While China's stock market and mutual fund industry have been soaring over the past year, government think-tank State Council Development Research Center is warning that profitability may not be sustained, China Daily reports.

At the end of last year, there were 53 fund management companies in the country, 20 of them joint ventures, offering more than 220 funds with $62.5 billion in assets.

However, due to the immaturity and volatility of China's stock market, funds face liquidity and diversity issues, along with the challenge of finding good-quality stocks.

They are also bound to suffer steep outflows when the market drops, as Chinese investors are not well educated and aren't likely to wait out the long term.

Thus, according to a report from the think-tank, fund companies should do a better job of educating retail investors and diversify into providing customized wealth management services for institutional clients. Likewise, Morningstar published a report in March calling for greater diversity in product design and investment style.

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