"Funds have become vital institutional investors in the Chinese mainland securities market and indispensable financing tools for ordinary mainland investors," said Zhang Gang.

Bank deposits also have decreased to some extent. Statistics from the People's Bank of China show deposits in financial institutions increased 2.09 trillion yuan. Compared with the same period last year, the growth decreased 112.5 billion yuan. Meanwhile, at bank counters, many are withdrawing money instead of depositing.

Xu Jianqiang, an analyst with CITIC Securities recommended several fund management companies like E Fund Management Co. Ltd., China International Fund Management Co. Ltd. and Guangfa Fund Management. Xu said currently, foreign capital can invest in the Chinese yuan-denominated A share market through qualified foreign institutional investors (QFIIs). However, as Xu said, in terms of funds, QFIIs can only invest in closed-end funds by now. QFIIs can set up joint venture fund management companies and they can manage funds but not invest in other funds.

No free lunch

According to China Galaxy Securities, in 2006, the average return of stock funds reached a surprising 21.41 percent. Nearly all funds experienced a significant growth from the previous year.

But will the fund legend continue this year?

Experts and even fund management companies are worried about the "fund rush." Many fund managers expressed their concerns.

Wang Hongbin, General Manager of China International Fund Management Co. Ltd., worried that many investors have no idea what a fund is and they buy funds heedlessly without realizing the existence of risks.

It is interesting to find that many of the fund buyers are senior citizens and know little about funds. They would go directly to the bank assistant and buy some funds after suggestions are given.

"It is not good for fund operations," said Wang Hongbin.

Wang Hongbin pointed out those people are vulnerable to risks. If the market fluctuates a little bit, the group of people will go for redemption immediately. Therefore, fund managers must spare more effort in dealing with fund liquidity. In 2006, some fund management companies suffered huge losses when large-scale redemption occurred.

"We don't suggest people buy funds blindly," noted Wang Hongbin.

Zhou Yueqiu, managing director in charge of asset trust with ICBC, agreed.

"Currently, people tend to have high expectations in funds and are investing irrationally. Everyone wants to make a fortune by speculating in the fund market," said Zhou.

Not only are buyers irrational. The fund agencies can be too. Fund salespeople, for instance, will only tell buyers which fund is good, with high returns, and seldom tell them that risks exist.

As most of the funds are invested in the stock market and the stock market bears high risks, even the most effective market cannot avoid certain risks. Once the stock market fluctuates sharply, fund investors will probably suffer huge losses.

"How can we make investors know more about a fund management company? How can we teach them to buy and when? Answers to these questions are vital to keep both fund management companies and investors sober and are also conducive to the long-term and healthy development of stock market," said Fang Yonghong, General Manager of China Asset Management Co. Ltd.

Adequate supervision

At the end of last year, the China Securities Regulatory Commission (CSRC) suspended approval for the issuance of new funds, fearing the stock market was overheated. However, right after the suspension, the stock market suffered a great concussion and many people rushed to redeem their funds, causing huge losses to fund management companies.

In February, CSRC lifted the approval suspension and approved five new funds. Experts contended it will help inject new capital in the stock market and it shows the government's effort in maintaining a bullish market.

Nonetheless, the government is still concerned about maintaining proper supervision.

CSRC recently issued a document calling for fund management companies to disclose their operational information and problems by February 1 of this year. Since then, CSRC and local securities regulatory bureaus have held on-site inspections of fund management companies to monitor the companies' performance in terms of investment, sales, information disclosure and operations. Anyone found guilty would be punished accordingly. The inspection is still ongoing.

As a matter of fact, fund management companies have different policies regarding insider trading. Some companies prohibit investment management professionals from buying stocks but allow them to invest in funds. Others allow neither transaction. Most fund management companies don't allow insiders and their immediate relatives to trade stocks, but have no specific regulations on fund investments.

"As far as I'm concerned, this kind of large-scale issuance of supervisory regulations is unprecedented," a veteran fund supervisor told China Securities Journal. "It shows that the supervisory departments are worried about the operation of fund management companies. The fund industry has attracted much more money than before. But without proper and strict supervision, it will probably mean greater risks for the society."