years! Get the seasoned perspective you are looking for and the names of the top-performing funds in Richard's Total Return Portfolio with your RISK-FREE trial subscription to Profitable Investing. Richard Band's recommendations for conservative investors have grown 900% since 1984! Don't miss out! Get started today!