SBI's deposit rate at 7-year low, should FDs be your only option?

India's largest bank in terms of assets, State Bank of India on Tuesday slashed its interest rate on one-year fixed deposit for less than Rs 1 crore to 6.75%, a drop of 15 basis points. This is the lowest in seven years. 

Post demonetisation announcement, the banks have been passing on the benefits to customers by slashing the interest rates. 

The bank was offering interest rate at 6.75% back in 2010. Till now, no private banks have announced the reduction of interest rates. SBI rivals ICICI Bank and HDFC Bank still hold rates on one-year deposits under Rs 1 crore at 6.9%. 

So should you park your money in fixed deposits?

FDs are the most favorable investment for Indians. Parking money in FDs make sense if you do not want to take risk or you are a "conservative" investor. 

ALSO READ: Despite banks reducing deposit rates, Mutual Funds are a good investment option

Archit Gupta, Founder & CEO ClearTax said, "There are investors who cannot afford to take any sort of risks. They rely on the guaranteed returns and capital protection that FDs provide. For this certain type of investors, who are generally retired individuals, FDs still make sense, despite slashed interest rates."

However, at the same time, if you are looking for long-term investment and ready to take risk, then FDs should not be your only option. 

Simply because investors in their 20s, 30s and even 40s, who still have a working life ahead of them, FDs don’t make sense. 

For them, there is another option, that is, Mutual Funds.

ALSO READ: Bank deposit rates are falling: What can you do

Mutual funds are better options, bet it debt, equity or hybrid funds. And this is not only because of the higher returns that mutual funds can earn. They are also more tax-efficient than FDs. The interest earned from FDs is added to the investor’s taxable income and taxed at the applicable tax slab rate. 

Mutual funds, on the other hand, are taxed favourably. Long-term gains from debt funds are taxed at 20% after indexation, while long-term gains from equity funds and balanced funds are completely tax-free. 

Adhil Shetty, CEO & Co-founder Bankbazaar.com, said, "Mutual funds allow investors to invest towards any financial objective for any investment horizon. You can buy mutual funds for as little an amount as Rs. 500. You can enter or exit a mutual fund as per your requirement (except ELSS funds). The sheer versatility of mutual funds, the possibility of above-average returns, tax efficiency, easy entry and exit, all make it a great investment option."

Depending on your needs and time-frame choose your investment options!