Over 25% of focused mutual fund schemes held no largecap IT stocks as of July 2026. Fund managers are avoiding giants like TCS and Infosys, fearing that AI disruption and slowing discretionary spending could threaten future profit margins despite current low valuation multiples.
Indian equity markets are witnessing a distinct shift in how domestic mutual funds view the information technology sector. As of July 2026, data indicates that more than one-quarter of focused mutual fund schemes have completely removed largecap IT companies from their portfolios. This move is significant because it highlights a deep skepticism among professional fund managers regarding the future growth of some of the market's largest technology service providers.
While the Nifty IT index has seen price corrections, bringing price-to-earnings ratios to multi-year lows, many managers are not rushing to buy. Instead, major funds such as the SBI Focused Fund and Old Bridge Focused Fund have reported zero exposure to these largecap names. This trend suggests that fund managers do not view the current stock prices as attractive enough to offset the structural risks facing the industry.
At the heart of this caution is the uncertainty surrounding the long-term impact of artificial intelligence. While these technology firms have announced plans to integrate AI into their offerings, investors remain unconvinced. The concern is that AI-led automation may cannibalize existing high-margin services, or that the cost of transitioning to these new models will squeeze profitability. Managers are waiting for clear, tangible evidence that these companies can maintain margins while navigating this technology shift.
Another major pressure point is the slowdown in global discretionary spending. Many international clients are cutting back on non-essential IT projects, which directly impacts the revenue growth of Indian IT majors. When combined with the potential for AI to disrupt traditional outsourcing models, some investors worry that these stocks could become value traps. A value trap occurs when a stock looks inexpensive based on its current earnings, but the company fails to grow, causing the share price to stay low for an extended period.
Investors may monitor several factors to understand if this sentiment shifts. The key will be whether companies can demonstrate sustainable growth in their upcoming quarterly results and provide concrete proof of successful AI adoption that adds to their bottom line rather than just adding costs. Until then, institutional interest in the sector is likely to remain selective, with many funds preferring to wait on the sidelines rather than betting on a quick recovery for the industry giants.