IT (information technology) stocks have been a cause of concern for Dalal Street for some time now, and the pressure has intensified this month. The Nifty IT index is down 21% and is on course for its worst monthly performance in nearly 23 years, as investors worry about disruption from artificial intelligence.
The sharp selloff has wiped out $68.6 billion in market capitalisation from the 10 Nifty IT constituents in February alone. Even sector heavyweights like Tata Consultancy Services and Infosys have seen significant erosion in value.
While the fall reflects growing unease about AI shortening project cycles and reducing labour-led billing, it has also reset valuations meaningfully.
For some investors, the correction is not just a warning sign but a potential entry opportunity, especially for those with a long-term horizon.
AI RISK IS NOW MEASURABLE
Trivesh D, COO at Tradejini, says the AI risk is no longer theoretical.
“The AI risk is no longer theoretical, it is measurable. Indian IT revenue growth has already slowed to 2–4% in FY25, down from a 10–15% CAGR between FY18 – FY22,” he said.
He pointed out that generative AI adoption accelerated after ChatGPT’s launch in November 2022, with global enterprises cutting discretionary tech spending between 2023 and 2025.
He added that if AI reduces developer hours by even 20–30%, revenue productivity may rise, but overall volume growth could weaken. Early signs of flat headcount growth across Tier-1 IT firms in FY25 despite large deal wins support this trend.
VALUATIONS HAVE CORRECTED, BUT NOT A FIRE SALE
According to Trivesh, valuations have adjusted meaningfully.
“The Nifty IT index is down over 30% from its December 2025 peak, and large caps now trade at ~18–22x FY27 earnings versus 28–30x at the peak,” he said.
He cautioned that while valuations are no longer expensive, they are not “screaming bargains” either.
“If revenue CAGR slips to 3–4% structurally, multiples may compress further toward 15–17x. The sector is in transition, and the market is still pricing moderation, not disruption,” he said.
This is where the debate begins for investors. When a sector corrects sharply due to future fears rather than an immediate collapse in earnings, it often creates selective entry opportunities. But the transition risk remains high.
STOCKS OR IT MUTUAL FUNDS?
On whether investors should buy individual IT stocks or opt for funds, Trivesh believes concentration risk is elevated.
“In the current environment, concentration risk is high. AI’s impact will not be uniform; some firms will pivot faster, while others may lag,” he said.
For most retail investors, he prefers diversified exposure.
“For most retail investors, diversified exposure through a broader flexi-cap fund makes more sense than owning one or two stocks,” he said.
He added a nuance on sector funds.
“Pure IT sector funds can still be volatile because they remain benchmark-heavy toward large legacy names. A diversified multi-cap fund with selective IT exposure may offer better risk-adjusted positioning,” he said.
In simple terms, while direct stocks may offer higher upside if one company adapts quickly to AI, they also carry higher company-specific risk. Funds help reduce that risk, though they may moderate returns.
WHAT SHOULD INVESTORS TRACK?
Trivesh suggests watching revenue per employee and AI revenue contribution.
“If revenue per employee rises while headcount remains flat, AI is boosting productivity but may be limiting incremental revenue growth,” he said.
He noted that AI revenue contribution for large IT firms is currently around 5–6%. If that scales to 15–20% by FY27–28 along with overall revenue expansion, AI would be clearly additive.
“If total revenue stays flat, it suggests cannibalisation,” he added.
HOW MUCH IT IS ENOUGH?
On allocation, he advises moderation.
“For most retail investors, a 5–8% active allocation is sufficient. Nifty 50 already carries ~10–11% IT weight. Overexposure beyond 12% total portfolio weight increases cyclicality risk,” he said.
He added that zero exposure is defensible, moderate exposure is reasonable, and aggressive overweight requires strong conviction in AI-led reacceleration by FY27.
LONG-TERM BET, NOT A TRADE
He is clear that this is not a short-term play.
“This is not a tactical trade. It is a structural thesis, and structural theses demand time. So, at least 3–5 years,” he said.
The next 12–18 months may remain volatile, with earnings clarity emerging only after several quarters of AI monetisation data.
For investors, the message is balanced. AI fears have triggered a sharp correction and reset valuations. That does create room for selective entry. But the sector is going through a transition phase, and clarity on how AI reshapes growth will take time.
The smarter bet may not simply be stocks versus mutual funds. It may be about position size, patience and realistic return expectations in a changing IT landscape.
