India's Nifty IT Index has fallen 28% this year, marking its worst performance in 16 years, yet the largest funds are bottom-fishing.

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Indian technology stocks are experiencing their worst annual decline since 2008, but the country’s largest actively managed equity fund is choosing to go against the trend and increase its holdings.

According to Bloomberg on Tuesday, the $14.9 billion Flexi Cap Fund under PPFAS Mutual Fund has been steadily increasing its holdings in Indian IT service stocks over the past three months, betting that the market’s concerns about artificial intelligence disrupting the traditional IT outsourcing industry are overly pessimistic.

Rajeev Thakkar, Chief Investment Officer for equity investments at the fund, said in an interview on June 11, "The idea that all jobs will be taken back in-house, that no one will outsource anymore, or that models will be so efficient as to require no human intervention at all — I think that’s unrealistic."

This contrarian move comes as valuations in India’s IT sector have been compressed significantly. The NSE Nifty IT Index has dropped about 28% this year, as worries that AI will erode traditional outsourcing demand continue to weigh on the sector, with Accenture’s recent weak earnings guidance triggering another bout of selling.

Worst plunge in 16 years, valuations at historic lows

The Nifty IT Index’s decline this year is on track to mark its worst annual performance since 2008, with constituent stocks including Indian IT giants Tata Consultancy Services and Infosys.

In terms of valuation, the index’s projected price-to-earnings ratio for 2026 has fallen sharply from 21.2 times a year ago to 15.7 times now. Investors are primarily concerned that as AI technology increasingly penetrates the software development process, demand for traditional IT outsourcing will be systematically suppressed.

Accenture’s recently released pessimistic performance outlook has further worsened market sentiment, causing the sector to tumble sharply last Friday, before stabilizing somewhat on Monday.

Contrarian logic: AI may become a productivity windfall for IT service providers

Thakkar's optimistic outlook for the IT services industry runs counter to current mainstream market sentiment. He believes that while AI may automate some software development tasks, it can also bring productivity gains and cost savings to IT service companies, with part of the benefits retained by the companies themselves.

In his view, the market has become overly pessimistic. "We invest in companies that can generate cash flow right now and have real value," Thakkar said. "As long as the valuation is reasonable and the outlook is acceptable, we will get involved."

Currently, about 19% of the fund's portfolio is allocated to the technology sector, with HCL Technologies and Infosys both among the top ten core holdings. Of this 19%, about half is invested in IT service stocks, the rest in overseas tech companies such as Alphabet and Amazon.

Shifting from cash to equity, not limited to IT

This round of increased investment is not limited to the tech sector. According to Thakkar, the fund also increased its holdings in stocks from the financial, utilities, and coal mining sectors during the same period, with funds coming from cash reserves previously kept in bonds and money market instruments.

The fund’s latest monthly report shows that as of May, the allocation proportion to bonds and money market instruments had fallen to 14.03%, down from a high of 23.77% in April last year. The proportion of core equity holdings rose from 67.30% a year ago to about 70%.

Thakkar previously maintained a high cash position due to elevated stock valuations, but as the market correction offers more attractive entry opportunities, the fund is gradually converting idle capital into equity exposure.

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