Why India’s Largest Active Fund Is Buying Into Beaten-Down IT Stocks Despite AI Fears
Keywords: India mutual funds, IT services, artificial intelligence, active investing, valuation, PPFAS Mutual Fund, Flexi Cap Fund, technology stocks, market sentiment, portfolio allocation
Introduction
As global investors debate whether artificial intelligence will permanently reshape the outsourcing landscape, one of India’s largest actively managed equity funds is taking the opposite view. Instead of avoiding information technology stocks, PPFAS Mutual Fund’s flagship Flexi Cap Fund has been buying into the sector after a sharp selloff, signaling confidence that the market may have become too pessimistic about the long-term outlook for Indian IT services companies.
The move is notable not only because of the scale of the fund, but also because it comes at a time when sentiment toward Indian IT is deeply challenged. Investors have increasingly worried that AI tools will automate large parts of software development, reduce the need for traditional outsourcing, and ultimately weaken demand for the labor-intensive business models that have long supported India’s IT services industry.
Yet Rajeev Thakkar, the fund’s Chief Investment Officer, believes those concerns are overstated. In his view, the market has swung too far toward a worst-case scenario, ignoring the possibility that AI could enhance productivity rather than eliminate the need for IT firms altogether. For long-term investors, that disconnect between sentiment and fundamentals may be creating an attractive entry point.
A Contrarian Bet in a Weak Sector
The PPFAS Flexi Cap Fund, with assets of about $14.9 billion, increased its holdings in IT services companies during the three months ended May, a period in which valuations in the sector fell sharply. The fund also deployed cash that had previously been parked in debt and money market instruments, adding exposure not only to technology but also to financials, utilities, and coal mining stocks.
This active repositioning is significant because it reflects a deliberate willingness to buy when others are selling. In equity markets, sectors that appear structurally challenged often remain under pressure longer than many investors expect. However, for fund managers focused on fundamentals and valuation, such periods can also provide opportunity.
Thakkar’s decision suggests that the fund sees the current selloff in Indian IT as more than just a cyclical downturn. Instead, it may represent a market overreaction to a technological shift that, while important, does not necessarily destroy the industry’s core economic logic.
Why the Market Is Worried About IT Services
The concerns facing Indian IT companies are real. The NSE Nifty IT Index is on track for its worst annual performance since 2008, reflecting growing anxiety about the impact of artificial intelligence on offshore outsourcing. The index has already fallen by about 28% this year, pushing valuations down sharply. Its 2026 forecast price-to-earnings ratio has dropped to 15.7 times, compared with 21.2 times a year earlier.
That decline is rooted in a simple fear: if AI can write code, test software, automate customer service, and assist with end-to-end digital workflows, then enterprises may need fewer external service providers. In the most extreme version of this argument, companies would bring more work in-house, rely on AI-powered tools, and reduce dependence on traditional outsourcing vendors.
For a country like India, whose IT services industry has long been a key export engine and employer, that narrative carries substantial weight. The sector’s business model depends on scale, labor arbitrage, and long-term client relationships. Any technology that compresses those advantages naturally raises questions about future growth and profitability.
Thakkar’s View: AI Will Change the Business, Not Eliminate It
Thakkar does not deny that AI will affect IT services. On the contrary, he appears to accept that the industry will undergo meaningful transformation. His argument is more nuanced: AI may automate some tasks, but it is unlikely to replace human involvement across the entire software lifecycle or eliminate the need for enterprise technology partners.
In his view, the market has become too focused on the downside. Even if AI enables faster code generation or more efficient development workflows, that does not mean clients will stop outsourcing complex technology projects. Enterprises still require system integration, compliance, domain expertise, cybersecurity, cloud migration, maintenance, and ongoing digital transformation work. Many of those tasks are difficult to fully automate, particularly in regulated industries or large legacy environments.
More importantly, productivity gains do not automatically accrue only to customers. If IT firms can deliver more work with fewer resources, they may be able to retain part of the economic benefit through improved margins, stronger pricing power in specialized services, or expanded capacity to take on new projects. In other words, AI may increase industry efficiency without destroying industry value.
This is the core of Thakkar’s optimism: the technology may change the distribution of value within the sector, but not necessarily remove the sector’s relevance.
Valuation Matters When Sentiment Turns Extreme
One reason the fund may be comfortable buying now is valuation. After the recent selloff, Indian IT stocks are far cheaper than they were a year ago. A decline from 21.2 times to 15.7 times forward earnings is not trivial, especially for a sector still characterized by strong cash generation, global client exposure, and relatively stable balance sheets.
For long-term investors, valuation often becomes most important precisely when narratives are darkest. When a sector is widely viewed as structurally impaired, prices can overshoot on the downside. At that point, even modest improvements in growth expectations or margin outlook can lead to significant share price recovery.
This does not mean every IT stock is a bargain, nor does it imply the sector will immediately rebound. But it does suggest that the risk-reward profile may be more attractive than headlines imply. If earnings remain resilient while valuations stay compressed, investors may find that the market has already priced in a great deal of bad news.
The Fund’s Broader Strategy: Staying Flexible and Fully Invested
The recent increase in IT exposure also fits the broader design of a flexi cap strategy. Unlike a narrowly constrained fund, a flexi cap fund can allocate across large-, mid-, and small-cap stocks and shift between sectors as opportunities emerge. That flexibility allows managers to hold cash when valuations are unattractive and deploy it when market conditions improve.
According to the latest monthly report, technology represented nearly 19% of the fund’s portfolio, with roughly half of that invested in IT services companies and the rest in overseas technology names such as Alphabet and Amazon. This indicates that the fund is not merely making a domestic sector bet; it is expressing a broader conviction that technology remains a durable source of value, albeit in different forms.
The purchase of financial, utility, and coal mining stocks alongside IT also suggests a balanced approach. Rather than concentrating on one theme, the fund appears to be repositioning across sectors where valuations, earnings visibility, or cyclical dynamics appear favorable. This kind of disciplined capital allocation is often a hallmark of active management done well.
What This Signals About the Indian Market
The fund’s actions may also carry a wider signal for Indian equities. In recent years, investors have often been willing to pay a premium for growth and stability, especially in sectors with strong earnings visibility. But as global interest rates, macro uncertainty, and technology disruption have changed the market backdrop, investors are becoming more selective.
The fact that a major active fund is adding to IT after a steep correction suggests that professional money managers may be looking beyond the immediate disruption narrative. They may believe that India’s IT industry still has structural strengths: deep talent pools, global delivery capabilities, established enterprise relationships, and proven adaptability through previous technology cycles.
Historically, the sector has weathered numerous waves of concern, from Y2K normalization to cloud computing to automation. Each time, the business model evolved rather than disappeared. AI may prove to be another such inflection point—disruptive, yes, but also potentially additive for firms that adapt quickly.
Risks Remain, and Selectivity Will Matter
Still, optimism should not be mistaken for complacency. AI could indeed compress certain low-end services, reduce manpower intensity, and increase competition among vendors. Not every IT company will benefit equally. Firms with weak pricing power, limited domain expertise, or poor execution may struggle to maintain growth and margins in a more automated environment.
That is why selectivity matters. Investors will need to distinguish between companies that are merely exposed to IT spending and those that can harness AI to improve delivery, deepen client relationships, and move up the value chain. The winners may be the firms that combine scale with specialization and that invest early in new capabilities.
In addition, global enterprise spending remains sensitive to macroeconomic conditions. If corporate budgets weaken, even efficient IT companies may face slower growth. So while valuation has improved, the sector is not without risk.
Conclusion
PPFAS Mutual Fund’s decision to buy beaten-down Indian IT stocks offers a useful reminder that markets often price in fear faster than fundamentals change. While concerns about artificial intelligence and outsourcing are legitimate, they may not justify the level of pessimism now embedded in IT valuations.
Rajeev Thakkar’s perspective is that AI is more likely to reshape the business of IT services than to eliminate it. Productivity gains, cost efficiencies, and evolving enterprise needs could still allow the sector to generate attractive returns, even in a more automated world. For investors, the key question is not whether AI will matter—it clearly will—but whether the market has already discounted too much of its negative impact.
In that sense, the fund’s contrarian move reflects a broader investment principle: when a strong business model is being questioned by a powerful new narrative, discipline and valuation awareness can uncover opportunity. For now, India’s largest active fund is betting that the future of IT is not extinction, but transformation.