India's technology stocks have been under pressure for months as investors weigh the impact of artificial intelligence on traditional tech businesses. While the stocks saw recovery in Wednesday's session, the fall has raised an uncomfortable question for mutual fund investors, 'How exposed are their portfolios to the IT slump?'
The Nifty IT index has fallen nearly 20% this month, marking one of its sharpest short-term corrections in recent years. The decline comes after a strong rally driven by optimism around artificial intelligence, which had pushed valuations to elevated levels. Now, as global demand uncertainty resurfaces and foreign institutional investors continue to sell Indian equities, the sector is facing renewed stress.
For direct equity investors, the impact is visible in stock prices. For mutual fund investors, however, the effect depends largely on where their money is allocated.
Thematic and Sectoral Funds Feel the Heat First
The biggest impact is being felt in technology-focused mutual funds. Sectoral and thematic funds that invest primarily in IT stocks have the highest allocation to the sector, making their net asset values highly sensitive to any movement in technology shares.
The average allocation to IT stocks in sectoral technology funds stands at 68.07%. This means that when IT stocks fall sharply, these funds are likely to mirror that performance closely.
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Several schemes have high exposure. Tata Digital India Fund and Motilal Oswal Digital Fund each have nearly 78% allocated to IT stocks. HDFC Tech Fund has over 71% exposure, while Aditya Birla Sun Life Digital India and ICICI Prudential Technology Fund also have allocations close to or above the category average.
The impact is visible in returns. Over the past year, many of these technology funds have posted negative returns, reflecting the volatility within the sector.
Because these funds are concentrated bets, they tend to outperform sharply during rallies but can also correct significantly during downturns. For investors, that translates into higher volatility.
Diversified Funds Not Immune
While thematic funds are the most exposed, diversified equity funds are not entirely insulated.
Large-cap, flexi-cap, multi-cap and large-and-midcap funds typically maintain some exposure to IT stocks because the sector forms an important part of benchmark indices. However, their allocations are far lower compared to sectoral funds.
Data from ACE MF shows that average IT allocation stands at 8.01% in large-cap funds, 10.26% in mid-cap funds, 7.96% in large-and-midcap funds, 9.78% in flexi-cap funds and 7.06% in multi-cap funds.
That said, some diversified schemes have taken higher-than-average exposure. Motilal Oswal FlexiCap has allocated over 24% to IT stocks, significantly above the flexi-cap category average. Motilal Oswal Large & Midcap and Motilal Oswal Multicap funds also carry IT allocations of 22% and 19%, respectively. NJ FlexiCap and Franklin Large & Midcap similarly hold double-digit exposure.
For such funds, the IT correction can create a measurable drag on net asset values, even if the rest of the portfolio remains stable. However, the broader diversification typically cushions the blow compared to pure technology funds.
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What It Means for Investors
The current correction is effectively testing how mutual fund portfolios are positioned. Investors in sectoral technology funds are likely to see sharper volatility, as their returns closely track the Nifty IT index. Diversified fund investors may experience some impact, but it is usually moderated by exposure to other sectors such as banking, capital goods or consumption.
The key takeaway is not necessarily to exit at the first sign of volatility, but to understand allocation risk. Sectoral funds are designed for tactical exposure and can be rewarding during upcycles, but they also carry concentrated risk during downturns.
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