Sept 26 (Reuters) - The rally in India's mid- and small-cap stocks will continue amid more inflows into these segments, the head of India's tenth-largest mutual fund said on Tuesday.

"The rally may continue due to more flows and less companies to invest in," Kalpen Parekh, managing director and CEO of Mumbai-based mutual fund DSP, told the Reuters Trading India forum.

Mid- and small-cap indexes have significantly outperformed their larger peer in 2023. The Nifty small-cap 100 index has risen nearly 33% this year, while the Nifty midcap 50 index is up around 29%, versus an 8.7% rise in the benchmark Nifty 50.

DSP Mutual Fund will also launch a small-cap fund this year to take advantage of the inflows to the segment, Parekh said.

"We have approval for launching an index fund of small-cap with high-quality companies," he said, adding that the fund is likely to launch in December.

DSP manages assets of over $16 billion. In 2018, DSP Group purchased BlackRock's 40% stake in DSP BlackRock Investment Managers and was renamed DSP Investment Managers.

BlackRock has returned to India this year in partnership with Mukesh Ambani's Jio Financial Services.

Parekh believes exchange-traded funds (ETFs) in India will continue to grow on the back of factors such as the simplicity of passive investing, driven primarily by money from India's provident funds.

"Individual investors are choosing the index fund route," he added.

Indian asset managers are launching more passive funds in an overcrowded market for active funds, as they struggle to beat benchmark returns, forcing a shift in the $558 billion industry.

Parekh said that DSP's quant fund had underperformed post-pandemic, as the market had rewarded a different set of companies, but expected the tide to turn soon.

"We stick to the rules as defined so when the phase turns, the fund should do well," he said.

(Join Trading India, a chat room hosted on Refinitiv Messenger: https://bit.ly/3TNDwkC) (Reporting by Savio Shetty; Editing by Eileen Soreng)