This may be a golden age for biotechnology. But most investors lack the scientific knowledge to distinguish fool's gold from the real deal, so they're better off choosing from specialty health or biotech mutual funds rather than trying to pick individual stocks.

Analyzing these stocks is even harder than valuing Internet start-ups, say money managers. Dot coms, at least, can showcase their developments. Biotech firms spend years developing a product in the lab and then more years trying to get it approved. Even if a research project wins Food and Drug Administration approval, that's no guarantee the company can turn its science into a profitable product.

That's where biotech funds come in. There are three types of professionally managed, diversified funds available--and not all of them have "biotechnology" in their names. Some basic healthcare funds, in fact, have greater biotech holdings than so-called biotech portfolios. PIMCO Healthcare Innovation invests about a quarter of its money in pure biotech stocks, a slightly greater weighting than Monterey Murphy New World Biotech, according to fund tracker Morningstar.

The most conservative way to play biotech is through a general healthcare fund, one that dabbles in biotech but invests the majority of its assets in blue-chip pharmaceuticals and other healthcare companies. A good example is T. Rowe Price Health Sciences. This $870 million fund, managed by Kris Jenner, who was trained as a physician, invests from 20 percent to 40 percent of its assets in the biotech sector, depending on Jenner's assessment of the industry.

Hedging bets. Currently, Jenner has about 40 percent of the fund's money in the sector. Roughly two thirds of that is invested in established biotech companies, like Amgen, or in firms that in Jenner's judgment are less than 18 months away from turning a profit. The remaining third is invested in earlier-stage companies that he thinks show tremendous promise, such as Neurocrine Biosciences, a tiny biopharmaceutical company developing drugs for insomnia and other disorders. But even if a company like Neurocrine runs into trouble, investors need not worry. Jenner invests the majority of the fund's assets in big healthcare stocks like American Home Products, which makes this fund far less volatile than a pure biotech portfolio. Last year, Health Sciences lost just 6 percent of its value, compared with a 13 percent decline in the S&P 500 and a 17 percent fall in the Rydex Biotechnology Fund. Jenner's fund has averaged gains of nearly 17 percent annually the past five years.

Other diversified healthcare funds that invest more than 20 percent of their assets in biotech are Franklin Global Health Care and Dresdner RCM Global Health Care. The Dresdner fund, run by Michael Dauchot, who practiced internal medicine for five years before managing money, invests in established biotechs like Genentech and big pharmaceutical companies like Pfizer. Yet it also has significant exposure to smaller companies that provide research tools for genomics research, like Waters, a leading manufacturer of mass spectrometry instruments, and Invitrogen, which makes gear for molecular biology labs.

If you're willing to take on a little more risk, there are biotech-specific funds that focus mostly on blue chips in the sector. The best example is Fidelity Select Biotechnology, the oldest and largest biotech fund. Manager Brian Younger runs the $3 billion portfolio with stability in mind. He avoids illiquid start-ups, sticking instead to companies with drugs already on the market, such as Amgen, Biogen, and MedImmune. He also likes companies with products in "late stage" development, which has helped the fund post average annual returns of 20.1 percent for the past five years.

If you can stomach more volatility, consider a fund like Marketocracy Medical Specialists. "What we want to see are companies that are working on things so big and misunderstood that when it comes to light, it will be powerful enough" to double their market value within two years, says manager Ken Kam.

Among the companies Kam favors are CV Therapeutics, which will soon be seeking FDA approval for a drug that treats angina. Kam routinely surveys physicians and scientists to gauge the promise of such biotech discoveries. That's the kind of inside access you'll never get as an investor in individual stocks.

Biotech stars