While arbitrage can take various forms, 'Arbitrage' mutual fund schemes usually choose to undertake a type known as 'Cash-Futures Arbitrage'.
This involves simultaneous purchase and sale of equivalent quantity of the same security in the 'cash' / spot market and 'Futures' markets
with the aim of profiting from price differences between the two markets.
Spot prices - the ones which are continuously flashed on the stock price ticker on TV - are usually lower than the ones prevailing in the
Futures market. There may be many Futures contracts for the same stock ... with each one expiring on a specific date.
Here's an illustration
Buy equity shares of XYZ for Rs. 300/- on September 15, 2023.
Simultaneously sell Futures contract of XYZ expiring on September 28, 2023 for Rs. 305/-.
On September 28, 2023 the spot and futures price converges.
Hence a relatively ‘low risk’ profit of Rs. 5/- can be earned.
Disclaimer: The above model is for illustration purposes only and should not be constructed as a promise/minimum returns/ safeguard of capital. Mutual Fund investments are subject to
market risks, read all scheme related documents carefully.
