There are two kinds of investors: the active and the lazy investor. The active investor buys and sells shares all the time. He tries to beat the market (index). The lazy investor doesn't fancy this or has no time to be active. He makes other people do the job and expects to get rich while sleeping.
Lazy investors are long term investors. For these investors there are huge amount of mutual funds available. Mutual funds have the advantage of diversification which reduces the risks. These mutual funds are run by fund managers who have stock analysts working for them. The fund managers and stock analysts manage the deposits of the lazy investor. They (the mutual funds) too are trying to beat the market.
The fund manager and stock analysts must be paid and there is (obviously) nothing wrong with that. Only the sun shines for free. In addition there are trading fees, legal fees and other operational expenses (administrative costs). To compare mutual funds on costs the Total Expense Ratio (TER) in invented. The total cost of the fund is divided by the fund's total assets. TER is presented as a percentage. The costs will be at the expense of performance. A lazy investor who wants to get a good return should watch those costs. Many scientific (see note) research suggests that beating the market over the long term rarely succeeds. Stock rates are usually difficult to predict (nobody has a crystal ball which shows the future) Off course in the short term there are mutual funds who beat the market. Which of the many funds that will be is difficult to predict. But costs are predictable!
For the lazy investor who doesn't want to pay a penny too much there are index funds on the market. There are a lot of indices: Dow Jones, S&P 500, Emerging Market, Dow Jones Sustainability Indexes, etc. There are also bond indices in which can be invested. So a good asset allocation is possible with index funds. Unlike active mutual funds, there is no manager and no stock analyst needed. A computer acquires the shares of an index and in the right ratio. It appears that an index fund over the long term gives a better yield than actively managed mutual funds.
The lazy investor should actively look at the costs when investing in mutual funds. Best is to invest in different index funds.
De povere prestaties van beleggingsfondsen- J.R. ter Horst, T.E. Nijman en F.A. de Roon 1999 (In Dutch)
The Implications of Style Analysis for Mutual Fund Performance Evaluation- John Bogle 1998
Beleggen voor dummies (In Dutch)