Mutual funds did something interesting in July 2026.
Technology allocation climbed from 5.9% in June to 6.6%, marking a 70 basis point increase. This might seem small, but context matters. June had hit an all-time low. The July bounce represents the largest month-on-month increase in sector weight for technology. Yet, the allocation remains 140 basis points below July 2025 levels of 8%, suggesting fund managers are only beginning to rebuild exposure, not going all in yet.
What changed? Valuations.
The index itself surged 19% in July, its biggest monthly gain in six years. This rally wasn't driven by Indian news alone. A global selloff in AI chip stocks wiped over $1 trillion off chip names, sending money toward Indian software services firms that build no AI hardware.
Technology mutual funds dominated the July return chart, delivering 13.87% after declining 6.40% in June. The top nine funds all delivered over 10% returns. ICICI Pru Technology Fund led with 13.83%, followed by SBI Technology Opportunities Fund at 13.73% and Tata Digital India Fund at 13.30%. This performance reversal caught attention, but the real story lies in the stock-level decisions fund managers made.
The sector-level increase translated into specific buying. Mutual funds made net purchases of Rs 306 crore in KPIT Technologies and Rs 289 crore in LTIMindtree during July. Other IT names seeing increased holdings included Sagility, Mastek, and Tata Elxsi. This wasn't random buying. It revealed a clear preference pattern.
Fifty-four mutual funds bought and thirty-two sold KPIT Technologies, resulting in a net change of 5.85 million shares. ICICI Prudential India Opportunities Fund was the highest buyer, acquiring 2.12 million shares. Tata Elxsi saw forty-four mutual funds buying and twenty-one selling, with a net increase of 155,978 shares.
The buying patterns showed a distinct tilt toward mid-cap IT companies. While large-caps like LTIMindtree saw steady accumulation, the conviction appeared stronger in mid-caps like KPIT Technologies. Why? Mid-cap IT companies often have specialized capabilities in emerging technologies like AI, cloud, and digital transformation. They can adapt faster to the AI transition. Their growth potential remains higher, though with more volatility.
Behind the buying lies a complex reality. Christy Mathai at Quantum Mutual Fund identifies revenue deflation as the key near-term challenge. He estimates pricing pressure at around 2-3%, depending on the company and service line. This isn't theoretical. AI-driven productivity gains are translating into pricing pressure as clients seek the benefits of efficiency improvements upfront.
The mechanism works like this: AI enables 25-30% efficiency gains in software development, up to 50% in business processes, and up to 75% headcount reduction in contact centers. Clients see these productivity improvements and demand lower prices. IT firms are shifting from time & material billing to outcome-based pricing for AI projects, linking fees to business impact like cost savings or efficiency gains.
This creates a timing mismatch. Before productivity gains materialize, IT companies face significant near-term margin pressures from AI investments and employee training costs. HCLTech revised its margin guidance downward from 18%-19% to 17%-18%. TCS reported margin impact of 80 basis points in Q1 FY26 due to rising employee costs.
Here's where fund managers diverge. Vaibhav Dusad at ICICI Prudential AMC views AI disruption as a transition phase rather than structural deterioration. He expects IT growth to improve over the next three years, although margins could moderate from current levels. "Once we move through this period, growth should normalize, and three years from now, the growth outlook should look significantly better, although margins may be somewhat lower," Dusad says.
The pace of this transition depends partly on AI deployment costs. Dusad notes that a meaningful decline in AI costs would be needed for adoption to reach the scale of earlier technology cycles, potentially leaving more room for IT services companies during the transition. Evidence suggests AI costs are declining. Small business AI spending decreased from approximately $50/month in 2019 to $20-30/month in 2025, a 40-60% reduction in entry costs.
Mathai at Quantum Mutual Fund doesn't expect structural deterioration in margins. Companies may face near-term costs from AI investments and employee training, but productivity gains could eventually offset those pressures. The key question is the timing gap between investment costs and productivity realization.
Despite near-term challenges, both fund houses see opportunity. Mathai notes that deal activity remains resilient despite weak global discretionary spending. If spending normalizes, Indian IT companies could return to stronger growth, with dollar revenue growth potentially exceeding 6% once the current deflationary phase eases.
The AI-led expansion of the technology-services market could eventually outweigh the deflationary impact of automation. AI is projected to generate $22.5 trillion in cumulative economic value between 2025 and 2031, a compound annual growth rate of 35.6%. A "second wave" of AI-driven IT spending is expected in 2027, driving overall technology spend to levels last seen in the mid-1990s.
Indian IT companies are particularly well positioned for the implementation stage because of existing relationships with global enterprises. They already understand client systems, industry workflows, and regulatory requirements. This makes them natural partners when AI projects move from innovation laboratories into core business operations.
The differing views on AI transition timelines influence positioning strategies.
This aligns with their broader investment philosophy and expertise in managing technology-focused funds. Mid-cap companies (ranked 101st-250th by market capitalization) are in growth phases with more room to expand.
Quantum Mutual Fund prefers larger IT companies given their scale, capabilities, and ability to participate in enterprise technology spending. This preference reflects Quantum's value-oriented investment philosophy and focus on risk-adjusted returns. Large IT companies have the resources to invest in AI capabilities, R&D, and global expansion. Their established relationships with large global enterprises provide stability and predictable revenue streams.
Quantum's Value Fund and ELSS Fund maintained highest IT allocations through the February-March correction. The fund house used the weakness in February and March to add to IT holdings. IT has the highest allocation in Quantum's Value Fund and ELSS Fund, while exposure elsewhere is closer to benchmark levels. However, Quantum is not aggressively adding at current levels and is waiting for better opportunities.
The conditions for global discretionary spending to normalize include macroeconomic stabilization, interest rate environment clarity, and geopolitical resolution. An "uncertainty pause" encompasses strategic suspension of net-new spending across various sectors, including IT. Economic and geopolitical shocks present the greatest risks according to business leaders.
The more meaningful acceleration may emerge towards the end of FY27 or during FY28, when pilot programmes begin converting into enterprise-wide deployments. The transition from experimentation to implementation is critical. Small AI pilots do not generate enough revenue to offset weakness in traditional services. Large-scale deployments involving data architecture, governance, cloud infrastructure, and business-process redesign can produce multi-year contracts worth billions of dollars.
For investors, the key is distinguishing between companies successfully navigating the AI transition versus those facing structural decline. The strongest companies usually consolidate market share because they possess the balance sheets, client relationships, domain expertise, and investment capacity required to adapt. The recovery is unlikely to be immediate or linear, but the evidence increasingly suggests the sector is no longer in a phase of unchecked deterioration. It is entering a period of consolidation, accumulation, and business-model transition.
