Correction in IT funds
The Nifty Information Technology (IT) index fell 5.9 per cent on February 4, 2026, its biggest daily drop in nearly six years. It slipped by another 0.6 per cent on Thursday. Technology funds are down 5.3 per cent over the past week. Thirty-two funds belonging to this category manage ~₹51,500 crore.
AI fears triggered sell-off
In its fourth quarter (Q4 2025) earnings call on February 2, Palantir Technologies highlighted that one of its AI (artificial intelligence) offerings can compress the timeline for SAP ERP (enterprise resource planning) migration to SAP S/4 from multi-year projects to about two weeks in some cases. That narrative triggered fears that a meaningful portion of IT services work could move away from global, including Indian, IT services companies.
Next, Anthropic announced new AI plug-ins, or workplace automation tools, for its Claude Co-work agent. It claimed that these tools can carry out end-to-end tasks in areas such as legal work, sales and marketing, data analysis, and so on. Investors interpreted this as a direct threat to IT services firms’ labour-intensive model. “With AI now able to perform tasks such as contract analysis and legal document processing, there is concern that IT service providers’ revenues could be affected,” says Gautam Kalia, head–investment solutions and distribution, Mirae Asset Sharekhan.
Will tech spends move away?
A key reason for muted IT services growth is that the spending pool is shifting towards hardware and GenAI adoption on cloud or GenAI platforms. Experts say that when a new technology emerges, some depletion of the existing revenue pool typically occurs. Traditional service offerings tend to face disruption before newer revenue streams scale up meaningfully. “This transition phase is impacting visibility on growth and margins in the short term,” says Manuj Jain, co-founder, Valuemetrics, which provides valuation insights to help market intermediaries carry out dynamic asset allocation.
The risk is perceived to be high this time because of the rapid pace of change. Clarity on how these changes play out may only emerge after a couple of quarters or as long as a year.
Macro headwinds
Besides AI, several other factors are also weighing on the sector. Post-Covid overspending has normalised. This has weighed on growth in 2024 and 2025. Wars and tariffs have created macroeconomic uncertainty. They have reinforced recession concerns and made corporates cautious about spending on IT.
What could drive a turnaround?
Experts say that it is not all gloom and doom for the IT sector yet. Historically, when a new technology has come up, new growth levers have emerged in parallel, enabling IT companies to sustain growth. A new growth engine could again emerge for IT services to support their recovery.
“Companies that adopt and integrate AI advancements could emerge stronger,” says Gautam Kalia, head–investment solutions and distribution, Mirae Asset Sharekhan. Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors, adds that tech firms may also benefit from AI because it could make their own cost structures leaner. Markets may be overly pessimistic by assuming AI will fully disrupt the business models of IT services companies. “What they may be overlooking is that IT services firms can adapt to new realities,” says Dhawan.
Valuations have moderated
Due to the decline in the IT sector over the past 12 months, the IT index is trading at around 21–21.5x one-year forward earnings per share (EPS). The five-year average valuation is about 25x, while the 10-year average valuation is about 22x. Thus, current valuations are near the long-term average and meaningfully below the five-year average.
Avoid knee-jerk reactions
Existing investors should neither exit these funds in haste nor add aggressively to their current allocation. Kalia suggests that they should monitor revenue guidance and changes in new client contracts from IT companies.
Overreaction to negative news must be avoided. “Many of these businesses are cash-rich and can pivot to future growth areas,” says Dhawan.
Show new investor enter now?
Kalia suggests that new investors wait until greater clarity emerges on the outlook for the IT sector. He is of the view that they should avoid buying aggressively. Dhawan suggests that new investors could build exposure gradually through systematic investment plans and systematic transfer plans (SIP/STP), but must avoid lump-sum investments at this juncture to avoid timing risk. “A staggered approach can also help deal with rupee-dollar volatility,” he adds.
The IT sector has a weight of about 8.4 per cent in the Indian equity market. Jain suggests that investors use this as a reference point when deciding whether to go underweight or overweight on the sector. He adds that keeping allocation at around this level will help investors keep volatility in check.
Dhawan suggests that investors enter this sector with at least a five- to seven-year view.
