New Delhi, April 18 -- Arbitrage funds are defined as low-risk hybrid mutual funds that generate profits by exploiting price differences of the same asset between different capital markets, such as the cash and derivatives (future) markets. They typically buy shares in the cash market and simultaneously sell them in the future market, locking in a profit regardless of the market direction.

Classified as equity-oriented, these funds can trade in equities, while also deploying money in debt, and money market instruments. According to Securities and Exchange Board of India (Sebi) guidelines, arbitrage funds must invest at least 65% of their funds in equities.

A spot (or cash) market is where buyers and sellers agree on a price and settle t...