Don't be fazed by one-year return; ELSS long-term record is robust

Choose them for their strong wealth creation potential and short lock-in period, especially if you remain on the old tax regime, but don't judge them on past-year returns alone

Equity-Linked Savings Schemes (ELSS), also known as tax-saver funds, were once a favourite investment tool for tax-saving purposes. Now, they are gradually losing investor mindshare, despite their potential to create wealth over the long term.

 

Since April 2025, these schemes have seen net outflows of ₹2,888 crore, according to Association of Mutual Funds in India (Amfi) data. A total of 42 ELSS together managed assets worth ₹2.53 trillion as on October 31, 2025. 

ELSS come with a three-year lock-in and invest a minimum 80 per cent of their corpus in stocks. Besides the active fund options, three passive funds have also been launched in recent times. 

Why has the new tax regime dampened interest in ELSS?

 

The muted interest in ELSS is because investors have embraced the new tax regime. Existing investors could also be exiting after completing their lock-in or achieving their financial goals. 

“The decline is primarily driven by the shift to the new tax regime, which does not offer Section 80C deductions. While ELSS historically offered a good blend of returns and tax efficiency compared to other tax-saving instruments, the removal of the tax incentive under the new tax regime has reduced its immediate appeal,” says George Thomas, fund manager–equity, Quantum Asset Management Company (AMC).

 

How do ELSS still work as long-term wealth creators?

 

ELSS still offer a means to reduce the tax bill for those sticking to the old tax regime. These schemes make diversified equity investments across companies of all sizes. “Diversification across sectors and market caps ensures that growth opportunities are captured while risk is spread more evenly. With the appropriate time horizon and risk appetite, ELSS can be a compelling option for long-term wealth creation,” says Sorbh Gupta, head–equity, Bajaj Finserv AMC.

 

“ELSS offers equity-led growth with the shortest lock-in under Section 80C,” says Nirav R. Karkera, head of research, Fisdom. Thomas adds that the lock-in period in ELSS is only three years, compared to 5-15 years in other tax-saver options.

 

Investments of up to ₹1.5 lakh per year fetch tax deduction under Section 80C.

 

What equity risks should investors keep in mind with ELSS?

 

ELSS can be volatile. “As an equity product, ELSS carries inherent market risk and return variability as outcomes are influenced by broader market cycles,” says Gupta.

 

While the three-year lock-in period helps investors ride out interim volatility, it can also prove a hindrance. “Its key disadvantage is liquidity since the three-year lock-in restricts access to funds,” says Karkera.

 

Who should consider ELSS, and how much can they allocate?

 

Investments in ELSS may not suit investors with low or moderate risk-taking ability. “For investors with the appropriate time horizon and risk appetite, an ELSS can be a suitable addition to a long-term portfolio,” says Gupta.

 

“For moderate investors, using 25-40 per cent of the 80C limit in ELSS offers a balanced approach to tax-saving and diversification. Aggressive investors with a strong risk appetite and long horizon can allocate up to the full ₹1.5 lakh 80C limit to ELSS,” says Karkera.

 

What should investors do after the three-year lock-in ends?

 

Even after the mandatory three-year lock-in ends, investors should remain invested in ELSS. Since these are equity-oriented funds, they require a horizon of at least seven years to deliver inflation-beating returns and to outperform debt-based tax-saving options. A longer holding period also helps investors ride out short-term volatility.

 

New investors should assess whether the fund leans towards large-cap stocks or has a greater allocation to mid- and small-caps. The latter are typically more volatile. They should also avoid judging these schemes solely by their past-year performance, as long-term returns for the category remain strong. 

 

The writer is a Gurugram-based independent journalist