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Inflows into India's equity mutual funds rose to their highest in nearly two years in February, with small-caps leading the charge despite valuation concerns, data from an industry body showed on Friday.

Net equity mutual fund inflows rose 23.34% sequentially to 268.66 billion rupees ($3.25 billion), the highest since March 2022, data from the Association of Mutual Funds in India (AMFI) showed.

Domestic equity mutual funds have seen net inflows for three years in a row, aggregating 4.82 trillion rupees, well above the net foreign inflows of 177.78 billion rupees.

The benchmark NSE Nifty 50 has risen 54.68% over the last 36 months, aided by mutual fund inflows.

"Rising interest in sectoral and thematic funds due to the introduction of eight new funds aided equity inflows in February," said Venkat Chalasani, chief executive of AMFI.

Small-cap funds accounted for most of the investments among equity-oriented schemes in terms of market capitalisation, although they moderated to 29.22 billion rupees last month from 32.57 billion rupees in January.

Inflows in mid-caps shed 12.28% sequentially to 18.08 billion rupees.

Large-cap equity mutual funds saw net inflows for the second straight month.

Small- and mid-caps stocks fell 0.31% and 0.48%, respectively, in February, compared to a 1.18% gain in the Nifty 50. Their underperformance has extended into March so far.

"We have sought measures to strengthen risk management and enhance disclosures given to investors," Chalasani said.

Last month, AMFI asked asset management companies to ensure appropriate policies to manage risks and protect investors following the surge in the small- and mid-cap segments.

AMFI will share the first set of disclosures on March 15, Chalasani added.

Reuters reported on Feb. 29 that India's market regulator asked money managers to restrict one-off investments in small- and mid-cap funds.

Contributions into systematic investment plans (SIPs) hit a new record of 191.86 billion rupees in February.

($1 = 82.6730 Indian rupees)