Each year present our favorite funds. Here's why some funds have been eliminated from our recommended list and why others have been added. By Steven Goldberg, Contributing Columnist March 28, 2006 The question I hear most from readers is "What funds should I invest in?" We give you our answer in the May issue of Kiplinger's Personal Finance every year. We present our 25 favorite funds and assemble them into portfolios suitable for investors with different time horizons. My editors and I spend months boiling down the thousands of funds to 25. And we don't always see eye to eye on all the picks. RELATED STORIES The 25 best mutual funds Portfolios to achieve your goals How our 2005 picks performed When a fund's size matters Every year, we replace some funds with others -- and many readers want to know why. This article explains our thinking. Off the list First the funds we dumped. The easy part (for us) is the funds that closed to new investors during the past year. They include Century Small Cap Select (symbol CSMVX), Julius Baer International Equity A (BJBIX), Masters' Select Smaller Companies (MSSFX), Third Avenue International Value (TAVIX) and Third Avenue Real Estate Value (TAREX). If they were still open, we would have recommended them again. If you own any of them, there's no reason to sell. Of course, that's not the only reason we dropped funds. American Century Equity Income (TWEIX) has had three consecutive subpar years and is doing poorly again so far this year. Although I believe it will bounce back, there's no reason to stick with it when there are so many other proven value managers with better records. Harry Lange, Fidelity Capital Appreciation's (FDCAX) gifted manager, was promoted to run the much larger Fidelity Magellan fund (FMAGX). Capital Appreciation's new manager, Fergus Shiel, is a talented veteran, but we don't yet have as much confidence in him as we had in Lange. Richard Aster's Meridian Growth (MERDX) had a wretched 2005. I think Aster will recover, but he's managing more and more money, and he lost a key stock picker just over two years ago. When you're picking only 25 funds, there's no reason to stick with any that come with questions marks, and this one has a couple. Clipper (CFIMX) was dropped because the managers left. The new managers, however, are the same talented duo that run Selected American Shares (SLASX), which remains on our list of favorites for 2006. The new Clipper is likely to be terrific. It will hold fewer stocks than Selected American, but otherwise the two funds will be quite similar. We chose Selected American over Clipper because Selected American is a relatively low-risk fund. But investors willing to take a little more risk for more potential profit should consider buying Clipper. Finally, the hardest one to explain -- Masters' Select Value (MSVFX). This is a great fund. Four all-star managers each manage one-quarter of the fund's assets. They are Mason Hawkins of Longleaf Partners, Bill Miller of Legg Mason Value, Bill Nygren of Oakmark Select and Michael Embler of the Mutual Series funds. If you own it, don't sell it. The reasoning behind dropping it: We added newly reopened Masters' Select Equity (MSEFX), which has two of the same managers and the same approach. Select Equity employs six managers or management teams, each with responsibility for either 10% or 20% of the fund. Each is limited to eight to 15 stocks. The cast includes Chris Davis and Ken Feinberg of Selected American, Mason Hawkins of Longleaf and Bill Miller of Legg Mason Value. This year's other additions Among the value managers we added to the latest version of the Kiplinger 25 is Dave Williams, who runs Excelsior Value Restructuring (UMBIX). He has a terrific record, and in assembling our list, we have overlooked him and his fund too long. Ditto for Ron Muhlenkamp at Muhlenkamp (MUHLX). Andy Pilara, lead manager of RS Value (RSVAX), is also excellent -- plus his fund offers a lot of exposure to mid caps and small caps. (Read more about RS Value.) That is a segment of the fund world where it is difficult to find worthy choices that are accepting money from new investors. Indeed, we took a bit of a gamble to include Bridgeway Small-Cap Growth (BRSGX). The fund is fairly new, but John Montgomery, who relies on computer models to pick stocks, has established a great long-term record with his other funds. We also took somewhat of a gamble on Marsico International Opportunities (MIOFX). The record since inception is awesome, but manager Jim Gendelman has only run the fund six years -- not as long as I normally like to see. What tipped the balance here is that Gendelman works closely with Tom Marsico. T. Rowe Price Real Estate (TRREX) is a steady, above-average performer -- exemplifying the T. Rowe approach. SSgA Emerging Markets (SSEMX), a computer-driven fund, has consistently delivered above-average results over a long period. It also boasts a relatively low expense ratio. We thought we should add an emerging-markets fund this year. Obviously, we should have added one three years ago -- but there's nothing we can do about that. We're tickled that Vanguard launched Primecap Core (VPCCX), a fund similar to Vanguard Primecap (VPMCX), which a superb fund that is closed to new investors. Primecap Core is fund run by the same management team as Primecap. CGM Focus (CGMFX) is a hedge fund masquerading as a mutual fund -- and, thankfully, with a mutual fund-like expense ratio. Unless you're prepared for plenty of thrills and chills, stay away from this aggressive fund, which is run by veteran Ken Heebner. Even if you are ready for a wild ride, don't put more than 5% or 10% of your stock money in this fund.