Domestic mutual funds have significantly reduced their technology sector exposure to an eight-year low of 6.7% in April 2026, down 60 basis points month-on-month and 180 basis points year-on-year, according to Motilal Oswal Financial Services. The combined assets under management (AUM) of dedicated IT and tech funds stands at approximately ₹40,000 crore as of March 2026. This strategic shift reflects investor caution amid a transition phase for the IT sector, with a preference for domestic sectors like financials and defence due to better near-term earnings visibility. The technology sector currently represents 7% of India's GDP and 17% of global IT services, though it accounts for only 1% in fast-growing fields such as semiconductors and artificial intelligence.
Over the short term, IT and tech funds have posted negative double-digit returns of approximately -13% to -14% over the last 3 and 6 months, according to Essential Business Intelligence. The Nifty IT index has significantly underperformed, falling 27.62% over the past year while the Nifty IT TRI declined 25.85%. Among passively managed funds, Axis Nifty Index Fund, Bandhan Nifty IT Index Fund, DSP Nifty IT Index Fund, ICICI Prudential Nifty IT Index Fund, Nippon India Nifty IT Index Fund, and SBI Nifty IT Index Fund have fallen below the category median. Actively managed funds have faced deeper corrections, with HDFC Technology Fund and Tata Digital India Fund posting returns of -14% to -16% over the past 3 and 6 months. However, over the medium to long term, these funds have demonstrated strong performance with compounded average growth rates (CAGRs) of 10.3% and 9.7% over 3 and 5 years respectively, outperforming the BSE IT - TRI.
The global technology sector experienced significant pressure in Q1 2026, with Janus Henderson's Global Technology and Innovation Fund falling 7.02% and the MSCI All Country World Information Technology Index declining 6.73%, as reported by Janus Henderson. AI-related disruption particularly impacted software stocks, with Internet infrastructure company Snowflake (SNOW) and Internet platform Meta among the major decliners. Step-function advancements in AI capabilities have widened the range of outcomes for the software sector, compelling fund managers to review their holdings. However, high levels of capital investment benefited semiconductor capital equipment-makers and foundries, as their order books swelled in response to growing demand for agentic AI. The adoption of agentic AI is making winners out of legacy technologies including memory chips, optics, and central processing units that previously had not been considered as direct beneficiaries.
Despite the long-term underperformance, the Nifty IT index jumped 2.4% on May 18, 2026, demonstrating selective buying of AI-capable IT names rather than a wholesale sector reversal. The rally was driven by Coforge's USD 2.5 billion Encora acquisition for AI services, which added approximately 13,000 AI specialists to its team and strengthened its order book in AI implementation services. Companies like Coforge, Tech Mahindra, OFSS and LTIMindtree led the sector's outperformance against a falling broader market. The rupee at 96.17 and continued strength in US technology stocks provided additional catalysts, with gains in major US technology companies improving global risk appetite and boosting optimism around enterprise technology spending demand.
