The AI Divide: Indian IT vs. Global Tech Funds

Who would not want to participate in a rally where a company like Taiwan Semiconductor Manufacturing Company (TSMC) has delivered returns of 150 per cent in just one year? With global investing becoming increasingly accessible through international technology funds, the temptation to chase AI-driven opportunities abroad is understandable, particularly when India's IT sector is facing growth challenges. But should investors shift their focus entirely towards global technology funds, or do domestic opportunities still hold merit? The answer lies in understanding the risk-reward dynamics of both approaches and determining which one aligns better with your investment objectives. Here's a closer look [EasyDNNnews:PaidContentStart]

Technology investing has entered a new phase. For nearly three decades, Indian investors looking for technology exposure had a fairly straightforward choice. Buy shares of leading software exporters or invest through domestic technology Mutual Funds that held companies such as Infosys, TCS, HCL Technologies, Wipro and Tech Mahindra. These businesses became symbols of India's rise as a global technology powerhouse and rewarded investors handsomely over the long run.

Today, however, the technology landscape looks very different. The world's biggest technology opportunities are no longer confined to software outsourcing and digital transformation services. Artificial intelligence, semiconductors, cloud computing, data centres, cybersecurity, robotics and automation are reshaping industries across the globe. The companies leading these transformations are largely based outside India, particularly in the United States and parts of Asia.

This shift has sparked a fresh debate among investors. Should they continue relying on domestic technology funds for technology exposure, or should they consider international technology and AI-focused funds that provide access to global innovation leaders? The question has become even more relevant following Taiwan's recent rise in global stock market rankings. Taiwan overtook India in market capitalisation, driven largely by the spectacular rally in semiconductor and AI-related companies.

The development serves as a reminder that some of the biggest beneficiaries of the AI revolution are not software service providers but companies involved in designing and manufacturing the hardware that powers artificial intelligence. As Indian investors increasingly gain access to international mutual funds, exchange-traded funds (ETFs) and fund-offunds structures, technology investing is no longer limited by geography. The challenge for investors is identifying where the greater opportunity exists and determining which investment approach aligns with their risk profile and objectives.

Global Tech Funds Shine
Global technology funds have significantly outperformed our domestic counterparts over the past year, driven by the surge in artificial intelligence-related investments and strong gains in semiconductor stocks. A notable example is the Nippon India Taiwan Equity Fund, which benefited from its exposure to Taiwan's thriving semiconductor ecosystem. One of its key holdings, Taiwan Semiconductor Manufacturing Company (TSMC), has emerged as a major beneficiary of the global AI boom, as its advanced chips power many of the world's leading AI applications and data centres.

The stock has rallied more than 150 per cent over the past year, reflecting strong demand for high-performance computing and AI infrastructure. As a result, funds with meaningful exposure to semiconductor leaders and AI enablers have delivered robust returns, highlighting how global technology funds provide access to segments of the technology value chain that are largely absent from Indian markets

Why India's Tech Funds Lost Momentum
Domestic IT funds have faced a challenging period over the past year, with many delivering negative returns despite the global excitement surrounding artificial intelligence. The primary reason lies in the nature of the Indian IT industry itself. Unlike many global technology companies that are directly benefiting from the AI investment boom, Indian IT firms remain heavily dependent on enterprise technology spending by clients in developed markets, particularly the United States and Europe.

Over the past year, concerns over slowing economic growth, persistent inflation and geopolitical uncertainties prompted many global corporations to adopt a cautious approach towards technology budgets. Clients delayed discretionary projects, prioritised cost optimisation initiatives and reduced spending on large digital transformation programmes. This directly affected revenue growth prospects for Indian IT service providers. Another factor weighing on sentiment was the growing perception that generative AI could disrupt traditional outsourcing and software development models.

While leading Indian IT companies are actively investing in AI capabilities, investors remain uncertain about the long-term impact of AI on billing rates, employee utilisation and overall business models. Such concerns have led to periodic valuation compression across the sector. The sector also entered this phase with relatively elevated expectations following its strong post-pandemic performance. As earnings growth moderated, stock prices adjusted accordingly. Currency fluctuations, slower hiring trends and cautious management commentary further dampened investor sentiment.

Two Very Different Technology Stories
A common mistake among investors is focusing solely on returns while overlooking the fund's nature, its suitability to their investment goals, and the risks involved. At first glance, domestic IT funds and global technology funds may appear to belong to the same category. Both invest in technology-related businesses and both seek to benefit from digitalisation. However, the similarities end there. Domestic technology funds primarily invest in Indian information technology services companies. These businesses help enterprises build software, migrate to cloud platforms, manage technology infrastructure and execute digital transformation projects. Global technology funds, on the other hand, invest across a much broader technology ecosystem. Their portfolios may include semiconductor manufacturers, chip designers, cloud infrastructure providers, artificial intelligence developers, software platform companies, cybersecurity firms and internet giants. In simple terms, domestic technology funds largely invest in companies that help businesses use technology, while global technology funds often invest in companies that create the technology itself.

This distinction is becoming increasingly important in the AI era. If AI were a gold rush, Indian IT companies would be the engineers helping businesses use the new technology, while many global technology companies would be the miners supplying the picks, shovels and gold itself. Understanding this distinction is crucial when deciding between domestic IT funds and global technology funds.

Understanding the Risk-Reward Trade-Offs
Domestic technology funds and global technology funds differ significantly in their risk-return dynamics. Here's a closer look at both –

Domestic Technology Funds
Domestic technology funds offer investors a focused avenue to participate in India's thriving information technology sector, which has been one of the country's most successful wealth creators over the past two decades. For Indian investors, one of the biggest advantages is familiarity. The underlying companies are widely tracked, their business models are relatively easy to understand, and financial disclosures are readily accessible. Investors also benefit from a well-established domestic regulatory framework and corporate governance standards that are generally robust among Large-Cap technology companies.;

However, investors should recognise that domestic technology funds largely represent a specific segment of the technology value chain. Their portfolios are heavily concentrated in software services and outsourcing businesses, offering limited exposure to several emerging technology segments. Investors seeking diversified exposure to multiple technology sub-sectors may therefore find domestic technology funds somewhat restrictive as a standalone allocation.

Global Technology Funds
Global technology funds provide investors with an opportunity to participate in some of the most transformative technological developments shaping the future of the global economy. Such exposure allows investors to benefit from structural growth themes that are either underrepresented or unavailable in the Indian equity market. A key advantage of global technology investing is diversification across geographies, business models and innovation cycles. Investors gain access to companies that often define technological trends rather than merely respond to them.

Many of these businesses possess strong intellectual property, global market dominance and significant research and development capabilities, enabling them to create entirely new markets and revenue streams. At the same time, the opportunities come with meaningful risks. Technologyfocused global portfolios can experience sharp swings in performance, particularly when investor sentiment towards growth stocks weakens or interest rates rise. Concentration risk is another important consideration, as a relatively small number of mega-cap companies often account for a substantial portion of portfolio returns.

Currency movements can either amplify gains or reduce returns for Indian investors. In addition, international investing involves Taxation rules, regulatory restrictions and operational considerations that may differ from domestic investments. The table below can help you assess where you fit as an investor and which technology fund category may be more appropriate. However, these indicators are illustrative rather than exhaustive and should be considered alongside your overall financial plan.

When AI Becomes Costlier Than Humans
For the last couple of years, artificial intelligence has been the biggest driver of global technology stocks. Investors rushed towards semiconductor companies, AI infrastructure providers and technology giants on expectations that AI would fundamentally reshape the global economy. But beneath the market excitement, a more complicated story is beginning to emerge. Corporate AI spending is exploding. Companies are spending aggressively on AI models, cloud infrastructure, data centres and automation tools.

In many cases, technology budgets that were expected to last a year are being consumed within a few months as businesses race to deploy AI across functions. Uber reportedly exhausted its entire 2026 AI budget within the first four months of the year, prompting its COO to question whether the spending is delivering sufficient value. The economics of AI are proving more complex than many initially expected. The rise of "token economics" has become a major concern.

Every AI query, prompt and workflow consumes computing tokens, creating recurring costs that can escalate rapidly as usage increases. Recent studies show that advanced AI agents can consume up to 1,000 times more tokens than traditional AI interactions, often with highly unpredictable costs. Discussions across industry forums increasingly focus on controlling AI spending rather than simply expanding usage. Microsoft has reportedly started discontinuing most of its direct Claude Code licences, encouraging its engineering teams to transition to GitHub Copilot CLI.

This raises an important question for investors. If AI adoption is proving expensive and complex, who stands to benefit in the next phase of the AI cycle? While much of the market's attention remains focused on chipmakers and AI platform providers, the real challenge for businesses is no longer gaining access to AI. It is implementing it effectively, controlling costs and generating measurable returns. That shift could create a significant opportunity for companies that help enterprises turn AI investments into business outcomes.

Is This Indian IT's Re-Entry into the AI Story?
And this is where Indian IT companies could re-enter the spotlight. As enterprises move beyond experimentation and begin deploying AI at scale, they will need support in integrating AI into existing systems, redesigning business processes, modernising legacy technology infrastructure and ensuring governance, security and regulatory compliance. These are areas where Indian IT firms have built deep expertise over decades. Unlike semiconductor manufacturers or AI model developers, Indian IT companies may not be the first beneficiaries of the AI boom.

However, they could become important enablers of AI adoption. History suggests that every major technology wave eventually creates demand not only for innovators but also for implementation partners who help businesses translate technology into productivity gains. The challenge is timing. Many global corporations are still evaluating the return on their AI investments, while project approvals remain selective and spending decisions are subject to greater scrutiny than before.

As a result, earnings growth across India's IT sector has lagged the explosive growth witnessed by some global technology leaders and semiconductor companies. Yet if the AI narrative gradually shifts from building models to extracting business value, the advantage could tilt towards technology service providers. In that scenario, Indian IT companies may emerge as key participants in the next phase of the AI economy, helping enterprises ensure that AI becomes a profitable business tool rather than an expensive experiment.

Amid growing optimism that higher AI implementation costs could work in favour of Indian IT service providers, the Nifty IT Index staged a sharp recovery in the second half of May and early June, rallying nearly 12 per cent in just 12-13 trading sessions. However, a single weak session subsequently erased almost half of these gains, once again raising questions about the sustainability of the sector's growth trajectory.

Investors looking to invest in domestic IT stocks should avoid making decisions solely on the belief that valuations have corrected significantly from their peak levels, as accurately predicting market bottoms is nearly impossible. At the same time, existing investors need not panic over short-term volatility. A prudent approach would be to closely monitor industry developments and gradually build exposure to fundamentally strong companies through a staggered investment strategy, such as a systematic investment plan (SIP), rather than making lump-sum bets.

Do Investors Need to Pick a Side?
Amid this uncertainty, investors may find themselves grappling with a key question: What should they do now? As discussed earlier, the choice between domestic and global technology funds should be guided by an investor's risk appetite, investment horizon and overall portfolio objectives. However, does that mean investors must always choose one over the other? Not necessarily.

The debate is often framed as an either-or decision, but in reality, domestic and global technology funds can play complementary roles within a portfolio. For many investors, combining both categories can result in a more balanced and diversified technology allocation. The key consideration is not whether to choose one or the other, but how much exposure to allocate to each. The ideal mix will depend on an investor's individual circumstances, existing portfolio composition and long-term financial goals.

Innovation is no longer confined by geography. The technologies shaping the future are being developed, manufactured and deployed across interconnected global networks. For investors, the opportunity lies not in choosing between domestic and international markets, but in building diversified exposure to the broader ecosystem driving digital transformation, productivity gains and long-term economic growth.

The Bottom Line
The debate between domestic IT funds and global technology funds is ultimately about much more than fund selection. It reflects a broader transformation taking place across the global economy. Technology is no longer confined to a single geography, and neither is innovation. Artificial intelligence may be developed in the United States, powered by chips manufactured in Taiwan, hosted on cloud infrastructure spread across multiple regions and deployed by technology service providers in India. The future of technology will be built through an interconnected ecosystem rather than within national borders.

The emergence of AI has undoubtedly expanded the investment universe. Its potential to transform industries, improve productivity and create new business models is immense. However, while AI may reshape the world in profound ways, it is unlikely to replace everything. Human creativity, judgment, relationships and domain expertise will continue to play a vital role even in an increasingly automated world. As with every major technological revolution, there will be winners, losers and periods of excessive optimism along the way. For investors, the key is to avoid confusing a powerful long-term theme with a short-term investment fad.

Chasing every technology rally can be risky. The objective should not be to own every popular theme, but to build a portfolio capable of creating sustainable wealth over decades. The next decade of wealth creation is unlikely to belong exclusively to one country, one sector or one technology. It will emerge from a global network of innovation, computing power and digital transformation. Investors who recognise this broader picture and position their portfolios accordingly may be best placed to benefit from the opportunities that lie ahead.

A well-constructed portfolio should be diversified across asset classes, and within equities, across market capitalisations, sectors and investment themes. Technology is just one segment of the broader equity universe, but given its long-term growth potential, it deserves a place in many portfolios. Rather than choosing between domestic and global technology opportunities, investors may consider a combination of both, allowing them to participate in India's technology services story as well as global innovation trends.

The exact allocation should depend on an investor's conviction, risk appetite and overall portfolio objectives. As a broad guideline, technology exposure could be limited to around 10-15 per cent of the equity portfolio. Such an approach helps reduce FOMO (Fear of Missing Out), enhances diversification and allows investors to participate in technology-led wealth creation while keeping risks under control. Stay tuned for more in-depth insights to help you identify and capitalise on emerging investment opportunities. Happy investing!
 

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