Generative AI Fears Hit Mutual Fund Portfolios

Declines in IT stocks have seen mutual fund holdings lose an estimated ₹50,000 crore (around 12 billion dollars) since early February. It is due to fears that generative AI will disrupt the industry  have led to declines in mutual fund holdings in the top ten IT stocks from ₹3.56 lakh crore at the end of January to ₹3.04 lakh crore as of February 13. 

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The rapid development of AI (artificial intelligence) is threatening the business of many of India's software exports by negatively impacting demand for coding and IT services performed by people. 

During this period, the Nifty IT index dropped by 14%, while there was broad-based selling across the segment.

Major IT Stocks Lead Declines

The most heavily weighted IT stocks were the largest declines among the top ten. Infosys was down 16.5%, TCS was down 14%, and HCL Technologies was down 14.2%. Tech Mahindra was down 12%, and Persistent Systems and Wipro were each down approximately 10%. 

Mutual fund holdings in Infosys have decreased from ₹1.37 lakh crore to ₹1.14 lakh crore, TCS from ₹62,270 crore to ₹53,660 crore, HCL Technologies from ₹40,885 crore to ₹35,080 crore, and all other IT stocks, including Tech Mahindra, Coforge, Mphasis, and Wipro, have experienced similar declines in the value of their mutual fund holdings. 

Fund Houses Bear Heavy Exposure

SBI Mutual Fund has the largest position of around ₹620 billion in the top five IT stocks, followed closely by ICICI Prudential Mutual Fund and HDFC Mutual Fund with ₹50 billion and ₹416 billion, respectively. 

UTI Mutual Fund and Nippon India Mutual Fund each have approximately ₹297 billion and ₹283 billion, respectively, while Kotak Mutual Fund, Mirae Asset Mutual Fund and Motilal Oswal Mutual Fund round out the notable positions.

ACE Equities issued reports indicating the largest positions in Infosys, TCS and HCL Technologies, and the reductions in these positions correlate strongly with pressure across the IT services sector.

AI Developments Fuel Selloff

The recent sell-offs in the IT services sector have been driven by many factors, including the open source release of Anthropic's Cognition suite of plug-ins. These plug-ins will provide tools for productivity, enterprise search, sales, finance, and many other functions across the business.

The plug-ins created a much larger set of capabilities for Claude across a wide variety of operational domains, and the sell-off began to accelerate after the release of these plug-ins, ultimately reducing the software and services revenue.

Palantir revealed that its AI platform will allow many SAP customers to complete cloud migrations in just a few weeks, which many cloud migrations used to take years to complete as several-year-long efforts. Companies that have a high exposure to services generating revenue for their applications are at risk of deflation in those revenue streams and will experience increased pressure.