Arbitrage Funds are mutual funds which capitalize on the price difference for the same security or asset across various markets such as cash and derivatives (or even across the stock exchanges). There are dedicated specialists called Fund Managers who handle these funds.

For example, a fund manager can buy a particular stock from the derivatives market at Rs 110 and then sell the same stock in the cash market at Rs 120. In this process, the investor earns Rs. 10 per stock. The difference in the price is the arbitrage spread and a fund which takes advantage of the price difference of the two is called an Arbitrage Fund.