For the moment, mutual funds are generating the positive returns that endeared them to investors in the '90s. But before you get swept away by their success, don't forget that savvy stock picking is only one determinant of how much your fund earns. Here's a reminder from Standard & Poor's about another important factor.

After comparing the returns and expenses of 5,292 domestic stock funds, the investment research firm concluded that, on average, funds with lower expenses outperform funds with higher expenses. The advantage generally widens as time passes because in low-cost funds, more money stays invested instead of going toward expenses.

"Investors need to pay closer attention to expenses, especially in a market environment where returns are expected to be in the single digits," says Phil Edwards, S&P's managing director of fund research.

S&P divided the funds into nine categories based on the types of companies they invest in (large, medium and small) and their investment strategy (growth, value or a blend of both), calculating the average expense ratio for funds in each category. Then it split each category into two groups: funds with above average expenses and those with below average expenses and calculated the average expense of each group. The only category where the more expensive funds outperformed was mid-cap blend funds.

Large-cap growth funds have an average expense ratio of 1.6 percent. That means for every $1 of assets in the fund, 1.6 cents goes toward expenses (hiring people to manage and administer the fund.) Funds above that line had an average expense ratio of 2.24 percent vs. a 1.1 percent average for funds below the line. That gives the lower cost funds a 1.14 percent point head start when it comes to putting money in investors pockets.

Over the one-year period ended April 30, the higher-cost large-cap funds lost 16.7 percent vs. a 15.66 percent loss for the lower-cost funds. Over five years, the performance gap widened to 1.79 percentage points while over 10 years it was 1.54 percentage points.

Typically, performance among large cap funds doesn't vary much because fund managers hold many of the same stocks. That's not true of small cap stocks, where fund managers are presented with a much wider selection of lesser known stocks to choose from. One reason why small-cap funds usually cost more to run than large-cap funds is because managers have to spend more on research.

Yet based on S&P's study, much of that money doesn't appear to be well spent. Small-cap growth funds with above-average expenses had an average annual return of 2.44 percent over the last 10 years vs. a 7.49 percent average annual return for their lower-cost competitors.

"All things being equal, expenses make a difference," says Paul Brahim, managing director of the Equity Capital Management division of BPU Investment Group, Downtown.

Brahim uses a variety of screens when selecting funds for clients. Funds that "pass all the performance screens more often than not are also in the lowest expense category," he says.

Doug Kreps, portfolio manager for Green Tree money manager Fort Pitt Capital, says it's possible for higher-expense funds to outperform lower-fee ones. Still, he finds the case for low-cost funds pretty compelling.

"Whatever you can do to reduce your fees, the better chance you have of outperforming," Kreps says.

When it comes to Vanguard's High-Yield Corporate Bond Fund [Ticker: VWEHX], yield-chasing lemmings need not apply.

The nation's second-largest mutual fund operator closed its $9.2 billion junk bond fund to new investors at the market's close Thursday in order to protect investors who may not know the risks involved. Closing the fund will also shield existing investors from higher trading costs and potential capital gains caused by the newcomers, Vanguard said.

Junk bond funds invest in lower-rated corporate debt. In return for accepting the higher risks, investors get a sweeter yield, something every investor is interested in these days. Moreover, junk bonds typically do well coming out of a recession, as improving earnings make it easier for junk bond issuers to prepay their debt, reducing the risk of holding the bonds. As the risk goes down, the price of the bonds goes up, giving investors capital gains as well as interest income.

Investors poured $1.4 billion into Vanguard's junk fund in the first five months of the year, about double the amount invested in the previous five months, Vanguard said. Investors pumped $15.8 billion into junk bond funds during the first four months of the year, according to Lipper, an investment research firm.

Vanguard's worried uninformed investors can't see beyond the high yield to what would happen if a few big junk bond issuers defaulted on debt payments. There's also a concern that new investors are joining a party that's almost over. Through Thursday, Vanguard's junk fund had given investors a 9.7 percent return this year. Lipper says the group has earned 14 percent so far this year, including reinvested distributions. Among other junk funds, T. Rowe Price's High-Yield fund [PRHYX] has earned 12.3 percent while Federated Investors' High Income Bond fund [FHICX] has generated a 9.9 percent return.

Vanguard expects the fund will be closed to new investors for at least three months. Existing shareholders are still able to invest $100,000 a year.