Sales of mutual funds, which more than doubled last year to $110.5 billion, have brought the little guy back into stocks and bonds in a big way.

One in four U.S. households now owns shares in stock and/or bond mutual funds, according to the Investment Company Institute, the trade group for mutual funds. The New York Stock Exchange reported last fall that almost all the 11 percent growth in stock ownership in the last two years came through mutual funds.

Mutual funds' assets appreciated by 27.17 percent last year. And while that gain did not match the 31.79 percent rise -- assuming reinvestment of dividends and interest -- in the Standard & Poor's 500 Stock Index, the return on pooled investments was on the whole a lot better than that offered by money market funds, certificates of deposit, or other vehicles favored by small investors.

And some funds, particularly those invested overseas and in domestic health stocks, put on a spectacular performance. Fidelity Investments led the pack with increases of 78.7 percent and 69 percent respectively in its Overseas and Over the Counter funds, according to Lipper Analytical Services.

With interest rates down and the stock market performing well, industry observers expect further growth this year as bank certificates of deposit mature and owners switch large individual retirement accounts from CDs to securities.

The individual investor has taken to mutual funds to gain a fighting chance against the institutions that dominate the market. For the 21 million mutual-fund shareholders, entrusting the portfolio to professional managers beats trying to pick stocks oneself.

Yet, given the increasing popularity of mutual funds, the challenge now becomes which fund to pick. With the addition of 300 new funds last year, total funds of all types have grown to about 1,500, or triple the number that existed at the start of this decade.

This year's winner may be next year's loser and vice versa, so past performance is not a reliable guide for future investment. Consequently, there has developed an industry of advisers who pick the managers who pick the stocks. The Hulbert Financial Digest of Washington's annual analysis of the newsletters with the best mutual-fund recommendations gives last year's nod to Fund Exchange Report of Seattle, which showed a gain of 45.5 percent last year in its "conservative growth margined" portfolio -- a portfolio of five mutual funds bought with borrowed money.

This portfoilio was composed of these funds: Vanguard Index, Mutual Shares, Neuberger Partners, One Hundred Fund and Safeco Income. Fund Exchange Report recommends the same ones for this year.

For its aggressive growth margin portfolio, Fund Exchange Report's choices are Stein Roe Capital Opportunities, T. Rowe Price New Horizons, Founders Special, Lehman Capital and Janus.

A San Francisco-based newsletter called No Load Fund X, which had a 38.1 percent increase in its collection of "higher-quality growth funds" last year, names these favorites for the short term: Scudder International, T. Rowe Price International, Dodge & Cox Stock and Century Shares Trust.

Growth Fund Guide of Rapid City, S.D., with a 33.8 percent appreciation in its aggressive growth fund portfolio in 1985, endorses Quasar Associates, Fidelity OTC and Twentieth Century Growth for this year.

Alone among the newsletters to make numerical projections is the Mutual Fund Forecaster, a publication of the Institute for Econometric Research in Fort Lauderdale, Fla. Since last February, it has been sticking its neck out and making profit projections a year in advance.

By the end of 1985, the Forecaster's 25 recommendations of last Feb. 15 had appreciated an average of 32 percent -- exactly matching Forecaster's 12-month projection. Of its top 25 choices last year, nine, or 36 percent, performed at or above the anticipated rate of return. And Chairman Glen King Parker points out that the 12-month period will not be over for several weeks, so other funds may exceed predictions if the bull market continues.

Because the Mutual Fund Forecaster does not track international funds, it missed a number of the top performers for 1985. Its first choice, Loomis-Sayles Capital Development, had the 11th-best record of all mutual funds, a gain of 46.2 percent. The publication had predicted a 43 percent profit.

If an investor had put an equal sum of money into each of the 25 mutual funds recommended last February by the Forecaster, that investment would have grown by 32.04 percent, or five points more than the average mutual fund. That nearly equals the 33.2 percent return on stock picks by the country's investment advisers, as tracked by CDA Investment Technologies Inc. of Silver Spring.

Mutual Fund Forecaster's best buys for the next 12 months, together with the degree of risk and the sales charges, are listed in the accompanying chart. They are New England Life Growth, Tudor, Fidelity OTC, Legg Mason Value Trust and Nicholas II.

Each projection is based on several factors: against a forecast of the performance of the overall market are measured a fund's record, its tendency to outperform -- or underperform -- the market and its price volatility.

Risk is seen as a measure of the fund's sensitivity to market fluctuations and the historical tendency of its price to vary. The degree of risk ranges from very high to very low. The best buys are those with the highest profit projection for each risk rating.

A number of additional factors also affect mutual fund prices, according to the publication. In general, smaller funds, which invest in more volatile stocks, do better than larger funds in bull markets and worse in bear markets. Although more volatile low-priced stocks usually outperform high-priced stocks, mutual funds with high-priced shares perform equally as well as those whose shares are cheaper.

Management changes tend to affect small funds more than large ones, so investors should watch changes in small funds more closely, according to the Forecaster. Finally, the publication asserts there is no difference in performance between funds on which there is a "load," or sales charge, and those without one.

All performance results are stated without regard for the commission, which may vary according to the fund and the amount invested. However, the existence of a front-end commission or a redemption fee when the fund is sold can make a large dollar difference to a person who invests for one year or less.

Loads run up to 9.3 percent, according to the publication's calculations; 8.5 percent, according to the funds' accounting. For example, if a person invested $1,000 and the fund showed a 30 percent profit at year-end, the investment would be sold for $1,300. With a 9.3 percent commission, the investor's actual cash return drops to $1,189.50 or $1,179, depending on which end the sales charge is deducted. Thus, the investor's real return is reduced to 18 or 19 percent.