Market neutral funds aim to invest in bullish stocks and an equivalent number of bearish stocks. The objective is to generate above-average returns at relatively lower levels of risk. In fact, this category of funds adopts a precision approach to long-short investing, by ignoring the market’s direction. This is particularly relevant in today’s highly volatile market scenario when the objective is to protect the capital invested. This approach aims to identify pairs of assets whose price movements are related. Subsequently, the fund goes long on the outperforming asset and shorts the underperformer. Market neutrality is achieved by allocating the same proportion of assets to both positions.

Below we will share with you 3 potential market neutral mutual funds. Each has earned either a Zacks #1 Rank (Strong Buy) or a Zacks #2 (Buy) as we expect the fund to outperform its peers in the future. To view the Zacks Rank and past performance of all market neutral mutual funds, investors can click here to see the complete list of funds.

JPMorgan Multi-Cap Market Neutral A (OGNAX - MF report) focuses on acquiring common stocks of companies that are believed to have impressive potential. The fund may also invest in 'short selling' stocks. It invests in companies from different domains irrespective of their market capitalizations in order to minimize exposure to domestic markets. The fund seeks preservation of capital over the long run. This market neutral fund returned 2.4% over the last one year period.

The fund has an expense ratio of 1.49% as compared to category average of 1.74%.

Gateway A (GATEX - MF report) seeks to achieve maximum return from equity markets with less risk. The fund focuses on acquiring common stocks to add to its well diversified portfolio. The fund invests a significant share of its assets in index call options in order to reduce volatility and maintain steady cash flow. However, it may also reduce fund’s profit making ability. This market neutral fund returned 4.4% over the last one year period.

Paul R. Stewart is one of the fund managers and has managed this fund since 2006.

TFS Market Neutral (TFSMX - MF report) generally invests in companies that are traded in domestic exchanges. It allocates a significant portion of its assets in small cap companies having market capitalizations between $500 million and $2 billion. The fund may also invest a maximum of one-fourth share of its assets in registered investment companies ("RICs"). It seeks long-term capital growth to produce returns which have low level of correlation with the S&P 500 Index (SPY). This market neutral fund returned 9.2% over the last one year period.

As of October 2014, this fund held 2795 issues with 14.11% of its assets invested in E-mini S&P 500 Index Future Dec14.