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By Wang Lan (China Daily)
Updated: 2007-11-06 10:33

The China Securities Regulatory Commission (CSRC) has warned fund management firms not to overexpand and urged them to do more to educate investors.

The CSRC issued a circular cautioning against blind expansion of funds, which it said could seriously undermine the stability of the industry.

The regulator said fund management companies raising new funds, expanding existing ones or converting closed-end funds to open-ended ones must limit their size to the level stipulated in the prospectus within six months from the date of release.

Analysts said overexpansion can have a negative impact on performance because as a fund gets larger, it's increasingly difficult to maintain the same level of return.

"Fund mangers should avoid overemphasis on the size of their funds in their sales pitch," said Shan Kaijia, a funds analyst at Haitong Securities. "Instead, they should help investors, especially retail investors, select funds that are within the limit of risk they can bear," Shan said.

At the end of October, the net asset value of all 341 funds managed by 59 firms amounted to 3.3 trillion yuan, an increase of 280 percent from the beginning of this year, according to the CSRC.

The regulator also announced tougher rules to rein in excessive speculation by fund management companies, requiring them to do more to educate investors about the risks involved in fund investment.

Analysts said investors shouldn't rush into funds simply because of their low price, but rather focus on funds that show the greatest promise of long-term gain.

"Fund managers and investment advisors should tell their clients to place less importance on short-term gains when they invest in funds," said Shan at Haitong Securities. "They should remind investors that buying funds is a long-term investment."

Hu Wenzhuo, an analyst at Orient Securities, said the regulator's stance reflects the government push to stabilize the stock market, which has risen to dizzying heights in recent weeks.

"Fund investors are playing an increasingly important role in China's stock market, as the combined portfolio of all mutual funds account for about 40 percent of the total A-share market value," Hu said.