Think ELSS is over? You might be mistaken

Summary: As more Indians move to the new tax regime, ELSS funds are quickly losing relevance. However, the biggest advantage of these funds isn’t the tax benefits. Here’s why you shouldn’t write ELSS funds off already and why they may still be useful for certain investors.

Every March, taxpayers used to scramble to find the best tax-saving investments. One such investment is ELSS.

ELSS (equity-linked savings schemes), also known as tax saving funds, are diversified equity funds that qualify for deductions of up to Rs 1.5 lakh under Section 80C. The catch? This perk is exclusive to the old tax regime.

As more Indians migrate to the new regime, that tax carrot has disappeared for an increasing number of investors. The numbers show it: ELSS has seen net outflows of Rs 388 crore over the last three years.

But here's what most investors are getting wrong. Tax savings were never the whole story with ELSS. Strip away the 80C angle, and there's still a compelling case sitting underneath, one that's easy to miss when you're only looking at your tax bill.

A lock-in that works in your favour

ELSS funds come with a three-year lock-in period. Most investors treat this as a drawback. It isn't.

Markets are volatile by nature, and every sharp fall tempts investors to bail out. ELSS's lock-in removes that option: investors must stay put, regardless of market conditions. That forced patience is not a punishment. It is discipline, built into the structure.

Suggested read: Everyone is exiting ELSS funds. Should you, too?

There is, however, a genuine downside. If your ELSS fund has been underperforming for, let’s say, two years, you cannot pull your money out. That is not a small inconvenience. Every month trapped in a lagging fund is a month your money isn't compounding where it should be. Over time, that gap compounds too.

Fund managers have more room to manoeuvre in ELSS

Like flexi-cap funds, ELSS funds can invest freely across market capitalisations. But the lock-in gives their managers something flexi-cap managers rarely have: the freedom to take a long view.

When a manager knows investors cannot redeem on a bad week, they can hold a high-conviction mid-cap position through short-term turbulence, without flinching at redemption pressure. That structural patience filters down into better positioning, and the returns reflect it.

Suggested read: Has the new tax regime hurt ELSS returns?

The numbers back this up. Since 2003, on a five-year rolling return basis, ELSS has outperformed flexi-cap funds 53 per cent of the time and the Nifty 500 TRI index 58 per cent of the time. That is not a category falling behind. That is a category doing its job quietly.

Why ELSS's outflows might actually be good news

Flexi-cap funds have a problem they can't quite shake: size.

As their asset bases have swelled, taking meaningful positions in mid- and small-cap stocks has become increasingly difficult — buying enough to matter risks moving the price. The result is that many flexi-cap funds have quietly drifted toward large caps, not because their mandates changed, but because scale left them no choice.

Suggested read: Flexi-cap funds or ELSS: Which one fits your portfolio?

ELSS doesn't have this problem. The outflows that have shrunk the category have also kept it nimble. Paradoxically, the investors walking away because the tax break is gone are leaving behind a leaner, better-positioned category, one that may now be more capable of generating alpha than it was when everyone wanted in.

So, should you invest in ELSS?

To summarise, if you're on the new tax regime, don’t write off ELSS funds already. The category has a strong long-term track record and has, on several occasions, outpaced flexi-cap peers. Its three-year lock-in also builds the kind of discipline that benefits every investor, especially first-timers or those who struggle to hold steady when markets turn rough.

If you're looking for the right ELSS fund to invest in, subscribe to Value Research Fund Advisor. You'll get analyst-backed recommendations, in-depth fund analysis, and portfolios built around your financial goals.

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This article was originally published on March 31, 2026.