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NEW YORK (MainStreet) –- So, you want to invest in a mutual fund that beats the indexes. Great. Do you even know that that means?

It isn't hard to identify mutual funds and fund managers who’ve outperformed the stock indexes in the past. Greg Vigrass, chief executive of Folio Institutional, notes that it's future performance that matters and that it helps to know what market index you're looking at before tracking your fund's progress against it.

“I think people need to actually understand what it means to 'beat the index,'” Vigrass says. “They look at the S&P 500 or broad market index and say 'I want to beat that.' But are they picking a fund for which that is the correct benchmark?”

In essence, don't rely on past performance and gut instinct if you aren't even able to answer the most simple questions about your mutual fund. What index is it pegged to? Over what period of time are you expecting it to beat that index? Are you being realistic in terms of timeframe? What is your tolerance for risk. Yes, you can look at a fund's 3-, 5- or 10-year history and see how it performs in up or down markets, but that isn't the difficult part.

“What’s hard is identifying those who have the best chance to outperform in the next 10 and 20 years,” says Frank Congemi, an investment advisor in Deerfield Beach, Fla.

The first step seem counterintuitive, but involves being a little cheap. With actively managed mutual funds, high-cost funds are worth avoiding. Their fees cut eat into returns over the long term and are placing investors well behind their counterparts who've put their money into cheaper funds.

“Certainly look at the cost, because a key differentiator in fund performance is cost,” Vigrass says. The simplest way to look at that is that a fund that has a 1.5% expense ratio vs. a 0.5% fund ratio is going to be different. They're starting at a different place.

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To simplify your search, Congemi suggests tossing out funds in the Top 75% of expense rations and dabbling in only those in the lower quartile. That's still a whole lot of funds, but you can narrow the field a bit more by selecting funds whose portfolio managers put more of their own money into the funds they manage.

It's been a long-held theory that those lower-cost funds perform better. However, Morningstar Advisor released the results a study earlier this year demonstrating that this theory holds water: funds owned by managers who'd invested $100,000 or more of their own money had a 40% to 46% success rate, and by comparison, fund managers who put no money into their funds saw just a 35% success rate for those funds.

“Active management—in the right hands—can build wealth faster and more reliably than an index strategy,” Congemi says. “Low costs are fairly obvious, but the beauty of high manager ownership is that these people are literally putting their money where their mouth is.”

Meanwhile, American Funds ran the numbers last year and found just 85 U.S. equity funds and 20 international equity funds that are both low-cost and manager-invested (105 funds in total). American Funds compared the performance of a portfolio of index ETFs (a passive portfolio) versus selected active funds from 1994 through 2013 by creating a hypothetical portfolio. It had 25% in the S&P 500 and 25% in an international equity index, with the remaining 50% in various U.S. asset classes.

That passive portfolio returned 5.69% annually over 20 years, from 1994 through 2013. A portfolio composed of the 105 funds mentioned above, combining low cost and high manager ownership, returned 7.47% annually, 1.78 percentage points more: a 31.3% higher annual return compounded over 20 years. A similar portfolio of core American Funds did even better: 8.17% annually, or 43.6% more each year for 20 years.

While that's promising, Vigrass notes that investors shouldn't rely too heavily on any one indicator when investing in a mutual fund. Investing over time, diversifying holdings, keeping expenses low and reinvesting regularly are all steps worth taking if you're looking to beat a benchmark index.

“I think a lot of it comes back to people taking a little time up front and understanding what it is they're trying to accomplish, what their ability is to invest over time and target risk and ultimately identify a targeted benchmark or index correlated to what their objectives are,” Vigrass says. “Now you have a fair comparison point so you don't just open the paper and say 'the market's up, I'm not up as much, I must be underperforming.'”

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.