Mutual Funds Raise IT Allocation As AI Fears Ease, Sector Rebounds Sharply

Mutual funds are increasing their exposure to technology stocks after several months of caution, as easing concerns over artificial intelligence (AI)-led disruption, improving valuations and a sharp recovery in information technology (IT) stocks revive investor interest in the sector.

Technology mutual funds gained 13.87% in July, among the strongest monthly returns across equity mutual fund categories, reversing a 6.40% decline in June. The Nifty IT index climbed 19% during the month of July, its biggest monthly gain in six years.

Funds Step Up Buying In IT Sector

The recovery is also showing up in mutual fund holdings. Industry data showed that technology saw the biggest month-on-month rise in sector allocation in July. Mutual fund exposure to IT increased to 6.6% from 5.9% in June, a rise of 70 basis points. The June figure was the lowest on record.

Even after the increase, the allocation was still 140 basis points below the 8% level seen in July 2025. This indicates that fund managers have started adding to their IT holdings again, but the allocation has not returned to earlier levels.

Technology's share was also lower than its 7.3% weight in the BSE 200. Some fund houses, however, had a higher allocation to the sector than the benchmark. These included Aditya Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, PPFAS Mutual Fund, Sundaram Mutual Fund, Tata Mutual Fund and UTI Mutual Fund, according to a report.

Mutual fund buying was also seen in individual stocks. During July, funds made net purchases of ₹306 crore in KPIT Technologies and ₹289 crore in LTIMindtree. They also raised their holdings in Sagility, Mastek and Tata Elxsi.

Growth Outlook Remains Mixed

Fund managers have become more positive on the IT sector, but the outlook remains mixed. AI-led spending is changing client demand and could keep growth under pressure in the near term.

Experts expect growth to improve over the next three years. They largely see the current weakness as a transition period.

AI Impact On IT Sector Seen As Temporary

Fund managers see AI as changing the IT services business rather than hurting its long-term growth. AI is helping companies improve productivity. However, clients also want to get some of these savings through lower prices. This has put some pressure on pricing. However, higher use of AI by businesses could reduce this pressure over time.

Experts also do not expect AI to cause a lasting fall in margins. Companies may face higher costs as they spend more on AI tools and employee training. These costs could be balanced by better productivity over time. Some analysts also expect mid-cap IT companies to grow faster than large-cap entities.

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