Technology funds bounced back in July: What investors should know before boosting their IT exposure

Technology mutual funds have regained investor attention after a sharp rebound in July. As per the NSE website, the Nifty IT index rose 16.77% in July, reversing a 9.56% decline in June 2026.

But should investors view the rally as the start of a sustained recovery and consider increasing their allocation? Find out here.

How should investors view July rebound in technology funds?

Aditya Agarwal, Co-Founder, Wealthy.in, explained that “technology mutual funds delivered around 14% average return in July, following a 6.40% decline in June. It should be viewed as a sharp cyclical rebound rather than confirmation that the sector has entered a sustained upcycle.”

He further added that the Nifty IT index gained around 16% in July, its strongest monthly performance in six years, indicating that much of the sector’s recovery was market-driven.

“The rebound came after a prolonged period of underperformance, with IT stocks pressured by concerns around discretionary technology spending, global economic uncertainty, AI-led disruption and weak earnings expectations,” Agarwal noted, citing that part of July’s gain can therefore be attributed to value buying and a reversal of excessively negative sentiment.

He stressed that a sustainable recovery would require improvement in deal wins, technology spending, margins and earnings growth, particularly among Indian IT services companies.

Are fund managers increasing technology allocation in active funds?

Agarwal highlighted that “there is an increase in technology’s share in mutual fund portfolios from a record-low 5.9% in June to 6.6% in July, but it should not automatically be interpreted as a major change in fund-manager conviction”.

He noted that the July increase was likely driven by two factors: active portfolio changes and the strong appreciation in IT stocks.

“When a sector rallies sharply, its weight in an MF portfolio can rise even without substantial fresh buying, as the market value of existing holdings increases,” he explained. This is particularly relevant in July, when the Nifty IT index gained about 16%.

“Therefore, the 6.6% allocation should not be treated as a standalone buy signal,” he added.

Should investors increase their technology allocation now?

Agarwal recommended that investors should not increase their technology allocation merely because of July’s strong rebound. Instead, technology can be considered a satellite allocation within an already diversified equity portfolio, rather than a replacement for diversified equity funds.

Valuations in parts of the sector have become more reasonable, while the July recovery indicates that sentiment is turning less negative.

However, he noted that “risks remain, including slower global IT spending, currency movements, wage pressures, AI-related disruption and dependence on developed-market clients”.

“Investors should therefore consider their existing exposure to IT through diversified funds before adding a dedicated technology fund,” he added.

Investors with little or no IT exposure and a five- to seven-year horizon could consider staggered investments rather than making a large lump-sum allocation after the sharp rally.

Should investors choose active or passive technology funds?

Agarwal noted that technology is a relatively concentrated sector, making index funds or ETFs an option for transparent and low-cost exposure to established IT companies.

“For instance, the DSP Nifty IT ETF has an expense ratio of just 0.17% and seeks to replicate the Nifty IT TRI, subject to tracking error,” he added.

However, he noted that active funds can potentially add value by moving beyond index weights, selecting companies across technology-related segments and investing in international technology stocks. However, performance can vary significantly across these funds.

“Active funds may suit investors willing to accept higher costs and manager risk in pursuit of alpha,” he concluded.