Mutual funds raise IT exposure to 6.6% in July after record low. Is sentiment towards tech improving?

Technology's weight in mutual fund portfolios was recorded at 6.6% in July marking a 70- basis point month on month increase, according to a report by Motilal Oswal Financial Services. The report further showed that the weight in technology sector by mutual funds in July 2025 was 8% indicating a decrease of 140 basis points year-on-year basis.

A sign of improving sentiment?

The increase in technology allocation leaves investors wondering if the fund managers are finding valuations more comfortable after the sector’s underperformance and is this the sign of improving sentiment or a tactical increase and whether the buying is broad-based or concentrated in specific segments of the technology sector.

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Manish Kothari Co-Founder & CEO, ZFunds told ETMutualFunds that this looks more tactical than a genuine sentiment shift, at least for now and as noted earlier, it's largely valuation-led buying rather than renewed conviction in the sector's long-term growth trajectory; growth-oriented managers still need more clarity on AI's eventual impact on IT services revenue pools before turning genuinely constructive, so the enthusiasm remains selective rather than broad-based.

He further said that technology interest remains mixed: large-cap IT is attracting valuation-driven buying, while smaller players are gaining interest for their agility in AI, digital and engineering services and rather than a broad sector rotation, fund managers are selectively buying large-caps on valuations and smaller players on growth potential, with clearer AI-driven demand needed for stronger conviction.

Ketan Gujarathi, Fund Manager at Quantum AMC shared with ETMutualFunds that the improvement in sentiment could be driven by valuation comfort, healthy dividend yields and the absence of major earnings cuts. He believes large-cap IT companies look particularly attractive because their current prices appear to factor in only modest future growth, which he considers achievable.

He added that there are other pockets within technology services that offer strong growth potential. However, these could disappoint if the industry remains in a slow-growth environment for several more quarters.

According to the report, in July 2026, mutual funds showed interests in Technology, Automobiles, E-Commerce, Healthcare, NBFC-Lending, and Telecom, leading to a MoM rise in their weights on a monthly basis.

In the same time period, the stocks that saw the maximum MoM increase in value were Bharti Airtel, Infosys, Bajaj Finance, ICICI Bank, M&M, Eternal, TCS,Torrent Pharma, HCL Tech, and Adani Enterprises.

Ketan said that last month saw a small crack in global AI trade due to lack of monetizing plans for large AI investments and this bodes well for global IT services and software companies as AI-led deflationary pressure may be lower than feared.

Indian IT services may have seen a relief rally due to very low valuation and under-allocation by investors, the IT sector has been reporting lower earning growth from macro slowdown and marginally from AI-led deflationary pressure which led to underperformance. However, sharp cut in valuation multiples appears unwarranted, given earnings growth trajectory doesn’t indicate any decline, Ketan further said.

Kothari said that the 70-bps monthly jump in technology allocation largely tracks price action rather than a genuine shift in conviction and the rallied over the past month was aided by the sell-off in global chip and AI-related stocks, with India increasingly framed as an "anti-AI trade" beneficiary.

Commenting on a YoY drop, Kothari said that underweight tells the more honest story as uncertainty over how much of the value chain AI ultimately displaces from Indian IT services continues to weigh on fund manager sentiment, and that overhang won't lift until the dust genuinely settles on enterprise AI adoption timelines and its impact on discretionary tech spending.

He further said that caution isn't universal and Value and contrarian managers are turning positive on IT, attracted by cheaper valuations, while growth-oriented investors remain cautious over AI disruption.

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Nifty IT index in the current calendar year was down 17.29% whereas in the last six months it was down 5.51%. In the last three months, the index was up 10.97% and 11% in the last one month.

Technology sector mutual funds dominated the July return chart, with the top nine funds delivering over 10% returns during the month, an analysis by ETMutualFunds showed. There were nearly 610 funds in the said time period and top 10 funds were from the tech sector.

Tech sector funds: continue SIP, increase allocation or wait for clarity?

Post seeing recent strong performance by the IT sector based index and tech sector based funds, for investors already holding technology-focused mutual funds, the key question is whether the recent rise in fund managers’ exposure is enough to justify increasing their own allocation, or whether they should continue with existing SIPs and wait for greater clarity on earnings.

Ketan said that in a diversified portfolio, like we manage our funds, we believe the IT sector provides reasonable risk-reward to warrant an allocation and we have good allocation in our value fund, while other funds following growth style may see higher allocation only upon clarity on earnings growth rate.

Kothari said that existing SIP holders stay invested and let the recovery play out; new entrants size the position sensibly and treat it as tactical, not a long-term overweight call, until the AI-impact picture becomes clearer.

BSE 200 had a total allocation of 7.3% in the technology sector against 6.6% by mutual funds. Some fund houses such as Aditya Birla Sun Life Mutual Fund, Franklin Templeton Mutual Fund, PPFAS Mutual Fund, Sundaram Mutual Fund, Tata Mutual Fund and UTI Mutual Fund had more allocation compared to BSE 200.

How other tech funds performed in July

Three other funds based on the tech sector delivered nearly 13% return which included ICICI Pru Technology Fund, SBI Technology Opp Fund and Tata Digital India Fund gave 13.83%, 13.73% and 13.30% respectively in July 2026.

The other three tech funds to deliver double-digit returns were Motilal Oswal Digital India Fund, WOC Digital Bharat Fund and Franklin India Technology Fund which gave 10.93%, 10.59% and 10.05% respectively in the said time period.

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The next tech fund in the list was Invesco India Technology Fund which gave 9.91% return in July. Mirae Asset Hang Seng TECH ETF FoF which gave 8.34% return in the same period

Outlook for next 12-18 months

The technology sector could remain caught between near-term earnings pressure and longer-term opportunities arising from AI adoption. The Motilal Oswal report noted that technology was among the sectors where mutual fund weights increased in July, while several other sectors saw their allocations moderate.

Kothari said that the outlook hinges over three factors with the most critical being how the AI capex monetization question plays out globally; hyperscalers have poured enormous capital into AI infrastructure, and markets are asking when this converts into revenue. Any breakdown in that thesis, or slowdown in capex pace, would make Indian IT a relative beneficiary, reinforcing the "anti-AI trade" positioning already driving recent re-rating.

The other key factors according to Kothari are execution and valuation—how effectively Indian IT adapts to AI and communicates its relevance to investors. While current valuations offer comfort, near-term gains are likely to remain tactical until there is clearer visibility on AI monetisation and the sector’s ability to adapt.

Ketan said that IT services may see a couple of quarters of slow earning growth till macro headwinds and competitive pressure ease and enterprises can’t delay technology spends for long, we will see cyclical uptick over sometime. Thereafter as token costs come down and AI adoption increases, IT services will play a crucial role in integrating AI in the enterprise ecosystem.

He further said that for now, only productivity led AI savings are captured by enterprises, but as databases and workflows are made AI-ready, true potential of AI will be harnessed and this will show up in order book growth and could re-rate the IT sector valuation.

(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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