Launched with much fanfare a few months ago, the capital protection schemes launched by mutual funds have hit a regulatory hurdle. CNBC-TV18 reports.

More than 35 mutual fund schemes have been rated by CRISIL for the launch of the capital protection funds. But only five have hit the markets to date. The reason for this being that the regulator does not want aggressive portfolio structures and ''capital protection'' simulataneously.

SEBI is averse to structures called capital protection that have higher exposure to equity and require constant monitoring.

Typically, capital protection funds invest up to 20 per cent in equity but some funds want to go higher than that depending on market conditions. And this does not go down well with the regulator.

Out of the 28 funds that are yet to be launched, 10 are reworking their draft offer documents. SEBI says they will have to remove the word ''protection'' from their funds in case of riskier product structures.

Krishnan Sitaram, Head, fund services and fixed income, CRISIL, said, "It''s difficult to convince the regulator about the robustness of your structure, of your monitoring aspects. So what happens is if in such structures, which have a large equity content at the beginning, if equity markets fall, as per the structure, you will have to shift large proportions to debt. But if the fund house at its end is not closely monitoring it and wakes up two - three days later in which time equity markets have sharply fallen, then the final objective may not be met."

Mutual funds say, as of now, the capital protection funds are no different from the monthly income plans they already have in the market. They feel flexibility of high allocation to equity is a must to ensure higher returns.

Fund houses say modification in product structure can offer better value for money to risk-averse investors. They also argue that insurance companies have the go ahead to offer capital protection schemes and this puts them at a disadvantage. It remains to be seen whether the regulator will relent.