The Nifty IT index has fallen nearly 17% in a month. Bellwether names such as TCS and Wipro are down over 30% from recent highs. Infosys, LTIMindtree, HCL Tech and Tech Mahindra have also seen double-digit declines. In some cases, stocks have lost as much as one-fifth of their value in a single month.
The sell-off has been driven by anxiety around artificial intelligence and whether it threatens the basic economics of India’s $250 billion technology services industry. Generative AI tools are now capable of writing code, testing software and even maintaining systems. Investors who once viewed Indian IT as a steady compounder are now worried that automation could shrink billable work and pressure margins.
While Aequitas says that the correction is not just about AI hype, but reflects capital allocation choices made over the past five years, for mutual funds, the sector’s weight is very large.
Juzer Gabajiwala, Head of Research at Ventura, said IT is in fact the second largest investment by mutual funds. “Infosys has been in the top 5 holdings amongst all mutual funds put together. Nearly more than 120+ schemes from the equity categories hold IT stocks which have been the favourite of many fund houses,” he said.
Add to that in the calendar year 2025, IT has been one of the major underperformers. “So it is bound to have an impact on mutual funds. It will be interesting to look at the data for February to see how mutual funds are playing with this sector. Their stand vis a vis how the IT sector would perform will determine their outperformance. Impact will be at the scheme levels so lump sum as well as SIPs would be impacted. Sectoral funds which are into IT sector, digital, innovation with heavy IT exposure may see SIP stoppages,” he added.
The concern is not limited to sectoral funds. Many diversified largecap and flexicap funds carry meaningful IT exposure because of the sector’s weight in benchmark indices and its history of stable earnings. When one sector crosses the 10% mark across top schemes, a prolonged downturn can drag on overall returns even if other sectors perform well.Kirang Gandhi, a Pune-based financial mentor, said the risk is often invisible to retail investors. “The real risk for SIP investors isn’t a market crash, but a silent sector overload hiding inside diversified mutual funds,” he said.
He warned that if investors do not know which sectors their SIP is betting on, they may not be as diversified as they assume. “A long winter in one sector can freeze the returns of an entire portfolio. If you don’t know which sectors your SIP is betting on, you’re not diversified enough,” Gandhi added.
Not everyone is convinced that the IT slowdown will turn into a structural decline. Q George Thomas, Fund Manager-Equity at Quantum AMC, said valuations have turned more reasonable after the correction. “After the recent correction, largecap IT valuations are at comfortable levels. IT service spends by global enterprises have been muted for the last 2 years,” he said.
On AI, Thomas believes there is more noise than immediate disruption. “As far as AI is concerned, there is more noise than reality. Our sense is the savings derived out of productivity improvement of global enterprises will be redeployed to new projects. Even if we assume that AI is a major disruptive technology, enough latent technology demand exists for growth opportunities for IT service companies,” he said.
Deal wins could be taken as evidence that demand is not collapsing. Cumulative large deals won by Top 7 IT service companies listed in India has increased by 9% in dollar terms in the last twelve months. Within enterprises, the AI infusion is at a nascent stage.
When enterprise level adoption increases, Indian IT companies would see better demand as they are the ones who would integrate AI with existing systems. “The structural story of IT service players is intact and IT will recover in the medium to long run,” Gandhi said.
For SIP investors, the key issue is time and concentration. SIPs are designed to ride through volatility. Short-term corrections can help average down costs. But if the sector faces a prolonged earnings slowdown and index weights remain high, fund performance may stay subdued for longer than expected.
In next few months, disclosures will show whether fund managers are trimming IT exposure or using the correction to add. Retail investors, meanwhile, may need to look beyond labels such as “diversified” and examine actual sector allocations.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)