Indian mutual funds have started increasing their exposure to IT stocks following a 19% rise in the Nifty IT index in July. While fund managers are cautiously adding to companies like KPIT Technologies and LTIMindtree, they are closely watching how AI-driven spending affects profit margins. This shift reflects a move away from extreme pessimism as investors digest the real impact of artificial intelligence on the sector.
Indian mutual fund managers are slowly turning more positive on technology stocks, ending a period of intense caution. After a sharp decline in June, the IT sector staged a strong comeback in July, with the Nifty IT index jumping nearly 19%. This change in sentiment has encouraged fund houses to start rebuilding their positions in a sector that had previously faced significant selling pressure due to fears that artificial intelligence would disrupt traditional IT services.
Why Sentiment Is Changing
For much of the first half of 2026, many investors feared that AI would destroy demand for Indian IT services. However, this view has recently shifted. Instead of seeing AI as an existential threat, fund managers now largely view it as a period of transition. While clients are pushing for lower prices to get immediate efficiency gains from AI, the industry is adjusting to this new reality. Investors are now balancing these challenges against more comfortable valuations, as the sector is currently trading at a lower forward price-to-earnings ratio compared to its five-year average.
Buying Activity in Tech Stocks
Data from July shows that the mutual fund industry increased its sector allocation to 6.6%, up from the low of 5.9% seen in June. While this is still lower than the 8% allocation level recorded in July 2025, it marks a change in strategy. This activity was visible in specific stock transactions, with funds showing net purchases in companies such as KPIT Technologies and LTIMindtree. Other companies, including Sagility, Mastek, and Tata Elxsi, also saw increased interest from mutual fund managers during the month.
The Risks Ahead
Despite the recent recovery, fund managers remain cautious about the future. The primary challenge is that AI contracts tend to be shorter in duration, requiring constant deal-winning to maintain growth. Furthermore, discretionary spending in major Western markets remains uncertain due to macroeconomic and geopolitical factors. Experts point out that pricing pressure is still a reality, with some estimates suggesting a 2-3% impact on revenue as clients seek immediate cost savings from their tech vendors.
The sector's reliance on US dollar-denominated revenue also means that currency fluctuations will continue to play a role in earnings. Looking ahead, the key monitorable for investors will be the next set of quarterly earnings and management commentary on deal pipeline health. Investors may track whether IT firms can successfully move from the current deflationary phase to higher volume growth as AI adoption spreads across client businesses.