What is a risk-free investment and how does it work?

A riskfree investment refers to an investment where the investor is guaranteed to earn a return without risking their capital. In India, a common example of a riskfree investment is a savings account or fixed deposit account in a bank or post office. The principal amount deposited in these accounts is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to Rs 5 lakh per bank or post office.

In a savings account, the interest rate is typically lower than inflation, meaning that the real return (the return adjusted for inflation) may be negative. However, in a fixed deposit account, the interest rate is generally higher than the inflation rate, which means that the real return may be positive.

The riskfree nature of these investments means that the investor is not exposed to the volatility and risk of loss that is present in other types of investments such as stocks, mutual funds, or real estate. However, the returns are generally lower than what one could expect from riskier investments.