What is an Arbitrage Mutual Fund?

An arbitrage mutual fund is an investment fund which invests predominantly in arbitrage opportunities. Arbitrage is basically buying/selling a security in one market (for example, Cash Market) and simultaneously selling/buying it in another market (for example, Futures Market) where the price is different, thereby profiting from the temporary difference in prices. For taxation purposes, arbitrage mutual funds are taxed like equity and therefore benefit investors that fall in the higher tax brackets. Arbitrage funds are not exposed to market risks, but since they are also allowed to invest some part in debt instruments, there is a degree of credit risk and interest rate risk involved. As a whole, Arbitrage funds are considered as low risk instruments with post tax returns often beating many debt funds.