Finding the best mutual funds is not rocket science, but you won't find the best funds looking in the wrong places. Simply put, the best stock funds and best bond funds have one thing in common. What it is might surprise you.

Searching for the best mutual funds based on past performance records will get you nowhere. Last year's best stock funds often turn in a poor performance when market conditions change. And the best bond funds from the past can get nailed when the interest rate environment changes. In other words, even the largest and best mutual funds do not outperform the competition on a consistent basis.

But a few fund companies do offer investors a consistent profit advantage year after year, and that's why I call theirs the best mutual funds in the business. I'll explain with a story about Jack and Mike. They were at a neighborhood gathering with beverage in hand talking about their investments. Neither understood the subject and both were upset that interest rates were so low.

Mike was not a happy camper. "I gave my investment guy $20,000 to invest so I could make more interest, and when I got may last statement it was worth $18,000 and I never saw a penny of it', he said. Jack agreed that this sounded like a raw deal, and asked him what sort of investment he made. Mike mumbled that he thought his guy said something about putting him in one of the best bond funds he knew of. Jack smiled because he too had invested in bond funds and was making money according to his last statement.

Jack suggested that Mike talk to his brother who was retired from the investment business, and here's what I saw when I looked at Mike's statement. Mike was in a long-term bond fund that paid a decent dividend yield, with the dividends reinvested to buy more shares. The problem was two-fold. First, he paid sales charges of 4% that came off the top, and yearly expenses equal to more than 1% were being drained from his account - plus his guy was charging him for his services. Second, interest rates had gone up a bit, which caused the value of his shares to fall a bit.

Why was Jack making money, when he was losing it, is what Mike wanted to know. The truth is simple. A fund with high investment costs and expenses can drain your profits. It's like giving back all or most of your dividend income in many stock funds and as much as half in some bond funds. Over the long term this money could have remained in your account to enhance the value of your investment. Plus, Mike might have been in one of the best bond funds his guy had to offer, but the question is... best for whom? Mike or this investment salesman?

There's one more concern I pointed out to Mike. Long-term bond funds pay more interest, but that comes with a risk as well. When interest rates go up, they fall significantly in value. Now let's look at Jack's situation.

Jack can not tolerate risk and is a very thrifty fellow. Giving him free advice is a challenge. Not only did I recommend the best mutual funds I knew of to him, I recommended the cheapest to buy, hold and sell. Plus, we decided on short-term bond funds because they are subject to much less investment risk (interest rate risk) when rates in the economy go up. His total cost of investing: zero sales charges to buy or sell, and less than ½% a year in expenses.

How do you find the best funds that keep the cost of investing low? Check out the following on the internet: Vanguard, Fidelity, T Rowe Price, and American Century. To keep costs even lower, go with index funds. These are simply passively managed to track stock or bond indexes that are used as benchmarks for actively managed funds investing in the same investment sector. Why pay more for management that tries to beat the benchmark when very few can with any kind of consistency?

What's even worse is that many of the funds with a high cost of investing under perform their benchmark - the index their performance is compared to. Now you know why. It's tough to keep up with the averages when your portfolio has big leaks in it called high expenses and other fees. The best funds for your money: no-load index funds from a major company like those listed above.