Top ELSS Mutual Funds with 5-Year High Returns

Many investors face the pain point of finding investments that reduce tax while also growing wealth. This is where ELSS mutual funds ( Equity Linked Savings Schemes ) come in. These funds are popularly known as tax-saving mutual funds in India, offering Section 80C tax deductions and the potential for significant growth. In this comprehensive guide, we’ll explain what ELSS funds are, highlight the top-performing ELSS funds with high 5-year returns, address common questions, and show how you can make the most of these investments. By the end, you’ll understand how ELSS funds work, their 3-year lock-in period, and how to pick and use them effectively for your financial goals.

What is an ELSS Fund and Why Invest in One?

ELSS funds are a type of diversified equity mutual fund that come with tax benefits. Investments in ELSS qualify for a tax deduction of up to ₹1.5 lakh per year under Section 80C of the Income Tax Act. In real terms, investing the full ₹1.5 lakh can save you up to ₹46,800 in taxes (for those in the highest tax bracket). This dual benefit of tax saving and wealth creation is what makes ELSS funds so attractive.

How ELSS funds work: Like other equity funds, ELSS mutual funds invest primarily in stocks across large-cap, mid-cap, and small-cap segments, aiming to build a well-diversified portfolio. The key difference is that ELSS has a mandatory lock-in period of 3 years, during which you cannot redeem your units. This 3-year lock-in is the shortest among all tax-saving options under Section 80C (for instance, PPF has 15 years, tax-saving FDs 5 years, etc.). The lock-in not only enables you to save on taxes, but also enforces a disciplined, long-term investment approach. By staying invested for at least three years (and ideally longer), your money can ride out short-term market volatility and potentially earn higher returns that beat inflation.

Why choose ELSS? If you’re looking for an investment that provides inflation-beating returns along with tax savings, ELSS funds fit the bill. They have historically delivered better returns than traditional tax-saving instruments (like NSC or fixed deposits) because ELSS returns are market-linked (i.e. tied to stock market performance) rather than fixed.

Over the long term, equities tend to outperform fixed income options, meaning ELSS can grow your wealth significantly while saving taxes.

In summary, ELSS mutual funds are an ideal choice for taxpayers who want to save up to ₹1.5 lakh under 80C and are willing to invest in the stock market for at least a few years. Next, let’s look at which ELSS funds have delivered the best returns in recent years.

Top ELSS Mutual Funds with High 5-Year Returns

One of the key factors investors consider is past performance. While past returns don’t guarantee future results, they do give an idea of how consistently a fund has managed to create wealth. Here we highlight some of the top-performing ELSS funds in India based on 5-year annualized returns (CAGR).

Top 5 ELSS Funds by 5-Year Returns (as of 2025):

1. Quant ELSS Tax Saver Fund

The Quant ELSS Tax Saver Fund has been the top performer in the ELSS category in recent times. The high returns have been driven by the fund’s agile and aggressive investment strategy. Quant ELSS is known for active management- the fund managers dynamically allocate across market caps and sectors, often taking bold calls that have paid off in a rising market.

However, investors should note that this high return came with higher volatility; the fund can outperform strongly but may also see bigger swings. It suits investors with a higher risk appetite aiming for maximum growth.

2. Motilal Oswal Long Term Equity Fund

The Motilal Oswal ELSS Tax Saver Fund is another stellar performer. Motilal Oswal’s investment philosophy (focused on quality companies and long-term growth) has helped this fund consistently beat benchmarks. The fund typically holds a concentrated portfolio of high-conviction stocks (following Motilal’s “Buy Right, Sit Tight” approach). Despite being high risk (equity-oriented), it has rewarded investors handsomely. It’s popular among investors who want a reputed fund house with a strong equity research backing their tax-saving investment.

3. HDFC Tax Saver Fund

HDFC Tax Saver is one of the oldest and largest ELSS funds in the industry, and it has made a comeback in performance in recent years The fund’s strategy is diversified across sectors with a bias towards large-cap quality stocks, which provides stability. HDFC Tax Saver has a long-term track record (inception in 1996) and has seen multiple market ups and downs. Its recent high 5-year return indicates that the fund management capitalized well on the post-2020 market rally. For investors, HDFC’s ELSS offers the comfort of a well-established fund with decades of history, and is suitable for relatively conservative equity investors who still want strong returns.

4. SBI Long Term Equity Fund

This fund from SBI Mutual Fund is a favorite of many investors looking for stability plus growth. SBI’s ELSS fund portfolio balances between large-caps and select mid-caps, aiming for steady long-term appreciation. Being one of the biggest AMCs, SBI MF brings extensive research and risk management to the table. The fund has no exit load and the standard 3-year lock-in. It’s often chosen by moderately conservative investors- those who want high returns but from a fund that doesn’t take extreme bets. SBI Long Term Equity Fund provides a good balance of stability and growth, and its large AUM is testimony to investor trust. It’s a solid option for those who want to invest with a trusted brand and still earn competitive returns.

5. Nippon India Tax Saver Fund

The Nippon India ELSS Tax Saver Fund (formerly Reliance Tax Saver) has traditionally had a mid-cap tilt and a reputation for being a bit aggressive. It has a large investor base, partly due to the strong distribution Reliance AMC had built. The fund’s strategy often involves identifying emerging opportunities in mid and small-cap companies, which can boost returns when those stocks rally. However, it may see higher volatility during market corrections (as mid-caps can swing more). The portfolio is well-diversified across sectors. This fund can be a good addition if you are diversifying your ELSS investments, and want one fund that can provide an extra kicker in returns thanks to its mid-cap exposure.

Next, we will discuss a unique feature of ELSS funds- the lock-in period- which every investor must understand before investing.

Understanding the 3-Year Lock-in Period for ELSS Funds

One key aspect that differentiates ELSS funds from other mutual funds is the lock-in period. ELSS mutual funds have a lock-in period of 3 years, which means you cannot redeem or withdraw your investment for three years from the date of each investment. This is a mandatory requirement under the ELSS guidelines (pursuant to Section 80C rules) and applies to every purchase (whether lump sum or each SIP installment).

Why a lock-in? The 3-year lock-in is actually a benefit in disguise. It instills investment discipline and ensures you stay invested in equity for a reasonable time to ride out volatility. Equity markets can fluctuate wildly in the short term (weeks or months), but a multi-year holding period greatly improves the chances of positive and higher returns. By locking investors in for 3 years, ELSS funds encourage a long-term approach, which is often necessary for equity investing success. In fact, many advisors suggest that you treat ELSS like a 5-year+ investment despite the 3-year minimum, to really reap the benefits of compounding in stocks.

Lock-in implications for SIP: If you invest via SIP (Systematic Investment Plan) in an ELSS, each installment is considered a fresh investment for lock-in purposes. For example, a SIP done on 1st Jan 2025 will be free to redeem on 1st Jan 2028. A SIP on 1st Feb 2025 can only be redeemed on/after 1st Feb 2028, and so on. So at any given time, your recent SIP contributions will still be under lock-in. This is important for planning- if you intend to stop and withdraw, you may need to pause SIPs three years prior. Many investors simply continue holding even after lock-in, treating ELSS as a long-term part of their portfolio.

No premature exit: During the lock-in, you cannot liquidate or switch the units. Even if the market fluctuates or you need funds, redemption is not allowed before 3 years. So, it’s wise to invest money that you won’t need in the immediate short term. The lock-in could be seen as a downside (lack of liquidity), but again, it’s an accepted trade-off for getting tax benefits. Think of it this way: you are trading short-term liquidity for an immediate tax saving and higher return potential.

Taxation on exit: When you redeem after 3+ years, any gains are treated as Long Term Capital Gains (LTCG) from equity. For example, if you redeem and your total gains are ₹1.2 lakh, only ₹20k is taxed at 10%. If gains are within ₹1 lakh, you pay no tax on the gains. In other words, ELSS returns are tax-efficient; even the post-locking gains enjoy favorable treatment (no tax on small gains, and 10% on the rest).

In summary, the lock-in period for ELSS funds is 3 years- it’s a critical feature that you must be comfortable with. It’s actually an advantage compared to other tax savers (due to shorter duration) and helps you stay invested for the medium term. If liquidity in the near term is a concern, plan accordingly (don’t put emergency funds into ELSS). For most investors with a salary or business cash flow, a 3-year hold is manageable for the sake of tax saving and growth.

Having understood the lock-in, let’s compare ELSS funds with other types of mutual funds, including the increasingly popular index funds, to see how they stack up.

ELSS vs Other Mutual Funds (Index Funds and More)

It’s useful to know how ELSS funds compare with other mutual fund categories, both in terms of strategy and benefits:

ELSS vs Regular Equity Funds: In essence, an ELSS fund is a type of equity mutual fund- it invests in stocks just like other diversified equity funds. The primary differences are the tax benefit and the lock-in period. Non-ELSS equity funds have no lock-in and no upfront tax deduction on investment. ELSS funds, by virtue of being under 80C, force you to hold for 3 years but give you a tax rebate for investing. Performance-wise, ELSS funds can be as good as any equity fund. In fact, many ELSS schemes have matched or even beaten the returns of similar equity funds in other categories.

ELSS vs Index Funds: Index funds are passive mutual funds that mimic a market index (like the Nifty 50 or Sensex). They don’t have lock-ins (unless they are in an ELSS wrapper, which is rare in India- most index funds are open-ended without tax benefit). The main draw of index funds is low cost and simplicity: the fund manager doesn’t actively pick stocks, they just mirror the index composition. This usually results in lower expense ratios and returns that closely track the market.

Bottom line: If you want tax savings + equity growth, ELSS is a unique category that delivers both. Many savvy investors do both: max out ELSS for tax benefit, and invest any further surplus into broad index funds or other equity funds for diversification.

Conclusion

ELSS mutual funds are a powerful tool for investors in India- they help minimize taxes while maximizing investment growth. By offering the twin benefits of tax deduction under 80C and equity-linked returns, ELSS funds occupy a sweet spot in financial planning.

To make the most of ELSS funds, keep these points in mind:

• Start Early & Stay Invested: The sooner in the financial year (and in your life) you invest, the longer your money works for you. Aim to hold your ELSS investments well beyond the 3-year lock-in- patience pays in equity investing.

• Choose Funds Wisely: Look at the fund’s track record, consistency, portfolio quality, and fund house reputation. The “best” ELSS fund is one that aligns with your risk appetite and has a reliable performance history. It’s often wise to split across two good funds (for diversification) rather than chasing one hottest fund.

• Use SIP for Discipline: If you find it difficult to time the market or accumulate a lump sum, use SIPs. Systematic investing ensures you don’t miss investing due to market highs or lows, and it enforces the habit of saving every month.

• Keep Your Portfolio Simplified: Don’t overdo by buying too many ELSS funds. A couple of funds are enough for most investors to cover the market. Monitor them annually to ensure they remain consistent. Remember, you can switch to a better fund after 3 years if one fund isn’t doing well (since after lock-in, you’re free to redeem and reallocate).

• Align with Goals: Link your ELSS investments to long-term goals like retirement, children’s education, etc. This will naturally encourage you to stay invested longer and not panic over interim market swings. ELSS can be a great vehicle for goals 5-10 years out, giving both growth and tax relief.

Lastly, don’t hesitate to seek expert advice if needed. Investing can be complex, and it’s okay to ask for guidance. Firms like Wright Research specialize in data-driven investment strategies and can help you select and manage the right mix of mutual funds (including ELSS) tailored to your needs. Wright Research’s experts bring a quantitative and research-oriented approach to portfolio construction, which can be especially beneficial in navigating market complexities and optimizing tax-saving investments. By consulting a professional or using an advisory service, you can ensure that your ELSS investments are aligned with your overall financial plan and risk profile- boosting confidence in your decisions.

Frequently Asked Questions (FAQs)

1. Are ELSS mutual funds risky for first-time investors?

ELSS funds invest in the stock market, so they do carry market risk- their value fluctuates based on stock prices. For a first-time investor, this volatility might be uncomfortable at first. However, ELSS funds are diversified equity funds, meaning they spread investments across many companies and sectors, which reduces risk compared to buying a few individual stocks. The key is the time horizon: equities are generally risky in the short term but much less so over the long term. If you stay invested for at least 5+ years, the likelihood of negative returns reduces significantly.

2. Which ELSS fund gives the highest 5-year returns in India?

As of now (2025), the ELSS fund with the highest 5-year return is the Quant ELSS Tax Saver Fund. It has delivered approximately 28–29% annualized returns over the last 5 years, which is the best in the ELSS category. In fact, Quant ELSS has been a top performer not just in ELSS but compared to most equity funds in general, thanks to some very smart stock picks and timely moves by the fund management.

3. How long should I stay invested in ELSS funds for good returns?

The mandatory minimum is 3 years (lock-in period), but for truly good returns, you should aim to stay invested for 5 years or more. While ELSS funds have delivered strong 3-year returns in many cases, a longer horizon gives your investment more time to compound and smooths out short-term market volatility. Many financial experts suggest treating ELSS like a 5-7 year investment even though the lock-in is 3 years.

4. Can I invest in multiple ELSS funds in the same year?

Yes, absolutely. There is no restriction on investing in multiple ELSS funds in one financial year. From a tax perspective, it doesn’t matter how many ELSS funds you use; what matters is the total invested amount. However, from an investment perspective, one should be cautious about not over-diversifying into too many ELSS schemes. Investing in multiple ELSS funds is allowed, but not always beneficial. Experts often recommend sticking to at most 2 or 3 ELSS funds in a year. Why? Because having too many funds can become hard to track and may lead to overlapping portfolios.

So, while you can invest in multiple ELSS, a prudent approach might be: pick 2 (or at most 3) good ELSS funds that complement each other.

5. Is SIP or lump sum better for ELSS investments?

This depends on your financial situation and market conditions, but generally, a Systematic Investment Plan is considered a prudent way to invest in ELSS for most people. Investing via SIP means putting in a fixed amount every month (or quarter) throughout the year, rather than a one-time lump sum.

What experts suggest: Generally, if you have a large amount of surplus money and you’re keen to deploy it, you can invest in a lump sum (especially if it’s early in the year or if markets have dipped). But if you’re funding your ELSS investment from regular income or are unsure about market levels, SIP is the safer route. It’s also possible to do a combination- e.g., invest a chunk when a market opportunity arises and do SIPs for the rest.