The new tax regime has changed the game! Why are investors moving away from ELSS funds?

Equity Linked Savings Scheme (ELSS), once one of the most popular investment options to save tax, is no longer the first choice of investors. Due to the increasing impact of the new tax regime, investment in ELSS funds is continuously decreasing. Experts believe that the new tax system has had a direct impact on the demand for these tax-saving mutual funds.

The biggest feature of ELSS has been the tax exemption of up to Rs 1.5 lakh under Section 80C of the Income Tax Act and the lock-in period of only three years. But due to non-availability of 80C exemption in the new tax regime, its attractiveness has reduced.

Investors trend towards other funds

In the last few years, the government has made the new tax regime more attractive. Due to low tax rates and simple tax system, a large number of taxpayers are adopting this option. The impact of this change is clearly visible on ELSS funds. According to mutual fund industry data, ELSS schemes have witnessed consistent outflows in recent years. On the other hand, investment in other equity schemes like flexi-cap, multi-cap, index funds and ETFs has increased. Experts say that investors are not moving out of the equity market, but are choosing more flexible investment options instead of tax saving funds.

Lock-in period is also becoming a reason

ELSS have a lock-in period of three years, whereas most other equity mutual funds have no such obligation. Investors can redeem their investments anytime if needed. This is the reason why investors adopting the new tax regime are now giving preference to such funds, where there is more freedom in both investment and withdrawal.

Will ELSS lose its usefulness?

Financial experts believe that the relevance of ELSS has not completely ended. For taxpayers who still opt for the old tax regime, this remains an effective means of saving tax and investing in the equity market.

However, the success of ELSS funds in future will depend more not on tax benefits alone, but on their performance and returns to investors. With the expansion of the new tax regime, this category of funds will have to show better performance to attract investors.