(ELSS), once a staple of tax planning for retail investors, are increasingly finding themselves on the sidelines as more taxpayers migrate to the new tax regime.
According to data released by the, ELSS funds recorded net outflows of ₹650 crore in May, marking the fifth consecutive month of redemptions this year. The category has witnessed net outflows in 13 of the past 14 months.
However, industry experts argue that the trend has less to do with market performance and more to do with a fundamental shift in how investors approach both tax planning and wealth creation.
Why are investors moving away from ELSS funds?
For years, ELSS funds occupied a unique position in investors’ portfolios. They offered tax deductions under Section 80C while providing exposure to equities and carried a shorter lock-in period than most other tax-saving instruments.
That proposition has weakened significantly since the introduction of the new tax regime, where investments in ELSS no longer qualify for tax deductions.
“The persistent outflows from ELSS funds reflect a structural shift rather than a cyclical trend,” said Aparna Shanker, CIO-Equity, The Wealth Company Mutual Fund.
According to Shanker, the primary reason many investors bought ELSS funds was the tax benefit attached to them. As an increasing number of taxpayers opt for the new tax regime, that incentive has become irrelevant for a large section of investors.
“In the absence of a tax incentive, investors are increasingly evaluating mutual funds purely on portfolio suitability, flexibility and long-term outcomes,” she said.
Flexibility is becoming more important
The changing fortunes of ELSS funds also highlight a broader evolution in investor behaviour.
Instead of investing to meet a tax-saving deadline, investors are increasingly choosing funds based on their financial goals, asset allocation needs and liquidity preferences. This has benefited categories such as flexi-cap funds, multi-asset funds and hybrid funds, which offer diversified exposure without imposing a lock-in period.
Shanker noted that, in particular, are emerging as a preferred alternative because they offer similar long-term wealth creation potential through diversified equity exposure while giving investors the flexibility to redeem whenever required.
“Investor preferences today are moving towards flexibility and goal-based investing,” she said. “Rather than allocating capital because of a tax deadline, investors are choosing products that fit their financial objectives and liquidity needs.”
The trend is visible in fund flow data as well. While ELSS funds have been witnessing sustained outflows for more than a year, broader equity categories continue to attract investor interest despite market volatility.
ELSS still has a role for some investors
That does not necessarily mean ELSS funds have become obsolete.
Aditya Agarwal, co-founder of Wealthy.in, believes the continued outflows reflect changing tax preferences rather than a loss of confidence in equity mutual funds as an asset class.
“The continued net outflows from ELSS reflect a gradual shift in investor preference rather than a structural weakness in the category itself,” he said.
According to Agarwal, ELSS funds continue to serve a clear purpose for investors who remain under the old tax regime. For such investors, the combination of tax savings and equity exposure remains attractive, particularly because ELSS carries a lock-in period of only three years, shorter than most competing tax-saving products.
“Despite near-term outflows, ELSS funds continue to remain relevant for investors opting for the old tax regime, especially given their relatively lower lock-in period of three years compared to other tax-saving instruments,” Agarwal said.
He added that many investors are increasingly favouring diversified categories such as flexi-cap, multi-asset and hybrid funds, where investment decisions are being driven more by long-term wealth creation and asset allocation than tax efficiency alone.
Performance remains largely on par with flexi-cap funds
While ELSS funds continue to witness sustained outflows, their long-term performance remains broadly comparable with other diversified equity fund categories.
According to data from Value Research, ELSS funds have delivered an average three-year CAGR of 12.42%, only marginally lower than the 12.75% average return generated by flexi-cap funds.
The data suggests that the recent outflows may be driven less by performance concerns and more by changing tax preferences, as investors increasingly prioritise flexibility and goal-based investing over tax-saving considerations.