Mumbai, Aug. 6 -- India's new Closing Auction Session (CAS) mechanism is expected to improve execution for exchange-traded funds (ETFs) by reducing tracking error, but it has also created unintended challenges for arbitrage fund investors due to wider divergence between cash and futures closing prices, according to an Invesco Mutual Fund report.

ETFs are investment funds that track the performance of an index or a basket of securities, while an arbitrage fund is a type of mutual fund that makes money by buying a stock in the cash (spot) market and selling it at a higher price in the derivatives (futures) market at the same time.

The report said the new closing-price mechanism has replaced the earlier system under which closing prices in...