Risk-Free Rate
The return available on an investment considered to carry no default risk, used as the baseline for all other returns.
Formula
Test: the instrument is a sovereign obligation in the domestic currency, with maturity matching the horizon being analysed
Unit
%
In depth
In India the government security yield is the conventional proxy, with the ten-year used for long-horizon work and the treasury bill for short. No rate is truly risk-free: even a sovereign carries inflation risk and reinvestment risk, and the label means free of default risk in the issuer's own currency only. The choice of maturity matters, because it should match the horizon being analysed, and using a ten-year rate to discount a one-year cash flow is a mismatch. Every valuation and every risk-adjusted return measure rests on this number, so a change in it moves the entire framework.
Worked example
With a ten-year government yield of 7%, a business must earn more than 7% to justify its risk. A fund returning 7.5% with 14% volatility has delivered 0.5 percentage points for a great deal of discomfort.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Risk-Free Rate” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.