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Inflows into Indian equity mutual funds rose for the 29th month in a row, but the inflows remain volatile as investors preferred small- and mid-cap funds due to stretched valuations in large-caps, data from the Association of Mutual Funds in India (AMFI) showed on Wednesday.

The data showed that inflows fell 11.71% sequentially to 76.26 billion rupees ($921 million) in July. They had more than doubled in June but fallen to a six-month low in May.

While the benchmark Nifty 50 rose 2.94% in July, it was outpaced by a 5.5% gain in the Nifty mid-cap 100 and an 8% increase in the Nifty small-cap 100. All three indexes hit record highs that month.

Rajeev Thakkar, chief investment officer and director at PPFAS Asset Management, said the investors were likely chasing the money.

"The large caps are almost priced to perfection, while a lot of flows have been coming into the small- and mid-cap funds rather than diversified equity funds because people are probably just looking at recent past return and chasing a particular market-cap space."

Small-cap funds accounted for most of the investments for a 10th straight month, at 41.71 billion rupees, compared with outflows worth 18.80 billion rupees from large-cap funds, the data showed.

The drop in equity mutual fund inflows, however, was more than compensated for by foreign portfolio investors (FPIs) buying in domestic equities in July.

Contributions through systematic investment plans (SIPs) - in which investors make regular payments into mutual funds - hit a record 152.45 billion rupees in July, when over 1.5 million new SIP accounts were opened.

SIP contributions had fallen 0.1% in June.

"The SIP money coming in every month is keeping markets happy, which is likely to continue, but incremental growth could now be a little slower," said Avinash Gorakshakar, head of research at Profitmart Securities.