S&P Equity Research screened 81 funds that track the S&P 500 and found a wide variance in fund performance, expenses and risks. S&P ranked the funds from five stars to one star: 18.8 percent of the funds rated five stars, 45.7 percent of the funds rated three stars and 3.7 percent rated one star.

As would be expected, performance was a major cause of disparity between funds. S&P discovered that for the 12 months ended Sept. 30, 2009, the top fund in the group, based on price change, declined 6.1 percent, while the worst performer dropped 9.3 percent. Over that same period, the S&P 500 index actually dropped 9.4.

Fund Costs Are Critical

The expenses each fund charges wound up as the most telling statistic from S&P's analysis. The most expensive fund had an expense ratio of nearly 2.3 percent, while the least expensive fund had a ratio of under 0.1 percent. The expense ratio covers all fees associated with the funds' management, operation and distribution, minus reimbursements. Additionally, the average expense ratio for the four- and five-star funds was roughly 0.3 percent, while the two-star funds had an average expense ratio of nearly 1.3 percent.

"You've got a wide disparity in performance, but you've got an even wider disparity in cost structure," said Dylan Cathers, S&P equity analyst who helped develop the fund-ranking methodology. "The cost of some of these funds is very high considering all they are supposed to do is match the index."

So why is there such a difference in cost for S&P index funds, especially when they track the same thing? The expenses to run a mutual fund vary and may include additional fees to hire big name money managers, money for marketing efforts, the cost of high-priced office space or even employee parking. All of these things may have an effect on the overall return you receive from your fund.

Risk Will Impact Performance

And, of course, there's the third element of the study -- risk -- that also has a major impact on fund performance.

"Risk is only limited by the fund manager's imagination," Cathers said. "Some funds will invest in futures and or options on the index, which will magnify returns. Some managers will borrow money and use leverage to intensify the moves of things in their portfolio."

Index funds are not limited to investing only in the stocks of the index they track. Other investment moves can change the performance of a mutual fund significantly, depending on whether the index is going up or down. If a manager borrows money, then the cost of paying back the borrowed funds can also have an impact on returns.

Cathers said it's critical for investors to research and monitor their mutual funds to make sure their performance matches what the fund promises. But he admits that it's almost impossible for investors to know exactly what is in their S&P 500 mutual fund. He encourages investors to read the annual and semi-annual reports to find out what the fund is invested in. But the material is dated by the time investors see it, so its usefulness may be limited.

To help investors, S&P identified three five-star funds as among the best in terms of performance, cost and risk: United Association S&P 500 Index Fund II (UAIIX), Schwab S&P 500 Index Fund Select (SWPPX) and Fidelity Spartan 500 Index Fund Investor (FSMKX). The Schwab fund has a redemption fee of 2 percent, which might make it a bit less appealing, but all of the funds outperformed their peers over the trailing one-, three- and five-year periods and have expense ratios in line with peers.

If investors are diligent about researching the performance, cost and risk of all their investments, they will have a better chance of investing in a mutual fund that does what it is intended to do.