India IT Sector Faces 8-Year Low in Mutual Fund Allocation as AI Disruption Fears Spread

India IT Sector Faces 8-Year Low in Mutual Fund Allocation as AI Disruption Fears Spread

The Indian IT services sector — the backbone of global enterprise technology outsourcing — is seeing institutional investors retreat at a historic pace, driven by AI disruption fears.

Allocation Data

Per Motilal Oswal Financial Services (May 18, 2026):

• Technology sector weight in mutual fund portfolios hit 6.7% in April 2026 — an 8-year low
• Down 60 bps month-on-month and 180 bps year-on-year
• Nifty IT Index fell 27.62% over the past year; Nifty IT TRI fell 25.85%
• Funds tracking the tech sector lost up to 26% in one year (Bandhan Nifty IT Index Fund: -26.67%)

Why the Exodus

• Weaker global IT spending and delayed deal flows
• Muted earnings growth
• Concerns Indian IT companies are "losing out on the early AI opportunity"
• Investor preference shifting to domestic sectors: financials, manufacturing, and defence
• Geopolitical uncertainty

Expert Views Split

• Abhishek Jain (Arihant Capital): "AI-led automation will definitely disrupt parts of the traditional IT services business model, especially low-end repetitive work and manpower-heavy outsourcing models" — but large firms adapting to AI consulting, integration, and transformation services may emerge stronger
• Sankaran Naren: Described IT as a "contrarian valuation call" but warned it remains unclear whether it's a "value trap due to AI disruption or a temporary slowdown"
• Rajeev Thakkar: Indian IT companies have historically adapted to Y2K, dotcom crash, and SaaS transitions; AI productivity may expand demand rather than shrink it

Capital Flows Tell the Story

Capital goods, NBFCs, utilities, retail, and defence attracted flows while technology, private banks, healthcare, oil & gas, automobiles, and telecom lost allocation.¹ Infosys, HCL Tech, Wipro, and Persistent Systems saw the largest MoM value declines.