ELSS shines despite tax regime changes

Equity-linked savings schemes (ELSS) remain one of the few tax-saving options under the old tax regime that offer significant equity exposure - serving the dual purpose of tax efficiency and long-term wealth creation. Even as Section 80C faces an uncertain future, ELSS continues to be a reliable choice for investors sticking with the old regime. These funds operate like flexi-cap funds but come with a mandatory three-year lock-in period, allowing flexibility in sector and market-cap allocations. On average, ELSS funds currently hold 72 per cent of their net assets in large caps, 22 per cent in mid caps and the remaining 6 per cent in small caps. Key highlights & trends Performance remains strong: For the second year in a row, three out of four ELSS funds outperformed their benchmark. Half of these funds delivered an impressive alpha of 5 per cent over the BSE 500, reflecting exceptional stock-picking and portfolio management skills. Even during the market correction since the BSE 500's peak on September 26, 2024, ELSS funds have proven more resilient, with the majority of them outperforming the index by an average of 2 per cent. Over any 10-year period, their reliability has stood out, with a 99.7 per cent likelihood of beating returns from PPF (assuming a rate of 7.1 per cent). New tax regime dampening investor interest: With 72 per cent of taxpayers now in the new tax regime (as per the Finance Minister in August 2024), ELSS fund inflows dropped from Rs 4,000 crore in 2023 to Rs 2,847 crore in 2024. Notably, inflows remain concentrated in January-March, reflecting the persistent trend of last-minute tax planning. What's driving the outperformance: Key sectors such as communication, construction, automobiles, capital goods and services. Parameters 2024 Number of active ELSS funds 36 Assets Rs 2.38 lakh crore Asset-weighted expense 0.85% BSE 500 Return in 2024 16% Asset-weighted category return in 2024 21% Average return of top quartile funds 30% Average return of bottom quartile funds 14% Asset weighted mid- & small-cap exposure 23% Three most popular funds SBI, Quant, Parag Parikh Three least popular funds Axis, Nippon, ABSL Note: Returns, expense and portfolio-level attributes are as of December 31, 2024. Popular funds based on net flows up to December 31, 2024. Suggested read: Top ELSS funds for investors in the old tax regime Changes in recommendation Funds moved to Buy: HDFC ELSS Tax Saver Fund moved to Hold: HSBC ELSS Tax Saver Fund moved to Sell: Axis ELSS Tax Saver , UTI ELSS Tax Saver Fund and Index Names Rating 5Y SIP Return (%) Risk Grade Sharpe Ratio (%) Avg. no. of stocks Expense Ratio (%) Assets (Rs cr) BSE 500 TRI - 18.46 - 0.68 Aditya Birla SL ELSS Tax Saver 1 12.86 High 0.47 68 1.02 15,343.16 Axis ELSS Tax Saver 1 13.44 High 0.24 74 0.79 35,953.73 Bandhan ELSS Tax Saver 4 21.43 Above Average 0.76 70 0.66 6,822.