Arbitrage funds are opportunistic in nature and retail investors may not be equipped enough to spot the right time to enter and make the most of volatile market conditions. Arbitrage is a process of gaining from the spread between the cash and derivatives market or any two related mispriced assets.
In short, buying and selling stocks in future when there is a significant difference in the price of the stock in the cash market and in the futures contract.
Usually the stock price is lower in the cash segment as compared to the futures contract. Buying in the cash segment and selling in futures allows you to profit from the price difference in both the segments, called spread. Prior to the expiry date of the contract , this difference decreases and you can unwind your position booking profits.
In terms of returns, arbitrage funds would thrive in a roller-coaster market.
Source : Business standard
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