Mutual funds are the largest shelf for mainland individual investors: over ten thousand products, starting at ¥1, strictly regulated, with full information disclosure. The problem is that the naming system is extremely unfriendly to beginners — the same index can be bought four ways: over-the-counter A class, over-the-counter C class, an exchange-traded ETF, or an ETF feeder fund, with fees differing several-fold. This article sorts out both the categories and the channels in one pass.
By what they invest in: six major categories
- Money market funds: invest in bank deposits, short-term bonds, and the like. Yu’ebao (Alibaba’s ubiquitous cash-management product) is essentially a money market fund. Almost never loses money, annualized just above 1%, fast redemption capped at ¥10,000 per day. Its role is cash management, not investing.
- Bond funds: at least 80% in bonds. Pure bond funds don’t touch stocks and return roughly 2%–4% annualized, but they can lose money in phases when interest rates rise quickly (the bond-fund redemption wave of November 2022 is a living textbook); secondary bond funds can hold small equity positions and are more volatile.
- Equity funds: at least 80% in stocks, with the fund manager actively picking them.
- Hybrid funds: flexible stock/bond ratios spanning a huge range from bond-tilted to equity-tilted. The stock-position ceiling in the fund contract is far more reliable than the name.
- Index funds / enhanced index funds: instead of betting on a fund manager, they directly replicate an index (CSI 300, CSI 500, dividend indices…). Low fees, transparent rules, no style drift. Enhanced index funds add a bit of active management on top of tracking.
- QDII: buy overseas assets (Nasdaq, S&P 500, Hong Kong stocks, crude oil, gold) with renminbi. Constrained by foreign-exchange quotas, popular QDII funds frequently limit purchases or trade at large on-exchange premiums — chasing in at a 5% premium means you’ve lost 5% before you’ve even started.
There’s also one dimension that cuts across all categories: active vs. passive. With an active fund you’re buying the fund manager; with a passive fund you’re buying a rule. The mainland data of the past decade has not been kind to active funds — most active equity funds underperform their corresponding index over the long run, while charging fees several times higher.
By where you buy: the chasm between over-the-counter and on-exchange
This is the most important section of the article. The same index fund has two completely different purchase paths:
Over-the-counter (OTC): “subscribe and redeem” on Alipay, Tiantian Fund, bank apps, or fund-company direct-sales channels. Trades execute at the net asset value calculated after that day’s close: place an order before 15:00 today, your units are confirmed at tonight’s NAV, you see them on T+1, and redemption proceeds arrive between T+1 and T+3.
On-exchange: in a brokerage app, buy and sell ETFs (exchange-traded funds) in real time just like stocks. The price moves every second, and proceeds from a sale are immediately usable (equity ETF units can be sold on T+1, but some varieties — bond ETFs, money market ETFs, gold ETFs, and cross-border ETFs — support T+0).
The fee gap is an order of magnitude:
| Fee item | OTC active fund | OTC index fund | On-exchange ETF |
|---|---|---|---|
| Buy | 1.5% subscription fee (0.15% after 90% discount) | 0.1%–0.15% | Commission ~0.01%–0.03% |
| Sell | Redemption fee (1.5% penalty if held <7 days) | Same as left | Commission ~0.01%–0.03% |
| Annual holding | 1.2% management + 0.2% custody | 0.5%–0.6% | 0.15%–0.6% (mainstream broad-based ETFs down to 0.15%+0.05%) |
Over a ten-year horizon, a 1% annual fee difference eats roughly 10% of your final assets. That’s why this series — and the quantitative series that follows — treats the ETF as the protagonist.
Two special members:
- LOF: a fund that can be traded in real time on the exchange and also subscribed/redeemed over the counter. When the two prices diverge, a discount/premium arbitrage exists, but it requires custody transfer and is harder to operate than an ETF.
- ETF feeder fund: an OTC fund whose assets are mainly invested in the corresponding ETF — an indirect ETF channel for people without a brokerage account, with fees slightly higher than the ETF itself but far lower than active funds.
A class and C class: two price lists for the same fund
Many OTC funds carry an A or C suffix. The difference is only in how fees are charged:
- A class: charges a subscription fee at purchase (about 0.1%–0.15% after the 90% discount), with no sales service fee. The longer you hold, the better the deal.
- C class: free to buy, but accrues a daily sales service fee (typically 0.4%–0.8% per year). Better for short holding periods.
The rough dividing line is one to two years: if you plan to hold longer, choose A; for short-term or trial positions, choose C. The NAVs of the two share classes differ by a hair each day, but compounded over the years that’s a real difference in returns.
The personality of funds
- You give up decision-making power over individual stocks in exchange for diversification and professional management (or rule transparency). The biggest risk of a single active fund is not the market — it’s the manager leaving, style drift, or the strategy breaking down after assets balloon.
- Index funds swap human risk for rule risk: the index methodology (inclusion/exclusion criteria, weighting scheme) determines what you own, and it’s worth spending ten minutes reading the methodology of the index you’re buying.
- Fixed-amount fund investing solves the entry-timing problem in an A-share market of short bulls and long bears — it’s not perfect (you still lose money investing regularly in a downtrend), but it’s the best-matched posture for salaried cash flows.
Who it suits
- People with no time to research individual stocks: broad-based index ETFs are the default answer.
- People who only have a bank card and don’t want to open a brokerage account: OTC index funds / ETF feeder funds.
- People who want overseas assets without an overseas account: QDII — but always check the premium rate before buying.
- People who want to do quantitative investing later: the ETF is the only instrument with a low threshold, complete data, backtestability, and programmatic trackability. After Part 6 you’ll understand why.
Fee data reflects common industry levels at the time of writing; for specific products, refer to fund contracts and announcements. This article does not constitute investment advice.