Risk Free Rate

The risk-free rate of return is a theoretical rate of return on an investment with no risk over a given period of time. In practice, risk-free rate does not exist because even the safest investments carry some amount of risk, however, the risk will be very small. From an investor’s perspective, a risk-free rate is an important number because this rate is the least that he expects from his investments, and the return above this risk-free rate is the return that he earns as a reward for taking the risk of investing.

Government bonds are considered as risk-free investments as the government of India is liable to pay for the return on these bonds, so they carry very low default risk.  In the US, 3-month Treasury bill rate is usually used as a benchmark risk-free rate. While in India, 10-year government bonds are regarded as risk-free.