Mutual funds raise IT bets as AI fears ease, sector sees sharp rebound

Mutual funds are raising their exposure to technology stocks after months of caution, as easing concerns over artificial intelligence disruption, improving valuations and a sharp recovery in IT stocks revive investor interest in the sector.

Technology mutual funds gained 13.87 percent in July, one of the the strongest monthly return among equity mutual fund categories, after falling 6.40 percent in June. The Nifty IT index rose 19 percent in July, its biggest monthly gain in six years.

The recovery is also reflected in mutual fund positioning. According to industry data, technology saw its largest month-on-month increase in sector weight in July. After falling to a record low of 5.9 percent in June, mutual fund exposure to IT rose to 6.6 percent in July, up 70 basis points. However, allocation remained 140 basis points below the 8 percent recorded in July 2025, suggesting fund managers are only beginning to rebuild exposure to the sector.

While the overall allocation remained below the 7.3 percent technology weight in the BSE 200, some fund houses were more bullish. Aditya Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, PPFAS Mutual Fund, Sundaram Mutual Fund, Tata Mutual Fund and UTI Mutual Fund had higher technology allocations than the benchmark, according to a Motilal Oswal report.

The increase in sector allocation was also seen in stock-level buying, with mutual funds making net purchases of Rs 306 crore in KPIT Technologies and Rs 289 crore in LTIMindtree during July. Other IT names that saw increased holdings included Sagility, Mastek and Tata Elxsi.

Growth outlook remains mixed

Fund managers are turning more constructive on the sector, but expect the transition to AI-led technology spending to keep growth and margins under pressure in the near term.

Vaibhav Dusad, senior fund manager at ICICI Prudential AMC, expects IT growth to improve over the next three years, although margins could moderate from current levels. He sees the current weakness as a transition rather than a structural deterioration.

“I believe the sector is going through a transition phase right now. Once we move through this period, growth should normalise, and three years from now, the growth outlook should look significantly better, although margins may be somewhat lower,” Dusad said.

Christy Mathai, fund manager at Quantum Mutual Fund, said the fund house remains overweight IT, with revenue deflation still the key near-term challenge. He estimates pricing pressure at around 2-3 percent, depending on the company and service line.

However, Mathai said deal activity remains resilient despite weak global discretionary spending. If spending normalises, Indian IT companies could return to stronger growth, with dollar revenue growth potentially exceeding 6 percent once the current deflationary phase eases.

AI disruption seen as transitional

AI remains central to the sector outlook, but fund managers increasingly see the impact as a transition in the economics of IT services rather than a threat to the industry’s long-term opportunity.

Mathai said AI-driven productivity gains are currently translating into pricing pressure, as clients seek the benefits of efficiency improvements upfront. But as enterprise adoption matures, higher volumes could offset some of that deflation.

Dusad said the pace of adoption will depend partly on the cost of deploying AI. A meaningful decline in AI costs would be needed for adoption to reach the scale of earlier technology cycles, potentially leaving more room for IT services companies during the transition.

On margins, Mathai does not expect a structural deterioration. Companies may face near-term costs from AI investments and employee training, but productivity gains could eventually offset those pressures.

Finding opportunities

While Dusad expects mid-cap technology companies to continue delivering faster growth than large caps, Quantum is more comfortable with larger IT companies given their scale, capabilities and ability to participate in enterprise technology spending.

Mathai said Quantum had remained slightly overweight IT through the correction and used the weakness in February and March to add to its holdings. IT has the highest allocation in the fund house’s Value Fund and ELSS Fund, while exposure elsewhere is closer to benchmark levels.The fund house is not aggressively adding at current levels, however, and is waiting for better opportunities.