"It's not suitable or realistic to regulate the three funds - securities investment, industrial investment and start-up investment funds - simply through a single law because there are huge disparities in their developments," said Cao, who is also a professor in Peking University.

Most of the fund firms in the country are now involved in securities investment funds, which will play an increasingly leading role in the fund industry, insiders said. Its development is expected to fuel more institutional investment in China's stock market and bring more order to the market. More institutional investment will also lead to more rational investment decisions and standard practices in the stock market and higher returns for investors.

Cao said four aspects should be considered while drafting the law.

First, China Securities Regulatory Commission (CSRC), China's top securities watchdog, should expedite the establishment of open-ended funds. Since the world's first investment fund debuted in Britain more than 130 years ago, global investment fund assets have soared to about US$11 trillion.

All US investment funds, 67 per cent of the world's total, have increased their value nearly 100 times in the past decade. More than 40 per cent of US families have chosen to invest in mutual funds, known as open-ended funds in China.

But till now China has only a pitiable number of open-ended funds compared to foreign countries, though they actually developed rapidly in the country and experts expected them to be a stabilizing force in the decade-old fledgling stock market.

Second, corporate-type and contract-type funds should be managed separately. Most of the securities investment funds listed on domestic stock markets now are contract-types, while 90 per cent to 94 per cent of such funds in most foreign countries are corporate-types. The latter offers better protection to investors.

Third, legal protection of investors' interests should be granted and made clear. Adopting an independent director system, encouraging corporate-type funds and increasing transparency are good ways to do so.

Fourth, non-established funds too should get enough legal room for operations, considering the fact that the growth of a mature financial market overseas indicates that the law should include regulations for all types of funds.

Fund groups such as treasure-bond and currency funds will possibly become part of China's market soon. Between 1998 and 2001, 51 funds were set up in the country. Surprisingly, the first eight trading weeks in the domestic stock market this year, seven funds had got the licence to be issued or expanded.