Tech funds in freefall after IT rout - here's why diversified funds emerge as the real winners

IT and sector fund

• Technology funds fell 13.45 percent in one month amid IT selloff
• Mutual funds lost Rs 74,052 crore in IT stocks in 2026
• Diversified funds outperformed tech funds with smaller declines

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Technology funds are feeling the impact of the IT selloff, with the category down 13.45 percent in one month and 15.79 percent so far in 2026. The shift has been sharp, even after delivering 10.68 percent average returns over three years, the recent 8.72 percent one-year drop shows how quickly sector momentum can weaken.

The pressure is visible in institutional portfolios too. Mutual funds have lost about Rs 74,052 crore in IT stocks this year, while LIC’s losses stand near Rs 42,500 crore. A large part of this erosion is linked to sector heavyweights, with Infosys and TCS together accounting for nearly Rs 40,936 crore of mutual fund losses.

This mirrors the broader market trend, where the IT index has fallen nearly 20 percent this month, its steepest drop since September 2008. Even over three years, returns remain muted at about 1.65 percent, showing how extended weak phases can flatten gains despite earlier rallies.

Technology mutual funds mirror the correction

This weakness has directly shown up in technology mutual funds. Over the past one month, losses have been sharp across schemes - HDFC Technology Fund fell 16.19 percent, while ICICI Prudential Technology Fund dropped 15.64 percent. Most funds posted close to double-digit declines, showing the correction has been broad and sector-wide.

The pressure is visible beyond the immediate selloff. On a 1-year basis, most technology funds remain in the red, while YTD declines largely range between 11 percent and 18 percent across schemes.

Broader markets tell a more stable story

The gap becomes clear when compared with the broader market. The Nifty 50 TRI gained 1.55 percent in the past month even as technology stocks corrected sharply. Over one year, the benchmark returned 13.99 percent, while the year-to-date decline is limited to 2.59 percent, much smaller than the fall seen in IT.

Over three years, the Nifty 50 TRI delivered 14.64 percent returns compared with just 1.65 percent for the IT index. Put simply, while the technology pack struggled, the broader market’s diversified exposure helped cushion the fall and keep long-term gains steadier.

A similar trend is visible within large-cap funds across time frames.

On a 1-year basis, returns across the large-cap category broadly ranged between about 9 percent and 20 percent, with several schemes clustering in the 12–16 percent band, in sharp contrast to technology funds that remained in the red.

The difference is also visible in 2026 so far. Large-cap funds saw only mild declines, largely between flat and about -3.5 percent, compared with the 11–18 percent drop seen across technology funds.

This gap highlights a simple point: when one sector falls sharply, diversified funds tend to feel less pressure because their exposure is spread across multiple sectors.

Lt Col Rochak Bakshi explains, “SEBI’s categorisation rules require sector funds to invest about 80 percent in one sector. That means they will fully reflect the pain during sharp drawdowns like the IT correction.”

He adds that “conviction in sector investing must be backed by data rather than narratives, because concentration magnifies both gains and losses.”

Flexi-cap funds reinforce the diversification advantage

The resilience of diversified categories becomes clearer when looking at flexi cap performance. With the flexibility to shift across sectors and market caps, these funds have managed to limit downside even amid volatility.

Nilesh D Naik, Head of Investment Products, Share.Market (PhonePe Wealth) says “The performance of sectoral and thematic funds is significantly more cyclical than the broader market, so sharp drawdowns are more common compared to diversified equity funds.”

Few flexi cap funds remained within a narrow YTD decline band and continued to show strong long-term compounding, reflecting the benefits of dynamic allocation.

The Nifty 500 TRI, a proxy for diversified market exposure, delivered 14.93 percent over one year, while its 2026 decline is limited to 2.26 percent. Longer-term returns also remain steady at 14.49 percent over five years and 16.08 percent over 10 years.

Naik adds, “Infrastructure indices took more than a decade to recover after the 2008 crisis, and technology stocks also experienced long recovery periods after the dotcom crash. In comparison, diversified portfolios have usually bounced back faster. Broad-based equity funds often recover within two to three years after a fall, while sector-focused portfolios may take much longer to regain lost ground.”

Allocation lesson for investors

Experts say the current correction does not undermine the relevance of thematic strategies, but it highlights their intended role.

While diversified funds may not deliver the sharpest rallies, their ability to balance opportunities across sectors often provides stability when cycles turn.

Bakshi adds, “Sector funds should form part of a satellite allocation and may involve some degree of market timing.”

For long-term investors, this balance between participation and resilience remains the core advantage of diversification.