Editor's note: To view the stock screens mentioned in this column, download the free MSN Money Investment Toolbox.

So you want to start investing, but you have only $1,000?

Don't even think about individual stocks. Even great stock pickers come up with their share of duds. You need to own at least 10 stocks to keep one clunker from sinking your portfolio returns. You can't do that with $1,000.

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Your best approach is to put that $1,000 into an old-fashioned managed mutual fund.

Add it up: How far can $1,000 go?

Yes, I know, traditional mutual funds won't give you much to talk about in the locker room. They are nowhere near as fashionable as exchange-traded funds, or ETFs, the newer kids on the block. But mutual funds are better suited to your needs.

What is a mutual fund?

Most ETFs track indexes that reflect the action of a particular market segment, such as biotech or energy stocks. So to make money, you have to successfully predict which industries or market sectors are going to outperform over your investment horizon -- say, the next 12 months. That's a tall order for even an experienced investor.

It makes more sense to hire a qualified mutual fund manager to do the job. Mutual fund managers have better access to information, and many of them have teams of analysts to help.

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Of course, not all mutual funds are created equal. Many underperform. The trick is to find a fund manager with a long track record of beating the market. But high returns by themselves won't cut it.

Even the best funds have good years and bad years. Say you put your $1,000 into a volatile fund and that fund hits a dry spell. Then you watch your $1,000 shrink to $900, then $800, etc. If you're like most investors, you'll bail out before the fund turns around. This is why a track record of low volatility is just as important as overall returns.

Case study: A $1,000 investment

Here's a strategy I devised using MSN Money's Deluxe Screenerto spot funds with that magic combination of market-beating returns and low volatility. Just as critically, they welcome small investors.

How to use a stock screener tool

The first step

I'll start by defining the universe of funds suitable for small investors:

Some funds, especially those specializing in small companies, stop accepting new investors when they think they already have as much money as they can wisely invest, so there's no point in including them in the results.

Screening parameter: Closed to New Investors = False

Because bookkeeping and customer-support costs are basically the same regardless of account size, many funds establish relatively high minimum opening balances to avoid dealing with small investors. This screening parameter rules out funds that won't accept $1,000 initial investments.

Screening parameter: Minimum Initial Purchase <= 1,000

The screener database lists some funds with no minimum initial purchase requirements. These are, in fact, available only via special purchase plans, such as plans for college students. I eliminate them here.

Screening parameter: Minimum Initial Purchase >= 1

Some funds cater to pension plans, trust funds and other institutional investors and don't want individual investors. You can't blame them; that's where the money is. This factor rules them out for our purposes.

Screening parameter: Institutional = False

Say no to loads

Many fund operators rely on financial advisers and stockbrokers to market their funds. Fees, called loads, are collected to compensate the adviser or broker for recommending their funds. Front loads are paid when you purchase; deferred loads are paid when you sell. Most load funds charge one or the other but not both.

Loads are simply marketing expenses. The money doesn't go toward hiring smarter analysts or buying better computers. Thus there is no point in paying them if you're picking funds on your own.

Screening parameter: Front Load = 0

Screening parameter: Deferred Sales Charge = 0

Funds that are easy to buy

The screener sometimes lists funds that pass all of the above tests but are available only through financial advisers. To rule them out, I require that passing funds must be available through Charles Schwab's retail network. I'm not necessarily recommending purchasing through Schwab, but of the available broker choices in the screener, Schwab offers the biggest fund selection.

Generally, if Schwab lists a fund, you can also buy it through many other discount brokers.

Screening parameter: Brokerage Availability = Schwab Retail

Stocks, not bonds

Some mutual funds invest mainly in bonds instead of stocks. Bonds appeal mainly to investors looking for steady income instead of capital appreciation. Bonds may or may not have a place in your portfolio. But today, we're looking for stock funds. Some stock funds hold bonds to reduce risk, and that's worth doing. So I allow up to 20% bond holdings.

Screening parameter: Percent Stocks >= 80

Out of 5,000 or so mutual funds, about 200 would pass the tests that I've already described. From that group, we'll pick the low-risk funds with the best price-appreciation prospects.

Go with the best stock pickers

As is the case for practically every endeavor in life, some fund managers are better than others. Though this is a controversial topic, I've found that, assuming the same manager is at the helm, a fund with a strong track record is likely to outperform funds that have lagged the market, at least over the next year or so.

A manager who has consistently outperformed through all different sorts of market conditions is a better bet than a newcomer who may have had a good year simply because he or she got lucky and picked a few good stocks.

To find those strong long-term performers, I require a minimum 12% average annual return over the past five years. By comparison, the overall market, at least as measured by the S&P 500 Index ($INX), had averaged only a 7.5% five-year annual return when I wrote this column.

However, conditions will likely be different when you run the screen. So consider raising my 12% minimum if your screen turns up too many funds (more than 20) or lowering if it turns up too few (fewer than 10).

Screening parameter: 5-year Annualized Return >= 12

Expert help

Morningstar rates funds by comparing their historical returns to volatility, which is a risk measure. Morningstar rates funds from one to five stars, with five being the best. Funds with the highest return-to-volatility ratio within the same category (for example, small-cap growth) get the highest ratings.

Morningstar's ratings aren't perfect, but they are a good place to start. I've had the best results sticking with four- and five-star funds.

Screening parameter: Morningstar Rating >= 4-star

Steer clear of volatility

As I described earlier, sharp share price downdrafts would scare many investors into selling, even when the fund's long-term outlook is strong.

Volatility measures how much a fund's share price has bounced around in the past. By sticking with low-volatility funds, you'll reduce your chances of selling at the wrong time.

Morningstar's risk rating compares a fund's historical volatility to all other funds in its category. The possible ratings are high, above average, average, below average and low. Lower is better, but I've found that the funds rated "low" generally don't produce market-beating returns. So I accept both "low" and "below average" ratings.

Screening parameter: Morningstar Risk <= Below Average

Standard deviation gauges a fund's volatility on an absolute basis, instead of comparing it with other funds in the same category. So it also pays to stick with low-volatility funds based on that measure, as well Morningstar's risk rating.

Funds with standard deviations of 15 or lower are relatively safe, and I set my maximum acceptable standard deviation at that level. However, the lower the better, so try reducing that figure to 10 or 11 to further minimize risk.

Screening parameter: Standard Deviation <= 15

Avoid new managers

The risk and return figures I've used are based on historical returns. They would be meaningless if the fund manager responsible for those results has jumped ship. Since I based my analysis on five-year returns, it makes sense to require that the same manager has been on board for that time.

Screening parameter: Manager Tenure >= 5

Click here to run the screen. You should wind up with a list of 10 to 20 qualifying funds. You can use MSN Money's top-holdings report to see the total number of stocks in the portfolio, as well as the list of top 25 stocks by percent of the fund's assets. Funds holding 100 or more stocks are generally less volatile than those holding fewer stocks. Also, by examining the top-25 stock list, you can see whether the fund is betting on a particular sector or industry.

Pay attention to the standard deviation figure listed both on the screen results and in the portfolio report. Generally, the lower the standard deviation, the safer the fund.

The portfolio report also shows the portfolio weighting in terms of industry sectors. Funds with heavy weightings in a hot sector are riskier bets than more diversified funds.

The portfolio report also shows the asset allocation among stocks, bonds and cash, as well as the fund's foreign holdings.

Funds holding 10% to 20% bonds are usually less volatile than funds with no bonds. However, they typically produce lower returns in strong markets. Funds with a large weighting in foreign stocks produce relatively strong returns when the U.S. dollar is weakening against foreign currencies such as the euro, and they underperform when the U.S. dollar is gaining strength.

Check each fund's returns for individual calendar years in MSN Money's return report and avoid funds that racked up losses in years when the market was strong.

Take time to review all of the available information for each fund. The more you know about your funds, the better your results.

Produced by Elizabeth Daza/Graphics by Joe Farro

Published Oct. 1, 2008