February witnessed a sharp correction in the Indian IT sector stocks, with the Nifty IT index itself falling by nearly 20% — its sharpest monthly decline in 23 years.The month began with fears around Anthropic’s AI assistant, Claude, potentially replacing human-led software workflows and thereby hitting traditional IT services. Over the course of the month, four leading IT companies — TCS, Wipro, HCL Technologies and Infosys — lost between 15 and 21%.With key indices and mutual funds’ performances affected, there is growing anxiety among investors and fund managers alike. If investors are wondering if they should exit IT stocks, taking cue from an anticipated AI-led disruption that may hurt the Indian IT services industry, investment managers seem to be playing safe, as many maintain that ‘diversification is the best strategy’.This also stems from a belief that no one really knows whether AI will end up hurting the Indian IT sector or if Indian IT companies will be quick enough to adapt and take advantage of the technology.Further, the fall will matter beyond direct holdings, as investors also have significant exposure to IT companies through their mutual fund holdings, with MFs parking sizable funds in these companies. As of the quarter ended December 2025, while MF holding in Infosys stood at 22%, the share in HCL Tech was at 9.1%. MF holdings in TCS and Wipro are at 5.5% and 4.9%, respectively. On aggregate, the current value of MF holdings in these four IT companies stands at over Rs 2.1 lakh crore.The sharp decline in global IT stocks in February may have been triggered by Anthropic’s announcement around Claude’s advancing capabilities in software workflows. However, investment managers in India believe the correction cannot be attributed to AI concerns alone.Many point to weak near-term revenue growth projections for IT companies as a more immediate driver of negative sentiment.Story continues below this ad“While the discussion around AI disruption is dominating headlines, we have to look at the cyclical and structural position of the IT sector,” said the CIO of a leading mutual fund, requesting anonymity. “The global IT services industry is growing at about 3–5%, and Indian IT firms have traditionally gained market share in that environment. But capturing incremental market share has become more challenging. With industry growth now slipping below 3%, that is a serious concern.”He added that, irrespective of AI’s long-term impact — which may play out over the next three to five years — current earnings momentum is already weak. “That is hurting sentiment more than the distant risk of AI-driven disruption. There are structural issues beyond AI.”The 'SaaSpocalypse' | Why a new Anthropic AI workplace suite triggered a tech stock crash in US and IndiaOthers believe the correction is also linked to changing assumptions around long-term growth. “Stock prices reflect the net present value of future cash flows,” said Nilesh Shah, MD, Kotak Mahindra AMC. “While AI may not materially impact near-term cash flows, it could alter terminal growth assumptions (related to long-term value). That possibility is weighing on valuations.”According to some reports, terminal growth expectations for large Indian IT companies have structurally declined to below 5%, and to under 9% for mid-sized firms. Historically, these assumptions were in the high single digits or even low double digits. “The long-term outlook has weakened. There is uncertainty and confusion, and that is leading to a valuation reset,” said another senior fund manager.Is the AI-linked concern justified?Story continues below this adWhile concerns around AI are visible, fund managers are not yet taking extreme positions on the sector. Many are relying on the industry’s track record of adapting to technological shifts.“There is uncertainty at this stage, but it would be premature to assume Indian IT companies will fail to adapt,” said a senior fund manager. “We need to see how the competitive landscape evolves.”Another investment manager framed the debate as a balancing act between two opposing forces. “The key question is whether AI leads to deflation in existing services, or whether AI adoption drives higher enterprise spending. Time will determine which effect dominates. For now, the risk-reward appears reasonable, especially within a diversified portfolio context,” said Prashant Jain, founder and CIO of 3P Investment Managers.Also Read | Explained | The unusual divergence in India’s stock market trends: renewed IPO frenzy amid placid secondary marketsHe added that capital allocation decisions — particularly whether companies pursue buybacks in light of changes in buyback taxation — will also be closely tracked by investors.Story continues below this adThe CEO of another fund house described AI as an evolutionary process rather than an immediate disruption: “Indian IT companies have successfully navigated previous technological transitions. AI is another phase in that journey.”What should investors do?On one hand, senior investment managers are playing the wait-and-watch game for now and avoiding taking any extreme steps based on speculation around AI in the IT services space. It is being suggested that retail investors should take a cue and wait for the story to play out before exiting the sector, given a 15-20% decline in share prices in a month.Shah said that companies that adapt well and evolve will emerge as winners and may even see a jump in their business and revenues. “Investors need to keep their eyes and ears open and take the call as and when they see a change happening and the sector’s response to it. This is a place where you have to accept that you don’t know and so be watchful,” said Shah.Others say that while the decline in share prices provides a window for bottom fishing — purchasing stocks at a low with the expectation of future growth — investors need to diversify. “As of now, there is a lack of clarity on the impact of AI on Indian IT companies, and so the view on the future has weakened. In times of confusion, investors should look to diversify,” said a fund manager.