It is a general perception that Gilt funds invest primarily in the Government of India bonds and secured deposits with banks/companies. If this is true then why have these funds gone down 5-8 per cent on January 7, 2009 when the market went down 7 per cent following the report of fraud in Satyam Computers?
The fall in the return of gilt funds on January 7, 2009 was not related to the Satyam fraud. It was due to a rise in the 10-year GOI yield that stemmed from the government's announcing a $10 billion additional borrowing plan on that day.
In the first few days of the year, bond yields had fallen sharply on expectations of interest rate cuts and on 7th January, the announcement led to a sharp reversal in the bond yields. Since bond yield and price are inversely related, the rise in yield resulted in a fall in bond prices.
In the past few months, interest rate has fallen quite a bit and the future interest rate outlook is hazy. The yield of G-secs is not a smooth line. They are very sensitive to interest rate change. The above incident proves the volatility of gilt funds.