As IT stocks languish in bear territory, with marquee names like TCS down 32% from peak, HCL Tech sliding 27%, and Infosys tumbling 25%, technology’s weight in mutual fund portfolios has defied gravity. The sector allocation inched up to 7.9% in August 2025, recovering from a 14-month low of 7.8% in July, now commanding the third-largest allocation after private banks (17.5%) and automobiles (8.5%), ahead of healthcare (7.6%).
Data from Motilal Oswal reveals the contrarian story unfolding beneath the surface, as mutual funds, which collectively own about Rs 75 lakh crore worth of assets, bet against market sentiment and FII selling amid weak earnings, global demand slowdown, and AI-driven disruption.
Also Read | HIRE Act 2025: Can US’ 25% outsourcing tax break Dalal Street’s Rs 30 lakh crore compounding machine?
The Rs 5,000 crore Infosys bet
Leading the charge is Infosys, which attracted a massive Rs 5,000 crore inflow from mutual funds, making it their top technology pick, according to calculations by Nuvama. The buying spree comes amid intense debate over the company’s record Rs 18,000 crore buyback announcement, the largest in its history, with critics questioning whether the idle cash could have been better deployed for AI-related acquisitions or technology development.
Major buyers include Nippon India Mutual Fund, Quant Mutual Fund, and DSP, who are also loading up on HCL Technologies and Wipro alongside other beaten-down IT names.Also Read | Explained: What Infosys’ mega Rs 18,000 crore share buyback means for 26 lakh shareholders
4% dividend yield
The sector’s dramatic fall has created an unexpected silver lining of surging dividend yields. TCS and HCL Tech now offer yields of around 4%, while Infosys provides 3% alongside its buyback arbitrage opportunity. Wipro also delivers a 3% yield, making these stocks attractive for income-focused investors.
Most IT stocks remain firmly in bear grip, with LTIMindtree and Persistent Systems also down at least 20% from their peaks.
“We are currently at an equal weight position on the IT sector, supported by attractive valuations,” Vinit Sambre, Head-Equities at DSP Mutual Fund, told ET Markets. “The sector is vital for India, contributing 7.3% of GDP and employing 5.8 million people. Globally, it is equally critical—60% of Fortune 500 companies have established GCCs (global captive centers) in India.”
Sambre believes the structural importance provides a strong cushion despite risks like the proposed HIRE Bill. “Given the absence of comparable talent scale elsewhere, we see limited medium- to long-term risk to the Indian IT services industry,” he adds.
“I believe the IT sector has been under pressure from the global geopolitical-driven slowdown. Over the next 12 months, we expect conditions to improve, giving companies better visibility on deal flows and growth. This makes the sector an attractive contrarian bet at current levels.”
Three-year downcycle creates opportunity
Atul Bhole, Fund Manager at Kotak Mutual Fund, sees the three-year bear cycle as creating compelling value. “We have decent allocation to the IT sector in a few of our funds. Three years of low cycle, solid business models, management & decent enough margin of safety in valuations provide us with enough conviction to back this call.”
“Post this underperformance, valuations are on the lower side & margin of safety is decent particularly from dividend yield perspective. Many IT sector stocks are trading at 2.5-3% dividend yield,” Bhole explains. “We believe the concerns around the US economy & AI are in the last leg post 3 years of downcycle.”
AI threat looms large
However, the contrarian bet faces significant headwinds. Jefferies warns that “AI may drive 20% revenue-deflation in IT services over CY25-30 with higher impact on high-margin revenue streams.” The brokerage expects this to limit growth of their coverage to just 3.8% CAGR and keep margins under pressure.
The research house identifies three key risks: clients may delay IT spending fearing rapid AI advancements will make current investments obsolete; AI-led productivity gains may impact existing revenues by 20% over FY25-30; and clients haven’t fully realized returns on elevated tech spending of $280 billion average over 2021-24.
Despite the challenges, Jefferies notes that among large caps, Infosys and HCL Tech have lower risk of revenue deflation, supporting the mutual funds’ selective approach to the sector.
The contrarian play gains additional support from light institutional holdings in IT stocks, which Sambre believes “adds to the potential for re-rating as sentiment turns.”
As the Rs 75 lakh crore mutual fund industry places its bets on India’s most despised sector, the question remains whether these fund managers will be vindicated as visionaries or caught holding falling knives in a structurally challenged industry.
With automobile allocation climbing to a 10-month high and private bank weights at seven-month lows, the sector rotation story is clearly underway – and IT’s moment of reckoning may finally be at hand.
(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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