ELSS remains relevant even under new tax regime, ideal for long-term investors: DSP MF

DSP Mutual Fund has said Equity Linked Savings Schemes (ELSS) should not be viewed purely as tax-saving instruments, arguing that the category continues to play a meaningful role for investors even as tax incentives under Section 80C become less relevant for a growing number of taxpayers opting for the new tax regime.

The fund house said that while Indian investors today have far wider access to equity products, a key challenge remains the ability to stay invested through market cycles. In this context, DSP said ELSS retains relevance due to its mandatory three-year lock-in, which can help address behavioural shortcomings that often undermine long-term investing outcomes.

“Investor outcomes are often impacted less by product selection and more by behaviour,” said Manish Rathi, Head – Consumer Growth Marketing at DSP Mutual Fund. He noted that during periods of volatility, investors tend to exit early, chase momentum or react to short-term market noise. “The lock-in feature of ELSS can reduce these tendencies by encouraging investors to remain invested through cycles,” he said.

DSP said its internal data shows that the average holding period for digital, do-it-yourself equity investors is about 2.5 years -- shorter than what is typically required to benefit fully from equity compounding. Against this backdrop, ELSS, with its statutory three-year lock-in and diversified equity exposure, functions much like a flexicap equity fund in terms of portfolio construction and historical outcomes, while also embedding an element of enforced investment discipline.

“This makes ELSS relevant for today’s investor environment,” Rathi said, adding that structures which nudge investors to stay invested longer can materially improve the probability of better outcomes, especially when investors are prone to reacting to short-term market movements.

The mutual fund house also highlighted that ELSS investments are often treated as seasonal, lump-sum allocations concentrated around the January–March tax-saving period. DSP said investors could instead consider using a systematic investment plan (SIP) approach to ELSS, making it a year-round allocation rather than a decision driven solely by tax deadlines.

“Long-term investing tends to work best when it is structured and uninterrupted,” Rathi said. He added that SIPs into ELSS can introduce regularity and discipline, while the lock-in feature reduces the risk of premature exits during periods of heightened volatility.

ELSS and its significance

ELSS, or Equity Linked Savings Schemes, are equity mutual funds that offer a dual benefit of market-linked wealth creation and tax deductions under Section 80C of the Income Tax Act. They have the shortest lock-in period—three years—among equity-oriented tax-saving instruments, making them suitable for investors with a higher risk appetite seeking long-term growth.

Historically, several ELSS schemes have delivered strong returns across market cycles. Over the past three years, select top-performing ELSS funds have generated annualised returns exceeding 20%, while five-year returns have also remained robust, underscoring the category’s potential as a long-term equity allocation rather than a short-term tax product.

Industry bodies have also flagged the importance of preserving ELSS under the evolving tax framework. The Association of Mutual Funds in India (AMFI) has sought a separate deduction exclusively for ELSS investments under the new tax regime, similar to Section 80CCD(1B), with a notified cap. Market participants say such a move could help sustain ELSS as a simple, low-ticket entry point into equities and support continued retail participation in capital markets.

Top ELSS funds: performance trends

Performance patterns across ELSS funds further reinforce DSP’s argument. Short-term returns, covering six months to one year, have been dominated by relatively aggressive, high-conviction funds such as Motilal Oswal ELSS and Quant ELSS, which benefited from concentrated portfolios and faster sector rotation during recent market rallies. However, these strategies can also exhibit higher volatility.

In the medium term, spanning three to five years, leadership shifts toward more balanced and diversified strategies. SBI Long Term Equity Fund and HDFC ELSS consistently feature among top performers, reflecting disciplined valuation frameworks, robust stock selection and the ability to navigate multiple market phases—attributes that align well with the ELSS lock-in structure.

Over longer horizons of 10 years, consistency outweighs short bursts of outperformance. Funds such as HDFC ELSS, SBI Long Term Equity and Axis Long Term Equity stand out due to stable investment processes, effective risk control and relatively lower drawdowns during market corrections.

Overall, ELSS return patterns highlight the importance of time in the market, disciplined holding periods and process-driven fund management—reinforcing the category’s relevance beyond tax-saving alone, even under the new tax regime.