Data released on Friday by an industry organization revealed that in February, inflows into India's equity mutual funds reached their highest level in over two years, with small-cap stocks driving the surge despite concerns about valuation.

According to data from the Association of Mutual Funds in India (AMFI), net equity mutual fund inflows increased 23.34 percent sequentially to Rs 26,866 crore ($3.25 billion), the highest level since March 2022.

For the past three years, net inflows into domestic stock mutual funds have totaled Rs 4.82 trillion, which is significantly more than the net inflows from abroad of Rs 17,778 crore.

Thanks in part to inflows into mutual funds, the benchmark NSE Nifty 50 has increased by 54.68% during the past 36 months.

According to AMFI CEO Venkat Chalasani, "Growing interest in sectoral and thematic funds due to the introduction of eight new funds aided equity inflows in February."

In terms of market capitalization, small-cap funds comprised the majority of investments made in equity-oriented schemes; however, their share of investments decreased to Rs 2,922 crore last month from Rs 3,257 crore in January. Mid-cap inflows decreased 12.28% over a consecutive period to Rs 1,808 crore.

For the second consecutive month, net inflows were observed in large-cap equities mutual funds.

In February, small- and mid-cap stocks experienced declines of 0.31 percent and 0.48 percent, respectively, while the Nifty 50 saw a rise of 1.18 percent. So far in March, they have continued to perform poorly.

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

After the spike in the small- and mid-cap sectors last month, AMFI urged asset management firms to guarantee that the right policies were in place to control risks and safeguard investors.

Chalasani continued, "AMFI will release the initial set of disclosures on March 15."

On February 29, Reuters revealed that money managers were requested by India's market regulator to limit one-time contributions in small- and mid-cap funds.

In February, contributions to systematic investment plans (SIPs) reached a record-breaking Rs 19,186 crore.