IT stocks extend losses: Why diversified mutual funds are safer than thematic funds in a volatile market

Read Time:3 Minute, 39 Second

The sharp fall in IT stocks has dragged tech mutual fund NAVs lower and raising fresh questions for thematic fund investors

Nifty IT index fell over 6 percent, hitting tech-focused mutual funds’ NAVs
Tech funds fell more than diversified equity funds due to concentrated holdings.
Experts suggest reviewing portfolios, not panicking, for small tech investments.

Information technology stocks have taken a knock following the launch of Anthropic’s tools, which have worsened concerns around AI-driven disruption in the industry.

The losses in IT stocks have singed technology-focused mutual funds, highlighting how sectoral funds tend to swing sharply during market volatility.

On February 4, the Nifty IT index recorded its biggest one-day fall since March 2020. As the IT sector extended losses, the index slipped another 1 percent on February 5, taking its two-day decline to around 7 percent.

For mutual fund investors, these short-term swings are part of sector investing and typically reflect market sentiment rather than a fundamental shift overnight.

How thematic tech funds were impacted

The end-of-day data for February 4 showed that sectoral and thematic technology equity funds delivered an average one-day return of -4.71 percent. While this decline was smaller than the fall in IT stocks, it still marked underperformance within the broader mutual fund universe for the day.

Industry experts say the reason is structural, as most tech-focused schemes typically hold concentrated portfolios dominated by four to six large IT companies. As a result, sharp sector-wide corrections tend to translate quickly into NAV declines, unlike diversified equity funds that spread exposure across multiple sectors.

NAV changes differed across individual funds, but most tech funds fell in line with the broader IT sector decline.

Tech funds vs diversified equity funds

The contrast was visible when compared with diversified equity categories. On the same day, flexi-cap funds posted an average one-day return of 0.39 percent, supported by exposure to sectors that either remained stable or moved higher during the session. Over one year, flexi-cap funds delivered an average return of 6.84 percent, highlighting how diversified portfolios tend to cushion sector-specific shocks. Similarly, the Nifty 50 was down by 0.2 percent on February 4.

The figures show that sectoral funds rise faster in rallies and fall harder when a sector turns weak.

What does it mean for investors?

According to Gaurav Arora, Head of Research at SAHI, “Investor response should depend largely on how much technology exposure already exists in the portfolio.” Investors with limited exposure of 5-10 percent should avoid knee-jerk reactions. At this level, IT acts as a sectoral allocation rather than a portfolio driver, and short-term volatility does not materially impair long-term outcomes,” Arora said.

A higher exposure changes the equation. “When tech accounts for 25-30 percent or more of equity allocation, concentration risk becomes real. In such cases, gradual rebalancing helps manage downside risk without exiting the sector entirely,” he said.

For SIP investors, the current fall is not a reason to abandon discipline but it does warrant a review, experts say. If tech funds form a small part of monthly SIPs, continuing unchanged can help long-term cost averaging. Where thematic tech funds dominate SIP allocations, redirecting incremental flows towards diversified equity funds may offer a better balance.

Lump-sum investors are advised to be cautious. This phase is not a straightforward buy-the-dip opportunity. Staggered investments, combined with close monitoring of earnings visibility and business adaptation to AI, are seen as more prudent than aggressive averaging.

“AI is not replacing Indian IT’s role. In many ways, it is shifting companies from cost arbitrage to intelligence arbitrage, where integration, data and execution matter,” Swati Jain, CEO-Wealth at Arihant Capital Markets, said.

“Investors with smaller allocations can treat the correction as part of a sectoral cycle, while concentrated portfolios still warrant diversification.”

While tech funds can enhance returns during favourable cycles, they also carry sharper downside risks. For investors, maintaining portfolio balance matters more than reacting to a single day’s market move, say experts.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Courtsey To : Moneycontrol