An arbitrage fund is a type of mutual fund that leverages the price differential between assets that should theoretically have the same price to generate returns. These funds undertake arbitrage trading between cash and futures or between two stock exchanges to make profits. The fund buys stock in the cash market and simultaneously sells a contract for it on the futures market if the market is bullish on the stock. If the market is bearish, then the fund purchases the lower-priced futures contracts and sells shares on the cash market for the higher current price. The most appealing factor of an arbitrage fund is that it’s a low-risk investment option since it simultaneously purchases and sells securities, virtually rendering the transaction void of risks. Arbitrage funds also invest part of their capital into debt securities, which are typically considered highly stable, making them very appealing to investors with a low tolerance for risk. These funds offer low-risk investors an excellent opportunity to earn decent returns during times of high volatility. Arbitrage funds are taxed at par with equity mutual funds since they use over 65% of their assets for arbitrage trades. The time horizon for investing in arbitrage funds should be at least 3 months.