With the launch of arbitrage funds in India, the mutual fund investors are geared up to exploit the arbitrage opportunities with lower costs than the stock market investors.

In an increasingly volatile market, an investor tries to reduce his exposure to market risk by hedging in the derivatives markets. Though derivatives trading was introduced in Indian bourses four years ago, the mutual fund industry could get its flavor only recently after Sebi's approval. Now mutual fund investors can get a taste of hedging, courtesy the arbitrage fund. Arbitrage funds ushered in a new era in the Indian mutual fund industry to gain market neutral returns by way of hedging.

In December 2004, Benchmark Mutual Fund pioneered to launch a new derivatives fund in India called Benchmark Derivative Fund. In February 2005, another fund house, JM Mutual Fund, came out with a derivatives fund called JM Equity and Derivative Fund. These funds usually attempt to profit from the pricing anomalies on different exchanges. They offer unique features to their investors like market neutral returns and better tax efficiency.

The modus operandi of arbitrage funds in India aims at market neutral returns. The fund buys the equity shares in the spot market and subsequently sells the underlying shares in the futures market at a price higher than the price in the cash market.

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