After a treacherous year,mutual funds rebounded nicely in the first quarter. The S&P 500 gained almost 10% in March, after losing nearly 20% in the first two months of the year, and mutual funds followed suit. "January and February were horrible, but March was one of the best months for mutual funds in a long time," says Vince Deluard, global equity strategist at Trim Tabs.

U.S. equities saw a broad-based rally, with many categories back into positive numbers after months in the red. But with U.S. equities still down 6.4% year-to-date through April 12, international equities, led by emerging markets, managed to outperform the U.S.-especially Brazil, Russia, India and China. China was the best-performing country in the quarter, up nearly 30%, Deluard says.

"In March, there was a bit more optimism in the market and people started to step off the sidelines and put their money in riskier assets as was the case with emerging markets," says Jeff Tjornehoj, a fund analyst at Lipper. "Most of these markets have a commodity play to them, and we saw commodity prices go up over the quarter, which bolstered returns."

TIME TO GROW

Growth categories outperformed across the board, reversing a decade-long run for value funds. In fact, 65% of the 20 top-performing equity funds in the quarter were mid- or large-cap growth funds. While the top-performing fund, the Vanguard Capital Opportunity fund, was up a mere .25%, it vastly beat large- and mid-cap value funds, which made up 60% of the bottom performers.

This is partly due to the financial firms that got hit hard in 2008 and which are held in most value funds, says John Coumarianos, a fund analyst at Morningstar. Though financials rebounded slightly in the quarter, they're off an extremely low base from 2008.

Also classified as financials, REITs were also killed in the first quarter. The Vanguard REIT Index was down 32% for the quarter, off a 40% decline in 2008. "Anything with debt, like these big financial firms and REITs, is getting hit hard," Coumarianos notes.

TAKING A CLOSER LOOK

But the magnifying glass being taken to balance sheets these days wasn't only bad news. Tech companies, held in many growth funds, saw soaring returns. This is largely due to their impeccable balance sheets, Coumarianos says. Texas Instruments, for instance, has $12 billion in assets and only $2.6 billion in debt-a high liquidity ratio in today's market. It was up nearly 6.5% in the first quarter.

Bond funds took in $50 billion in net inflows, $19 billion in March alone, according to Strategic Insights. Bonds were up only .6% for the quarter, though they climbed back from a 17% drop in 2008. Junk bonds made up roughly 50% of the top 20 performing funds, with the category up nearly 6%.

One sector of fixed-income funds that didn't see inflows were long-term Treasuries, the sweetheart of 2008, which were down 10% YTD through Apr. 12. This, Coumarianos says, shows that investors are worried about what will happen once the economy rebounds. "People are skittish about holding longer-term Treasuries because if we get hit with inflation, they'll have a problem," he says. "They want the safety of Treasuries, but not a 30-year commitment."

Another sign of inflation worries are the large inflows gold funds saw in the first quarter, though their performance was fairly flat. "The big question is whether the new environment will be inflationary or deflationary," Deluard says. "You have smart people on both sides and a lot of hedge funds that went into gold, right now it's 50/50 as to what will happen."