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 illustrationDisclaimer: 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.
Please refer to the section titled 'EQUITY ORIENTED FUNDS' on this page
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*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.