Mutual funds have sharply reduced their exposure to technology stocks amid rising uncertainty around artificial intelligence-led disruption, slowing global IT spending and weak earnings visibility. According to the latest report by Motilal Oswal Financial Services, technology sector weight in mutual fund portfolios slipped to an eight-year low of 6.7% in April 2026, down 60 basis points month-on-month and 180 basis points year-on-year.
The sharp reduction in allocation comes at a time when the Nifty IT index has significantly underperformed broader markets over the past year. Concerns have grown that Indian IT companies may be losing out on the early AI opportunity.
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Explaining the decline in allocations, Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance shared with ETMutualFunds that Technology allocation has declined due to weaker global IT spending, delayed deal flows, muted earnings growth, and a current investor preference for domestic sectors such as financials, manufacturing, and defence. The current geopolitical situation has also affected allocations to the technology sector.
Abhishek Jain, Head of Research, Arihant Capital Markets told ETMutualFunds that, said that this decline is largely driven by concerns about slowing global IT spending, weaker discretionary demand, and uncertainty about the pace of recovery in key markets such as the US and Europe; investors have also grown cautious because the sector is currently undergoing a transition phase driven by AI-led disruption and shifting client spending priorities.
In addition, sectors such as financials, capital goods, and defence have attracted stronger flows due to better near-term earnings visibility, leading to relative underweight positioning in technology and the sector is not facing a structural decline, but rather a period of consolidation and re-rating as markets assess the long-term impact of AI on traditional IT services models, Jain further mentioned.
The data shows that in the last one year, Nifty IT fell 27.62% whereas the Nifty IT TRI fell 25.85%. The growing influence of artificial intelligence has emerged as one of the biggest concerns for investors tracking the technology sector.
AI-led automation is increasingly being seen as a potential disruptor for traditional manpower-heavy outsourcing businesses, particularly repetitive coding and support services that have historically driven revenues for Indian IT firms.
According to a report by ETMarkets, Big Tech companies continue to push ahead with aggressive capex plans. Microsoft expects to spend $190 billion this year, including about $25 billion attributed to higher component costs. Alphabet and Meta have both raised their 2026 capex guidance to $180–190 billion and $125–145 billion respectively, while Amazon has maintained its guidance at $200 billion.
Among these, investor concerns appear more pronounced in the case of Meta, which lacks the same direct cloud-driven benefits from AI spending as peers like Alphabet, Microsoft, and Amazon, the report further said.
Rise of AI-led automation to disrupt traditional IT services business models in India?
Jain said AI-led automation will definitely disrupt parts of the traditional IT services business model, especially low-end repetitive work and manpower-heavy outsourcing models. However, it may not necessarily become a negative for the entire sector.
“Large IT companies are already adapting by investing heavily in AI, cloud transformation, cybersecurity, and automation. Companies such as Accenture have already indicated strong demand for AI implementation projects.”
He further said that the nature of work is likely to evolve rather than disappear completely and Indian IT companies that successfully transition from traditional execution-based models to AI-led consulting, integration, and enterprise transformation services are likely to emerge stronger over the long term
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Echoing a similar view, Minocha said that AI-led automation is disrupting traditional, manpower-based IT service models, particularly in repetitive coding and support roles. However, firms that adopt AI, cloud, and cybersecurity strategies are likely to benefit over time.
What veteran fund managers say
Speaking at the Groww India Investor Festival 2026 in Mumbai during a session titled The Art of Not Losing Money, some veteran fund managers, despite the weak sentiment, believe that selective opportunities are emerging in the beaten-down IT sector. Sankaran Naren recently described the sector as a “contrarian valuation call”, though he cautioned that it remains unclear whether the sector is facing a value trap due to AI disruption or a temporary slowdown.
Rajeev Thakkar, meanwhile, argued that Indian IT companies have historically adapted successfully to major technological disruptions including Y2K, the dotcom crash and the SaaS transition.
Thakkar also suggested that AI-driven productivity improvements may eventually expand demand rather than shrink it, drawing parallels with industries where falling costs increased overall consumption. Naren pointed out that if AI disruption becomes severe enough, its impact may extend well beyond IT services alone, yet markets are currently “selectively punishing” the sector.
Do technology stocks offer attractive long-term opportunities now?Minocha said this correction has made select technology stocks more attractive for long-term investors. Segments related to AI, cloud, cybersecurity, data analytics, and digital engineering appear more resilient than traditional legacy IT services.
Jain said the technology sector still offers attractive long-term opportunities, though the recovery may take time and not be immediate and the recent correction has improved valuations in several quality companies, especially those with strong balance sheets, global client relationships, and capabilities in AI, cloud, cybersecurity, and digital transformation.
He further said that segments linked to AI implementation, cloud migration, data analytics, and enterprise automation appear particularly attractive over the long term, as global enterprises continue to allocate spending toward technology efficiency and automation; while traditional low-growth IT outsourcing models may face pressure, companies adapting to the AI ecosystem could see significant opportunities over the next few years.
The passive and active funds based on the tech sector lost upto 26% in the last one year. Bandhan Nifty IT Index Fund lost the most of around 26.67% in the last one year. Among the active funds, only Edelweiss Technology Fund gave a positive response of around 1.35% in the last one year.
Four international funds based on tech sector, Mirae Asset Global X Artificial Intelligence & Technology ETF FoF, Edelweiss US Technology Equity FOF, Mirae Asset Hang Seng TECH ETF FoF and Mirae Asset Hang Seng TECH ETF gave 67.09%, 44.93%, 6.67% and 4.68% respectively in the last one year.
Current approach and outlook over next 12-18 monthsPost seeing the performance, Jain said retail investors should avoid excessive short-term trading in technology stocks and instead approach the sector with a long-term investment horizon; the sector is currently undergoing a major transition driven by AI adoption, and volatility is likely to remain high over the next 12–18 months.
“Investors should focus on fundamentally strong companies with diversified business models, strong cash flows, and visible investments in AI and digital transformation.”
He further said that the biggest opportunity lies in companies that successfully monetise AI-led demand, while the key risks include slower global tech spending, margin pressure from automation, and delayed enterprise technology budgets; investors should therefore remain selective and use staggered investments rather than aggressive exposure during uncertain market phases.
Minocha said that retail investors should avoid over-concentration and increase exposure gradually through SIPs, STPs or a diversified fund mix; the key opportunities include AI adoption and digital transformation, while major risks are a global slowdown, reduced customer spending, and margin pressure.
Tech sector allocationThe report by Motilal Oswal Financial Services also highlighted that on a MoM basis, the weights of Capital Goods, NBFC - Lending, Utilities, Retail, NBFC - Non Lending, Chemicals, Real Estate, Logistics, and EMS increased, while those of Technology, Private Banks, Healthcare, Oil & Gas, Automobiles, Telecom, Insurance, and Cement moderated.
In terms of value change MoM, the stocks that witnessed the maximum MoM decline in value were Infosys, HCL Tech, Wipro, Lupin, Persistent Systems, Ipca Lab, United Breweries, JB Chemicals, Supreme Industries, and Torrent Pharma.
BSE 200 had a total allocation of 7.4% in the technology sector against 6.7% by mutual funds. Some fund houses such as - Aditya Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, ICICI Prudential Mutual Fund, Motilal Oswal Mutual Fund, PPFAS Mutual Fund, Sundaram Mutual Fund, Tata Mutual Fund, and UTI Mutual Fund had more allocation compared to BSE 200.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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