Indian IT stocks have been under sustained pressure for the past four sessions, dragging benchmark indices lower amid concerns that artificial intelligence (AI) is likely to disrupt the labour-intensive domestic tech sector. The Nifty IT index plunged almost 1% on Monday, February 16, taking its four-day selloff to 9.4%. On a month-to-date basis, the index is down 14.7%.
As the Indian IT sector commands a high over 10% weightage in the benchmark indices, the ripple effect of the downturn in the sector is echoing loudly through the Indian stock market.
Top MFs own 10% or more in technology stocks
India’s top mutual funds are increasingly becoming a point of debate as they hold a sizeable exposure to technology names.
Parag Parikh FlexiCap Fund (PPFAS), India’s biggest fund by assets of ₹1,33,970 crore, has parked a quarter of the funds in tech names. It not only holds Indian IT companies like Infosys, HCL Tech and TCS but also some of the “Magnificent Seven” names like Amazon, Alphabet, Facebook and Microsoft — a double whammy for retail investors amid the tech-led meltdown in the markets globally.
Kotak Midcap Fund, ICICI Pru Value Fund and Kotak Flexicap Fund have also parked 14-16% to tech stocks. Barring Nippon India Smallcap Fund, having ₹65,000 crore AUM, all other top Indian MFs have 10% or more weightage in tech names.
The concern around IT is not stemming from balance sheet stress — most large IT firms remain cash-rich and operationally disciplined — but about growth visibility and valuation reset.
The key reason behind the selloff, which started last week after Anthropic’s launch of its AI platform Claude, is that AI is creating a structural shift in Indian IT services by reducing timelines and automating tasks, putting pressure on the traditional headcount-based outsourcing model.
Investors are concerned that layoffs are likely in routine-heavy areas as fewer people will be needed to deliver the same outcomes. Even ERP implementation, as highlighted by Palantir’s recent focus, is now vulnerable to AI disruption.
Brokerage Motilal Oswal, in a note on February 5, said that increasing adoption of generative AI may erase up to 12% of the sector’s revenue.
“Before Palantir’s comments on ERP, we estimated 30-40% of IT services revenues at risk from AI deflation, largely focused on app development, maintenance, and testing. Assuming a 30-50% productivity hit on low-level work in these areas, we believe 9-12% of IT services revenue stands to be eliminated. We expect this to happen over 3-4 years, underscoring a ~2% hit on revenue growth. each year,” the brokerage said.
In the coming quarters, AI adoption could create headwinds for deal wins, potentially impacting topline, making close monitoring of deal flow essential to assess its real impact, opined Vinod Nair, Head of Research, Geojit Investments Limited.
In the US, concerns over whether massive AI investments will generate adequate returns are pressuring big tech companies. Amazon, Google, Meta and Microsoft collectively are expected to spend around $650 billion in the race for AI dominance, as per a reuters report.
“Revenue guidance for several large players hovers around 2–3% growth, sharply lower than the double-digit expansion seen in earlier cycles. At the same time, global peers have pivoted aggressively toward AI-led platforms, automation, and proprietary innovation. Indian IT, still largely dependent on legacy services and cost arbitrage, is seeing its core offerings being optimized by AI tools rather than expanded by them,” said Harshal Dasani, Business Head at INVAsset PMS.
Shifting FII focus
Flows are also telling a story. Foreign institutional investors (FIIs) have been reducing exposure, shows Trendlyne data.
FII holding in TCS has declined by 2.5 bps to 10.4% in the December quarter of FY26 from 12.7% a year ago. In the ongoing selloff, ₹10 lakh crore mark”>TCS shares have seen their market cap slip below the ₹10 lakh crore mark.
Similar selling has been visible in Infosys, where DIIs — largely domestic mutual funds deploying retail SIP money — have absorbed the outflows. FII holding in Infosys dipped to 30.3% from 32.9% as DII stake rose to 22.1% from 20.5% a year ago.
Other tech heavyweights like Wipro, HCL Tech and Tech Mahindra have faced similar fates.
Should retail investors worry?
IT stocks have been underperformers for some time now. In 2025, they lost 12.58% as India emerged as an anti-AI trade, and amid a slowdown in discretionary spending. In 2026 so far, they have lost another 15%.
The key question is, should retail investors panic?
Market veteran Sunil Subramaniam pointed out that the worst of the fall is already behind us. Mutual funds have taken a hit, and for retail investors to panic sell at this time and exit will not be the smart choice, as they will be converting their paper loss into cash loss.
He believes that the AI-led disruption was overblown by the stock market reaction. “The AI developments will change the face of the industry, but investors should rely on experienced fund managers to understand who could emerge as the winners.”
Ajit Mishra of Religare Broking said that investors holding sector-specific funds like IT funds should think about their strategy and keep a close eye on developments.
He believes in the short term it is better to avoid IT, but investors should not worry about their long-term holdings. “I believe that, considering the kind of dent most of these IT companies are facing at present, there will be some model or explanation about how IT companies are integrating AI into their order-servicing model. Therefore, if you are an investor, you should not read too much into the recent AI disruption,” he opined.
Dasani also believes that retail investors should not panic for now, but they need to pay close attention.
“A 10% or higher allocation to IT across leading mutual funds reflects the sector’s historic stability, strong cash flows, and governance track record. However, this cycle is different. If earnings growth remains muted while other sectors benefit from domestic capex and manufacturing momentum, overweight IT allocations could dilute portfolio returns. The worry is not solvency — it is stagnation,” he added.
Commenting on the IT sector outlook, Subramaniam told Mint that as days progress, Indian IT companies will be a major part of the revolution, as they adapt their business models to the evolving conditions. He advised keeping an eye on the IT summit in Delhi this week for cues.
Dharmesh Kakkad, Senior Fund Manager, ICICI Prudential AMC, earlier this year, told Mint that they are overweight on technology as the space stands out due to extreme pessimism, low implied growth assumptions, strong balance sheets, high cash generation, and improving deal momentum.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
