Mutual funds cut IT exposure to all-time low of 5.9% in June. Contrarian opportunity or signal for caution?

Technology's weight in mutual fund portfolios slipped to 5.9% in June 2026, down 70 basis points month-on-month and 240 basis points year-on-year, according to the latest Fund Folio: Indian Mutual Fund Tracker by Motilal Oswal Financial Services.

This reduction in exposure by mutual funds raises an important question for investors—should they interpret this as a warning sign or as an opportunity to accumulate the sector for the long term?

Shivam Pathak, CFP and Founder of Asset Elixir told ETMutualFunds that lower exposure reflects concerns around slower global technology spending and uncertainty around the impact of AI on traditional IT services. However, declining allocations and improving valuations could create opportunities for long-term investors.


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Another expert, Bharath Rathore, Executive Director, Anand Rathi Wealth Limited shared with ETMutualFunds that the reduction in exposure is largely a result of profit booking and portfolio rebalancing following the sector's strong run in previous years and additionally due to geopolitical uncertainties, slower enterprise technology budgets, and AI-led disruption across GCCs, has turned overall sector outlook negative in near term.

However, the sector may remain cautious in the near-term due to lower discretionary technology spending, AI penetration risk, geopolitical uncertainties and lower earnings guidance for FY27, Rathore further said.

The technology's weight in mutual fund portfolios in May 2026 was recorded at 6.6% whereas that in June 2025 was recorded at 8.3%, the report said.

During the month, technology was among the sectors that witnessed the sharpest decline in mutual fund allocation by around 7.4%, while fund managers increased exposure to sectors such as private banks and healthcare.

The report said that the month witnessed noteworthy changes in the sector and stock allocation of funds. On a MoM basis, the weights of Private Banks, Healthcare, NBFC - Lending, Automobiles, Retail, E-Commerce, Real Estate, Consumer Durables, and Logistics increased, while those of Technology, Oil & Gas, Utilities, Metals, Consumer, Telecom, Insurance, NBFC – Non-Lending, and Cement moderated.

A buying opportunity post sharp reduction?

According to the report, the technology sector saw a dip of 7.4% in sector value on a monthly basis, followed by the oil & gas sector which saw a dip of 2.9% in the sector value.

The all-time peak of the Nifty IT Index is 45,377.75, which was reached on December 10, 2024. Since December 10, 2024, Nifty IT - TRI corrected 22.67%. In the last three years and five years, it gained 1.38% and 2.48% respectively.

The index fell nearly 21% in the past one year. In the last six months and in the last three months, 23.32% and 4.86% respectively.

Technology stocks have corrected from their earlier highs, leading to more reasonable valuations. This has sparked debate over whether investors should gradually build exposure or wait for clearer signs of an earnings recovery.

Rathore said that investors should avoid taking investment decisions based on institutional ownership trends, rather one should focus on underlying fundamentals and their overall asset allocation strategy and he recommended investors avoid investing in sectoral/thematic categories as they are associated with concentration risk and tend to undergo cyclical performance.

He further said that while IT may continue to benefit from structural themes such as cloud computing, cybersecurity and digital transformation could support long-term demand. However for investors instead of making a concentrated bet, they are suggested to invest in diversified equity funds which enables auto diversification across the sectors and categories and helps to avoid concentration and ride across market cycles.

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To this pathak said that the sector looks more attractive from a valuation perspective than it did a year ago. Long-term investors can consider gradual exposure, while being prepared for near-term volatility.

Allocation to IT funds or stay diversified?

There are nearly 32 funds based on IT sector including active and passive funds who have completed one year of existence in the industry, of which Mirae Asset Global X Artificial Intelligence & Technology ETF FoF gained the maximum of around 57.49%, followed by Edelweiss US Technology Equity FOF which delivered 33.56% in the last one year.

Bandhan Nifty IT Index Fund lost the most of around 22.29% in the last one year and Axis NIFTY IT Index Fund lost 22.13%. ICICI Pru Technology Fund lost 13% in the last one year, Quant Teck Fund lost 9.76% in the same period.

Although technology remains an important part of the economy, experts caution against making concentrated bets through sectoral funds. Diversified equity funds already provide exposure to leading technology companies while reducing concentration risk.

Pathak said that diversified funds should continue to remain the core portfolio holding and IT funds can be considered as a small satellite allocation for investors with a long-term view on the sector.

Rathore said that investors should avoid investing in any specific sectorial/thematic funds as they tend to undergo cyclical performance and increase concentration risk associated with performance in any single sector. Instead investors are suggested to invest in active diversified equity funds which gives exposure across the segments, sectors, themes including IT sector and reduces the concentration risk and helps to maintain stability in the portfolio across different market phases.

The report said that the stocks that witnessed the maximum MoM decline in value were Infosys, NTPC, TCS, Hindalco, Reliance Industries, Tata Steel, Persistent Systems, HCL Tech, BSE, and ONGC.

BSE 200 had a total allocation of 6.5% in the technology sector against 5.9% by mutual funds. Some fund houses such as Aditya Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, Motilal Oswal Mutual Fund, PPFAS Mutual Fund, Sundaram Mutual Fund, Tata Mutual Fund and UTI Mutual Fund had more allocation compared to BSE 200.

Allocation and way ahead for IT sector

Despite near-term uncertainties, experts remain constructive on the long-term outlook for the technology sector, supported by digital transformation, cloud adoption and AI-led opportunities.

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Rathore said that in the near-term IT sector may remain mixed due to a series of short-term headwinds such as moderation in discretionary IT spending, geo-political uncertainties, and AI-led revenue disruption in traditional consulting services. However, long-term growth remains structurally strong with growing AI adoption in Indian IT companies, cloud migration, cyber security will help to create a meaningful order pipeline.

He further said that once global technology spending gradually recovers, Indian IT companies are well-positioned to benefit from these structural growth trends. Moreover, the current phase can be viewed as one of cyclical moderation rather than a deterioration in the sector's long-term fundamentals.

Pathak said that around 5-10% allocation to the technology sector is sufficient for most investors and the long-term outlook remains positive, although the sector may continue to face short-term challenges.

(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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