The "caterpillar" [technically it is a larva, since it is hairless] prone to infection by the fungus lives underground in alpine grass and shrublands on the Tibetan Plateau and the Himalayas at an altitude between 3000m and 5000m. Spending up to five years underground before pupating, the caterpillar is attacked while feeding on roots. The fungus invades the body of the Thitarodes caterpillars, filling its entire body cavity with mycelium and eventually killing and mummifying it. The caterpillars die near the tops of their burrows. The dark brown to black fruiting body (or mushroom) emerges from the ground in spring or early summer, always growing out of the forehead of the caterpillar. The long, usually columnar fruiting body reaches 5-15 cm above the surface and releases spores.

In Nepal caterpillar fungus is found on the subalpine pastures in Dolpo in Karnali Zone and Darchula in Mahakali zone. It is also common in Bhutan and India's Himachal Pradesh and Uttarakhand Himalayas. Reports of distribution outside of "High Asia" are erroneous and relate to other species of Cordyceps, e.g. Cordyceps militaris.

It is not certain how the fungus infects the caterpillar; possibly by ingestion of a fungal spore or by the fungus mycelium invading the insect through one of its breathing pores.