Arbitrage mutual funds — a type of hybrid equity-oriented fund — takes advantage of the price difference in stocks in the cash and futures market.
Hence, they are best-suited for low-risk investors, as they offer steady returns and carry zero risk of capital losses. As the positions are fully hedged, these funds are effectively risk-free. Moreover, they have the facility to invest a major portion of the portfolio in FDs, debt and money market instruments that offer a better return.
Mutual funds in India mostly trade on cash future arbitrage in individual stocks with liquid future contracts. For instance, Reliance Industries trades at ₹919 in the spot or cash market, and its one-month future trades at ₹924 on the same day.