An arbitrage fund is a type of mutual fund that seeks to generate profits by exploiting price differences of the same asset in different markets—primarily the cash (spot) and derivatives (futures) markets—through simultaneous buying and selling transactions.

Key Features and Benefits

• Equity-Oriented Hybrid: Must invest at least 65% of assets in equities and equity derivatives, but with fully hedged positions to minimize market risk.
• Low Risk: The simultaneous buy-sell transactions help minimize exposure to market fluctuations, making these funds less risky than pure equity funds.
• Tax Efficiency: Despite their hybrid structure, arbitrage funds enjoy equity-oriented tax benefits, making them more attractive compared to regular debt funds for certain investors.
• Suitable for Volatile Markets: These funds tend to provide better returns during periods of increased market volatility where arbitrage gaps are more frequent.

Arbitrage funds are best suited for conservative investors looking for low-risk, tax-efficient parking of money in short-to-medium investment horizons, especially during periods when markets are volatile.