The Wall Street Journal reported today that four mutual fund companies reported rising profits [subscription required] that met or surpassed Wall Street's estimates. Amvescap, Janus, Federated Investors, and Franklin Resources all reported strong numbers, and Fidelity Investments reported that its assets under managements had grown 19% to a staggering $1.77 trillion.

Why am I mentioning this? In order to be a savvy fund investors, it's important to know how they earn money. Assets under management is far, far more important than fund performance. Fund performance only matters to the extent that it helps them attract new investors. Take a look at the numbers:

If a fund charges a 2% expense ratio, has $100 under management at the beginning of the year, and earns a return of 5% for its investors, the fund company will earn $2.10 (before its own expenses).

If a fund charges a 2% expense ratio, has $100 under management at the beginning of the year, and earns a return of 25% for its investors, the fund company will earn $2.40 (before its own expenses).

In other words, a return that is five times as good for investors will only increase the fund company's earnings 14%. The interests of the fund manager are not aligned with the fund holders'. By increasing its assets under management, a fund adds a corresponding amount to its revenue -- 20% growth in assets under management means 20% more revenue for the firm.

So when you're evaluating mutual funds, remember this: Their business is asset gathering, not investing.