Arbitrage is the practice of taking advantage of a price
difference in two or more markets. For eg: if the price of rice in Mumbai is Rs
25/kg whereas in Chennai it is Rs 30/kg, then there is an opportunity to buy in
Mumbai and sell in Chennai. This is a simple example of Arbitrage.
Arbitrage mutual funds are funds that take advantage of
similar arbitrage opportunities between the equity spot and futures market. The
spot market is where we purchase/sell shares. The futures market is where we
trade in contracts to buy/sell shares at a future date.For eg: If one buys a 3 month futures contract to buy
Reliance shares, then one is paying a rate today to take delivery of shares
that will be delivered in 3 months.
