MERRILL LYNCH INDEX FUNDS INC, 497, 1997-02-06

MERRILL LYNCH INDEX FUNDS INC
497, 1997-02-06

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<PAGE> 1

PROSPECTUS
JANUARY 31, 1997

MERRILL LYNCH INDEX FUNDS, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------

Merrill Lynch Index Funds, Inc. (the "Corporation") currently consists of
four portfolios or series: Merrill Lynch S&P 500 Index Fund ("S&P 500 Index
Fund"), Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund"), Merrill
Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund") and Merrill Lynch
International Index Fund ("International Index Fund")(collectively, the "Funds,"
and each, a "Fund"). Each Fund is a non-diversified mutual fund whose investment
objective is to provide investment results that, before expenses, seek to
replicate the total return (i.e., the combination of capital changes and income)
of a securities index that has been selected as a proxy for the performance of a
selected market segment. The index is subject to change if, in the Directors'
judgment, a different index would serve as a better proxy for such market
segment. Each Fund will seek to achieve its objective by investing all of its
assets in the series (collectively, the "Series," and each, a "Series") of
Merrill Lynch Index Trust (the "Trust") that has the same investment objective
as the Fund. Each Fund's investment experience will correspond directly to the
investment experience of the respective Series in which it invests. There can be
no assurance that the investment objectives of the Funds will be achieved. For
more information on the Funds' and the Series' investment objectives and
policies, see "Investment Objectives and Policies" on page 4.
------------------------

Each Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of each Fund are offered at a price equal to the next determined
net asset value per share without the imposition of any front-end or deferred
sales charge, and are not subject to any ongoing account maintenance or
distribution fee. Distribution of Class A shares of each Fund is limited to
certain eligible investors. Class D shares of each Fund are offered at a price
equal to the next determined net asset value per share without the imposition of
any front-end or deferred sales charge and are not subject to any ongoing
distribution fee, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets.
------------------------

Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 (609)
282-2800, which has entered into a dealer agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). Shareholders may redeem their
shares at any time at the next determined net asset value. The minimum initial
purchase is $1,000 and the minimum subsequent purchase is $50, except that for
retirement plans the minimum initial investment is $100 and the minimum
subsequent purchase is $1. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Funds' transfer agent are not subject to
processing fees. See "Purchase of Shares" and "Redemption of Shares."
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------

This Prospectus is a concise statement of information about the Funds that
is relevant to making an investment in the Funds. This Prospectus should be
retained for future reference. A statement containing additional information
about the Funds, dated January 31, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Funds at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------

MERRILL LYNCH ASSET MANAGEMENT, L.P.--ADMINISTRATOR
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2

FEE TABLE

The following table provides a summary of estimated expenses, both
recurring and non-recurring, relating to shares of the Funds and the Series. For
purposes of this table, expenses of the Series in which each Fund invests are
treated as if they were expenses of that Fund, since that is their practical
effect. It is expected that there will be little duplication of expenses by the
Funds and the Series, and that, accordingly, the combined per share expenses of
each Fund and corresponding Series should not be significantly greater than the
expenses of each Fund alone would be if, instead of investing in shares of the
Series, the Fund retained an investment adviser and invested directly in the
types of securities held by the Series.

CLASS A SHARES

<TABLE>
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases....... None None None None
Sales Charge Imposed on Dividend Reinvestment... None None None None
Deferred Sales Charge........................... None None None None
Redemption Fee.................................. None None None None
Exchange Fee.................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory Fees (a).................... 0.05% 0.08% 0.06% 0.11%
Other Expenses:
Administrative Fees(b)........................ 0.20% 0.22% 0.14% 0.24%
Custodian Fees................................ 0.01% 0.02% 0.02% 0.07%
Other (expenses of the Funds and the
Series)(c).................................. 0.18% 0.25% 0.23% 0.25%
---- ---- ---- ----
Total Other Expenses........................ 0.39% 0.49% 0.39% 0.56%
Reinbursement of Expenses(d).................. (0.04%) (0.07%) (0.10%) (0.02%)
---- ---- ---- ----
TOTAL OPERATING EXPENSES OF THE FUNDS AND THE
SERIES........................................ 0.40% 0.50% 0.35% 0.65%
==== ==== ==== ====
</TABLE>

CLASS D SHARES

<TABLE>
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases....... None None None None
Sales Charge Imposed on Dividend Reinvestment... None None None None
Deferred Sales Charge........................... None None None None
Redemption Fee.................................. None None None None
Exchange Fee.................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory Fees (a).................... 0.05% 0.08% 0.06% 0.11%
Rule 12b-1 Account Maintenance Fees............. 0.25% 0.25% 0.25% 0.25%
Other Expenses..................................
Administrative Fees(b)........................ 0.20% 0.22% 0.14% 0.24%
Custodian Fees................................ 0.01% 0.02% 0.02% 0.07%
Other (expenses of the Funds and the
Series)(c).................................. 0.18% 0.25% 0.23% 0.25%
---- ---- ---- ----
Total Other Expenses........................ 0.39% 0.49% 0.39% 0.56%
---- ---- ---- ----
Reinbursement of Expenses(d).................. (0.04%) (0.07%) (0.10%) (0.02%)
---- ---- ---- ----
TOTAL OPERATING EXPENSES OF THE FUNDS AND THE
SERIES........................................ 0.65% 0.75% 0.60% 0.90%
==== ==== ==== ====
</TABLE>

- ---------------
(a) Paid by the Series of the Trust. See "Management of the
Funds--Expenses"--page 18.
(b) Paid by the Funds. See "Management of the Funds--Expenses"--page 18.

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<PAGE> 3

(d) Merrill Lynch Asset Management, L.P. (the "Administrator") anticipates
voluntarily reimbursing a portion of other expenses. The Administrator may
discontinue or reduce such reimbursement at any time without notice. Absent
such reimbursement, the total operating expenses of the Funds and the Series
are shown below.

CLASS A SHARES

<TABLE>
<CAPTION>
S&P 500 SMALL CAP AGGREGATE BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
- ---------- ---------- -------------- -------------
<S> <C> <C> <C>
0.44% 0.57% 0.45% 0.67%
</TABLE>

CLASS D SHARES

EXAMPLE:

An investor would pay the following expenses on a $1,000 investment
assuming (1) the Total Operating Expenses in respect of each class of shares of
each Fund as set forth on page 2, (2) a 5% annual return throughout the period
and (3) redemption at the end of:

Class A Shares

Class D Shares

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in each class of each Fund will bear
directly or indirectly. The expenses set forth under "Other Expenses" are based
on estimated amounts through the end of a Series' and a Fund's first full fiscal
year on an annualized basis.

The example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Securities
and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL
EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Funds' transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."

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<PAGE> 4

INVESTMENT OBJECTIVES AND POLICIES

The Corporation currently consists of four series: Merrill Lynch S&P 500
Index Fund, Merrill Lynch Small Cap Index Fund, Merrill Lynch Aggregate Bond
Index Fund and Merrill Lynch International Index Fund. Each Fund is a
non-diversified mutual fund whose investment objective is to provide investment
results that, before expenses, seek to replicate the total return (i.e., the
combination of capital changes and income) of a specified securities index. Each
Fund will seek to achieve its objective by investing all of its assets in the
series of Merrill Lynch Index Trust that has the same investment objective as
the Fund. Each Fund's investment experience will correspond directly to the
investment experience of the respective Series in which it invests. There can be
no assurance that the investment objectives of the Funds will be achieved.

The Funds' and Series' investment objectives are not fundamental policies,
and may be changed by the Directors of the Corporation and the Trustees of the
Trust, respectively, without shareholder approval. THE TRUSTEES AND THE
DIRECTORS MAY ALSO CHANGE THE TARGET INDEX OF ANY RESPECTIVE SERIES AND FUND IF
THEY CONSIDER THAT A DIFFERENT INDEX WOULD FACILITATE THE MANAGEMENT OF THE
SERIES AND FUND IN A MANNER WHICH BETTER ENABLES THE FUND AND SERIES TO SEEK TO
REPLICATE THE TOTAL RETURN OF THE MARKET SEGMENT REPRESENTED BY THE CURRENT
INDEX.

STRUCTURE OF THE FUNDS AND THE SERIES

Unlike many other mutual funds, which directly acquire and manage their own
portfolio securities, each Fund seeks to achieve its investment objective by
investing all of its assets in the corresponding Series of the Trust. Each
Series is a separate series of a registered investment company with the same
investment objective as its corresponding investing Fund. Because the Funds will
not invest in any securities other than shares of the respective Series,
investors in the Funds will acquire an indirect interest in the Series.

In addition to selling their shares to the Funds, the Series may sell their
shares to other mutual funds and institutional investors. All investors in the
Series invest on the same terms and conditions and pay a proportionate share of
the Series' expenses. However, other investors in the Series may sell their
shares at prices different from those of the Funds as a result of the imposition
of sales charges or different operating expenses. Therefore, investors in the
Funds should be aware that these differences may result in different returns
experienced by the various entities investing in the Series. Information
concerning other holders of shares of the Series is available from the
Administrator by calling 1-800-MER-FUND.

The Board of Directors of the Corporation believes that this structure may
enable the Funds to benefit from certain economies of scale. This view is based
on the premise that (i) certain of the expenses of managing an investment
portfolio that seeks to replicate the total return of a securities index are
relatively fixed so that a larger investment portfolio may achieve a lower ratio
of operating expenses to net assets and (ii) a larger investment portfolio may
be able to reduce certain securities transaction costs to the extent that
contributions to and redemptions from the investment portfolio from different
investing entities may offset each other and thus produce a lower net cash flow.

A Fund's investment in a Series may be withdrawn by the Board of Directors
at any time if the Board determines that it is in the best interests of the Fund
to do so. If any such withdrawal were made, the Board would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment objective as the
Fund or the retaining of an investment adviser to manage the Fund's assets
directly in accordance with the investment objective of the Fund. The

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<PAGE> 5

inability to find another such pooled entity or equivalent investment management
could have a significant impact on the investments of the Fund's shareholders.

Investors in the Funds should be aware that smaller entities investing in
the Series may be materially affected by the actions of larger entities
investing in the Series. For example, investors in the Series holding larger
positions than the Funds could have greater voting power and effective voting
control over the operations of the Series. Changes in the investment objective,
policies or restrictions of a Series might cause a Fund to have difficulty in
finding a substitute Series or equivalent investment management and might cause
it to redeem its shares of the Series, and such a redemption could result in a
distribution in kind of portfolio securities held by the Series, instead of
cash. If securities were distributed to a Fund, and the Fund desired to convert
the securities to cash, it would incur brokerage, tax or other charges in
converting securities to cash. In addition, such a distribution in kind might
result in a less diversified portfolio of investments of a Fund. These
possibilities also exist for traditionally structured funds which have large or
institutional investors who may withdraw from the fund.

Whenever a Fund is requested to vote on matters pertaining to a Series, the
Fund will hold a meeting of shareholders, and the Fund's votes with respect to
the Series will all be cast in the same proportion as the shares of the Fund for
which voting instructions are received.

MERRILL LYNCH S&P 500 INDEX FUND

The investment objective of the Merrill Lynch S&P 500 Index Fund is to
provide investment results that, before expenses, seek to replicate the total
return (i.e., the combination of capital changes and income) of the Standard &
Poor's(R) 500 Composite Stock Price Index (the "S&P 500"). There can be no
assurance that the investment objective of the Fund will be achieved.

The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch S&P 500 Index Series of the Trust, which has the
same investment objective as the Fund. The following is a description of the
investment policies of the Series.

In seeking to replicate the total return of the S&P 500, Merrill Lynch
Asset Management, L.P. ("MLAM" or the "Manager") generally will allocate the
Series' investments among common stocks in approximately the same weightings as
the index. In addition, the Manager may use options and futures contracts and
other types of financial instruments relating to all or a portion of the index.
The Series may also engage in securities lending and index arbitrage. See "Other
Types of Investments and Investment Techniques."

The S&P 500 is composed of the common stocks of 500 large capitalization
companies from various industrial sectors, most of which are listed on the New
York Stock Exchange Inc. A company's stock market capitalization is the total
market value of its outstanding shares. The S&P 500 represents a significant
portion of the market value of all common stocks publicly traded in the United
States.

MERRILL LYNCH SMALL CAP INDEX FUND

The investment objective of the Merrill Lynch Small Cap Index Fund is to
provide investment results that, before expenses, seek to replicate the total
return (i.e., the combination of capital changes and income)

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<PAGE> 6

of the Russell 2000(R) Index (the "Russell 2000"). There can be no assurance
that the investment objective of the Fund will be achieved.

The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch Small Cap Index Series of the Trust, which has the
same investment objective as the Fund. The following is a description of the
investment policies of the Series.

In seeking to replicate the total return of the Russell 2000, the Manager
may not allocate the Series' investments among all of the common stocks in the
index, or in the same weightings as the index. Instead, the Series may invest in
a statistically selected sample of the stocks included in the Russell 2000 and
other types of financial instruments. The Manager may use options and futures
contracts and other types of financial instruments relating to all or a portion
of the index. The investments to be included in the Series will be selected so
that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks, and of the stocks underlying or otherwise related
to the foregoing financial instruments, closely approximate those same factors
in the Russell 2000, with the objective of reducing the selected investment
portfolio's deviation from the performance of the Index (this deviation is
referred to as "tracking error"). The Series may also engage in securities
lending and index arbitrage. See "Other Types of Investments and Investment
Techniques."

The Russell 2000 is composed of approximately 2,000 smaller-capitalization
common stocks from various industrial sectors. A company's stock market
capitalization is the total market value of its outstanding shares.

MERRILL LYNCH AGGREGATE BOND INDEX FUND

The investment objective of the Merrill Lynch Aggregate Bond Index Fund is
to provide investment results that, before expenses, seek to replicate the total
return (i.e., the combination of capital changes and income) of the Lehman
Brothers Aggregate Bond Index (the "Aggregate Bond Index"). There can be no
assurance that the investment objective of the Fund will be achieved.

The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch Aggregate Bond Index Series of the Trust, which has
the same investment objective as the Fund. The following is a description of the
investment policies of the Series.

In seeking to replicate the total return of the Aggregate Bond Index, the
Manager may not allocate the Series' investments among all of the fixed-income
securities in the index, or in the same weightings as the index. Instead, the
Series may invest in a statistically selected sample of fixed-income securities
and other types of financial instruments. The Manager may use options and
futures contracts and other types of financial instruments relating to all or a
portion of the index. The investments to be included in the Series will be
selected with the objective of reducing the selected investment portfolio's
deviation from the performance of the Aggregate Bond Index (tracking error). The
Series may, from time to time, substitute a different type of bond for one
included in the index. Substitution may result in levels of interest rate,
credit or prepayment risks that differ from the levels of risks on the
securities composing the Aggregate Bond Index. See "Risk Factors--Investments in
Fixed-Income Securities." The Series may also engage in securities lending and
index arbitrage. See "Other Types of Investments and Investment Techniques."

The Aggregate Bond Index is composed primarily of dollar-denominated
investment grade fixed-income securities in the following classes: U.S. Treasury
and agency securities, U.S. corporate bonds, foreign

6
<PAGE> 7

corporate bonds, foreign sovereign debt (debt securities issued or guaranteed by
foreign governments and governmental agencies), supranational debt (debt
securities issued by entities, such as the World Bank, constituted by the
governments of several countries to promote economic development) and
mortgage-backed securities with maturities greater than one year. Corporate
bonds contained in the index represent issuers from various industrial sectors.

The Series may invest in U.S. Treasury bills, notes and bonds and other
"full faith and credit" obligations of the U.S. Government. The Series may also
invest in U.S. Government agency securities, which are debt obligations issued
or guaranteed by agencies or instrumentalities of the U.S. Government. "Agency"
securities may not be backed by the "full faith and credit" of the U.S.
Government. U.S. Government agencies may include the Federal Farm Credit Bank,
the Resolution Trust Corporation and the Government National Mortgage
Association. "Agency" obligations are not explicitly guaranteed by the U.S.
Government and so are perceived as somewhat riskier than comparable Treasury
bonds.

The Series' corporate fixed-income securities will be primarily of
investment grade quality--i.e., those rated at least Baa3 by Moody's Investors
Service, Inc. ("Moody's") or BBB- by Standard & Poor's Ratings Group ("S&P"),
the equivalent by another nationally recognized statistical rating organization
("NRSRO") or, if unrated, of equal quality in the opinion of the Manager.
Securities rated Baa or BBB are considered medium grade obligations. Interest
payments and principal are regarded as adequate for the present but certain
protective elements found in higher rated bonds may be lacking. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. Descriptions of the ratings of fixed-income securities are
contained in Appendix B to this Prospectus.

The Series may also invest in other instruments that "pass through"
payments on such obligations, such as collateralized mortgage obligations
("CMOs").

MERRILL LYNCH INTERNATIONAL INDEX FUND

The investment objective of the Merrill Lynch International Index Fund is
to provide investment results that, before expenses, seek to replicate the total
return (i.e., the combination of capital changes and income) of the Morgan
Stanley Capital International EAFE(R) GDP weighted Index (the "EAFE Index").
There can be no assurance that the investment objective of the Fund will be
achieved.

The Fund seeks to achieve its investment objective by investing all of its
assets in the Merrill Lynch International Index Series of the Trust, which has
the same investment objective as the Fund. The following is a description of the
investment policies of the Series.

In seeking to replicate the total return of the EAFE Index, the Manager may
not allocate the Series' investments among all of the countries, or all of the
companies within a country, represented in the index, or in the same weightings
as the index. Instead, the Series may invest in a statistically selected sample
of the equity securities included in the EAFE Index and other types of financial
instruments. In addition, the Manager may use options and futures contracts and
other types of financial instruments relating to all or a portion of the index.
The investments to be included in the Series will be selected so that the market
capitalizations, industry weightings and other fundamental characteristics of
the stocks, and of the stocks underlying or otherwise related to the foregoing
financial instruments, closely approximate those same factors in the EAFE Index,
with the objective of reducing the selected investment portfolio's deviation
from the performance of the Index

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(tracking error). The Series may also engage in securities lending and index
arbitrage. See "Other Types of Investments and Investment Techniques."

The EAFE Index is composed of equity securities of companies from various
industrial sectors whose primary trading markets are located outside the United
States and which are selected from among the larger capitalization companies in
such markets. A company's stock market capitalization is the total market value
of its outstanding shares. The countries currently included in the EAFE Index
are Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, The Netherlands, New Zealand, Norway,
Singapore, Spain, Sweden, Switzerland and United Kingdom. The weighting of the
index among these countries is based upon gross domestic product (GDP). (Market
capitalization is the basis for country weightings in another version of the
EAFE Index. Using the GDP weighting tends to decrease the relative weighting of
Japan and the United Kingdom while increasing the weighting of certain European
countries, generally resulting in a more diversified index).

ABOUT INDEXING AND MANAGEMENT OF THE SERIES

About Indexing. The Series are not managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial, and market analyses and investment
judgment. Instead, each Series, utilizing essentially a "passive" or "indexing"
investment approach, seeks to replicate, before each Series' expenses (which can
be expected to reduce the total return of the Series), the total return of its
respective index.

Indexing and Managing the Series. Under normal conditions each Series will
invest at least 80% of its assets (exclusive of assets held as collateral for
securities loans or as margin for futures transactions) in securities or other
financial instruments which are contained in, or related to the securities
contained in, the applicable index (equity securities, in the case of the
Merrill Lynch S&P 500 Index Series, Merrill Lynch Small Cap Index Series and
Merrill Lynch International Index Series (the "Equity Series"), and fixed-income
securities in the case of the Merrill Lynch Aggregate Bond Index Series (the
"Fixed-Income Series")).

Because each Series seeks to replicate the total return of its respective
index, generally the Manager will not attempt to judge the merits of any
particular security as an investment but will seek only to replicate the total
return of the securities in the relevant index. However, the Manager may omit or
remove a security which is included in an index from the portfolio of a Series
if, following objective criteria, the Manager judges the security to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.

In managing the Series, the Manager may employ index arbitrage. Index
arbitrage involves the sale of a replicating selection, or "basket," of stocks
with the simultaneous purchase of an equivalent dollar value of related futures
contracts, or alternatively the purchase of such an equity basket with a
simultaneous sale of related futures contracts. This technique is designed to
take advantage of a possible mispricing which could arise between the securities
market and the futures market. Extensive use of this technique could, however,
be limited by applicable tax laws.

In addition, the Manager may acquire certain financial instruments based
upon individual securities or based upon or consisting of one or more baskets of
securities (which basket may be based upon a target index). Certain of these
instruments may represent an indirect ownership interest in such securities or
baskets.

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<PAGE> 9

Others may provide for the payment to a Series or by a Series of amounts based
upon the performance (positive, negative or both) of a particular security or
basket. The Manager will select such instruments when it believes that the use
of the instrument will correlate substantially with the expected total return of
a target security or index. In connection with the use of such instruments, the
Manager may enter into short sales in an effort to adjust the weightings of
particular securities represented in the basket to more accurately reflect such
securities' weightings in the target index.

Each Series' ability to replicate the total return of its respective index
may be affected by, among other things, transaction costs, administration and
other expenses incurred by the Series, taxes (including foreign withholding
taxes, which will affect the International Index Series and the Aggregate Bond
Index Series due to foreign tax withholding practices), changes in either the
composition of the index or the assets of a Series, and the timing and amount of
Series investor contributions and withdrawals, if any. In addition, each Fund's
total return will be affected by incremental operating costs (e.g., transfer
agency, accounting) that will be borne by the Fund. Under normal circumstances,
it is anticipated that each Series' total return over periods of one year and
longer will, on a gross basis and before taking into account expenses, be within
5 basis points (a basis point is one one-hundredth of one percent (0.01%)) for
the S&P 500 Index Fund, 100 basis points for the Small Cap Index Fund, 150 basis
points for the International Index Fund, and 25 basis points for the Aggregate
Bond Index Fund, of the total return of the applicable indices. There can be no
assurance, however, that these levels of correlation will be achieved. In the
event that this correlation is not achieved over time, the Trustees of the Trust
and the Directors of the Corporation will consider alternative strategies for
the Series and the Funds.

OTHER TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES OF THE SERIES

Cash Management. Generally, the Manager will employ futures and options on
futures to provide liquidity necessary to meet anticipated redemptions or for
day-to-day operating purposes. However, if considered appropriate in the opinion
of the Manager, a portion of a Series' assets may be invested in certain types
of instruments with remaining maturities of 397 days or less for liquidity
purposes. Such instruments would consist of: (i) obligations of the U.S.
Government, its agencies, instrumentalities, authorities or political
subdivisions ("U.S. Government Securities"); (ii) other fixed-income securities
rated Aa or higher by Moody's or AA or higher by S&P or, if unrated, of
comparable quality in the opinion of the Manager; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At the time the Series
invests in commercial paper, bank obligations or repurchase agreements, the
issuer or the issuer's parent must have outstanding debt rated Aa or higher by
Moody's or AA or higher by S&P or outstanding commercial paper, bank obligations
or other short-term obligations rated Prime-1 by Moody's or A-1 by S&P; or, if
no such ratings are available, the instrument must be of comparable quality in
the opinion of the Manager.

Futures, Options, Swaps and Indexed Instruments. Each Series will also
utilize options, futures, options on futures, swaps and other indexed
instruments. Futures and options on futures may be employed to provide liquidity
as described in the preceding paragraph, and may also be employed in connection
with a Series' index arbitrage strategies. Futures, options on futures, swaps
and other indexed instruments may be employed as a proxy for a direct investment
in securities underlying the Series' index. In addition, the Merrill Lynch
International Index Series may engage in futures contracts on foreign currencies
in connection with certain foreign securities transactions.

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<PAGE> 10

The Manager will choose among the foregoing instruments based on its
judgment of how best to meet each Series' goals. In connection therewith, the
Manager will assess such factors as current and anticipated securities prices,
relative liquidity and price levels in the options, futures and swap markets
compared to the securities markets, and the Series' cash flow and cash
management needs.

The Series' use of the foregoing instruments and the associated risks are
described in detail in Appendix A to this Prospectus.

Foreign Exchange Transactions. The Merrill Lynch International Index
Series may engage in futures contracts on foreign currencies and foreign
currency forward and spot transactions in connection with transactions or
anticipated transactions in securities denominated in foreign currencies.
Specifically, the Series may purchase or sell a currency to settle a security
transaction or sell a currency in which the Series has received or anticipates
receiving a dividend or distribution.

OTHER INVESTMENT POLICIES AND PRACTICES OF THE SERIES

Illiquid Investments. Each of the Series may invest up to 15% of its net
assets in illiquid investments. Pursuant to that restriction the Series may not
invest in instruments which cannot be readily resold because of legal or
contractual restrictions, which cannot otherwise be marketed, redeemed, put to
the issuer or a third party, which do not mature within seven days, or which the
Trustees have not determined to be liquid, if, regarding all such instruments,
more than 15% of its net assets, taken at market value, would be invested in
such instruments.

The Series may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933 (the "Securities Act")
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Trustees, or the Manager
pursuant to guidelines adopted by the Trustees, continuously determines, based
on the trading markets for the specific Rule 144A security, that it is liquid.
The Trustees, however, will retain oversight and are ultimately responsible for
these determinations. The Trustees monitor the Series' investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.

Repurchase Agreements. Each Series may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the Manager
otherwise deems to be creditworthy. Under repurchase agreements, the
counterparty agrees, upon entering into the contract, to repurchase the security
from the Series at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the event of
default by the seller under a repurchase agreement the Series may suffer time
delays and incur costs or possible losses in connection with disposition of the
collateral. Repurchase agreements maturing in more than seven days are deemed
illiquid by the Securities and Exchange Commission and are therefore subject to
the Series' investment restrictions limiting investments in securities that are
not readily marketable to 15% of the Series' net assets.

10
<PAGE> 11

Lending of Portfolio Securities. To the extent permitted by law, each
Series may from time to time lend securities from its portfolio to banks,
brokers and other financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States government. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Each Series' policy concerning
lending is fundamental and it may not be changed without the approval of the
holders of a majority of the Series' outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Series
receives the income on the loaned securities and either receives the income on
the collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Series could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
Presently, no Series intends to lend portfolio securities representing in excess
of 33 1/3% of its total assets.

When-Issued Securities and Delayed Delivery Transactions. The Merrill
Lynch Aggregate Bond Index Series may purchase securities on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Series with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Series at the time of entering into the
transaction. Although the Series has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Series will maintain a segregated account with its custodian of liquid
securities in an aggregate amount equal to the amount of its commitment in
connection with such purchase transactions.

Dollar Rolls. The Aggregate Bond Index Series may enter into dollar rolls,
in which the Series will sell securities for delivery in the current month and
simultaneously contract to repurchase substantially similar (the same type and
coupon) securities on a specified future date from the same party. During the
roll period, the Series forgoes principal and interest paid on the securities
sold. The Series is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale.

Dollar rolls involve the risk that the market value of the securities
subject to the Series' forward purchase commitment may decline below the price
of the securities the Series has sold. In the event the buyer of the securities
files for bankruptcy or becomes insolvent, the Series' use of the proceeds of
the current sale portion of the transaction may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Series' obligation to purchase the similar securities in the forward
transaction. Dollar rolls are speculative techniques which can be deemed to
involve leverage. The Series will establish a segregated account with its
custodian in which it will maintain liquid securities in an aggregate amount
equal to the amount of the forward commitment. The Series will engage in dollar
roll transactions to enhance return and not for the purpose of borrowing. Each
dollar roll transaction is accounted for as a sale of a portfolio security and a
subsequent purchase of a substantially similar security in the forward market.

Standby Commitment Agreements. The Merrill Lynch Aggregate Bond Index
Series may from time to time enter into standby commitment agreements. Such
agreements commit the Series, for a stated period of time, to purchase a stated
amount of a fixed income security which may be issued and sold to the Series at
the option of the issuer. The price and coupon of the security is fixed at the
time of the commitment. At the time of entering into the agreement, the Series
is paid a commitment fee, regardless of whether or not the security

11
<PAGE> 12

is ultimately issued, which is typically approximately 0.5% of the aggregate
purchase price of the security which the Series has committed to purchase. The
Series will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price which is considered
advantageous to the Series. The Series will not enter into a standby commitment
with a remaining term in excess of 90 days and will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of all other illiquid securities, will
not exceed 15% of its total assets taken at the time of acquisition of such
commitment or security. The Series will at all times maintain a segregated
account with its custodian of liquid securities in an aggregate amount equal to
the purchase price of the securities underlying the commitment.

There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the
Series may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment
period.

The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Series' net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.

Short Sales. In connection with the use of certain instruments based upon
or consisting of one or more baskets of securities, the Manager may sell a
security a Series does not own, or in an amount greater than the Series owns
(i.e., make short sales). Such transactions will be used only in an effort to
adjust the weightings of particular securities represented in the basket to
reflect such securities' weightings in the target index. The Manager will not
employ short sales in reflection of the Manager's outlook for the securities
markets or for the performance of the securities sold short. Generally, to
complete a short sale transaction, the Series will borrow the security to make
delivery to the buyer. The Series is then obligated to replace the security
borrowed. The price at the time of replacement may be more or less than the
price at which the security was sold by the Series. Until the security is
replaced, the Series is required to pay to the lender any interest which accrues
during the period of the loan. To borrow the security, the Series may be
required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Series replaces the borrowed security, it will (a) maintain in a
segregated account with its custodian cash or liquid securities at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current market value of the security sold
short or (b) otherwise cover its short position.

INVESTMENT RESTRICTIONS

The Funds' and the Series' investment activities are subject to further
restrictions that are described in the Statement of Additional Information.
Investment restrictions and policies which are fundamental policies may not be
changed without the approval of the holders of a majority of the Funds' or
Series' outstanding voting securities as defined in the Investment Company Act.

12
<PAGE> 13

Among the more significant fundamental restrictions, a Series or Fund may
not invest more than 25% of its total assets (taken at market value at the time
of each investment) in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities);
provided, that in replicating the weighting of a particular industry in its
target index, a Series or Fund may invest more that 25% of its total assets in
securities of issuers in that industry. In addition, although each Fund is
classified as a non-diversified fund under the Investment Company Act and is not
subject to the diversification requirements of the Investment Company Act, each
Fund is required to comply with certain requirements under the Internal Revenue
Code of 1986, as amended (the "Code"). To ensure that the Funds satisfy these
requirements, the Declaration of Trust requires that each Series be managed in
compliance with the Code requirements as though such requirements were
applicable to the Series. These requirements include limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the market value of a Fund's total assets are invested in the securities of a
single issuer, or any two or more issuers which are controlled by the Fund and
engaged in the same, similar or related businesses, and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value of
its total assets are invested in the securities of a single issuer, and the Fund
does not own more than 10% of the outstanding voting securities of a single
issuer. The U.S. Government, its agencies and instrumentalities are not included
within the definition of "issuer" for purposes of the diversification
requirements of the Code. These requirements will be satisfied at the Series
level and not at the level of the Funds based upon a ruling received from the
Internal Revenue Service ("IRS") which entitles the Funds to "look through" the
shares of the Series to the underlying investments of the Series for purposes of
these diversification requirements.

The Funds' and Series' investment objectives are not fundamental policies,
and may be changed by the Directors and the Trustees, respectively, without
shareholder approval. THE TRUSTEES AND THE DIRECTORS MAY ALSO CHANGE THE TARGET
INDEX OF ANY RESPECTIVE SERIES AND FUND IF THEY CONSIDER THAT A DIFFERENT INDEX
WOULD FACILITATE THE MANAGEMENT OF THE SERIES AND FUND IN A MANNER WHICH BETTER
ENABLES THE FUND AND SERIES TO SEEK TO REPLICATE THE TOTAL RETURN OF THE MARKET
SEGMENT REPRESENTED BY THE CURRENT INDEX.

RISK FACTORS

Each Fund will be subject to the risks associated with an investment in its
corresponding Series. These risks are set forth below.

Cash Flows; Expenses. The ability of each Series to satisfy its investment
objective depends to some extent on the Manager's ability to manage cash flow
(primarily from purchases and redemptions and distributions from the Series'
investments). The Manager will make investment changes to a Series' portfolio to
accommodate cash flow while continuing to seek to replicate the total return of
the Series' target index. Investors should also be aware that the investment
performance of each index is a hypothetical number which does not take into
account brokerage commissions and other transaction costs, custody and other
costs of investing, which will be borne by the Series, and any incremental
operating costs (e.g., transfer agency, accounting) that will be borne by the
Funds. Finally, since each Series seeks to replicate the total return of its
target index, the Manager generally will not attempt to judge the merits of any
particular security as an investment.

Options, Futures, Swaps and Indexed Instruments. The Manager expects to
use options, futures, options on futures, swaps and indexed instruments as
described above under "About Indexing and Management of the Series--Other Types
of Investments and Techniques--Futures, Options, Swaps and Indexed Instruments."

13
<PAGE> 14

Use of such instruments may involve investment risks and transaction costs to
which the Series would not be subject absent the use of these instruments. A
discussion of these instruments is contained in Appendix A to this Prospectus.

Investment in Foreign Securities. Investments on an international basis
involve certain risks not typically involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
or U.S. governmental laws or restrictions applicable to such investments.
Securities prices in different countries are subject to different economic,
financial, political and social factors. Moreover, individual foreign economies
may differ favorably or unfavorably from the United States economy in such
respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Also, it is anticipated that most of the foreign securities held by a Series
will not be registered with the Securities and Exchange Commission nor will the
issuers thereof be subject to the reporting requirements of such agency. In
addition, foreign investors such as the Series may be subject to withholding
taxes in certain countries, which may reduce the returns of the Series.

Since the Merrill Lynch International Index Series will invest heavily in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates will affect the value of
securities in the Series' portfolio and the unrealized appreciation or
depreciation of investments so far as United States investors are concerned.
Currencies of certain foreign countries may be volatile and therefore may affect
the value of securities denominated in such currencies. Changes in foreign
currency exchange rates relative to the United States dollar will affect the
United States dollar value of the Series' assets denominated in that currency
and the return on such assets. The rate of exchange between the dollar and other
currencies is determined by forces of supply and demand in the foreign exchange
markets. These forces are, in turn, affected by the international balance of
payments, the level of interest and inflation rates and other economic and
financial conditions, government intervention, speculation and other factors.

Investment in Fixed-Income Securities. Because the Merrill Lynch Aggregate
Bond Index Series will invest in fixed-income securities, it will be subject to
the general risks inherent is such securities, primarily interest rate risk,
credit risk and prepayment risk.

Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. As a rule bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline; if interest rates
fall, bond prices generally rise. In addition, for a given change in interest
rates, longer-maturity bonds generally fluctuate more in price than
shorter-maturity bonds. To compensate investors for these larger fluctuations,
longer-maturity bonds usually offer higher yields than shorter-maturity bonds,
other factors, including credit quality, being equal. These basic principles of
bond prices also apply to U.S. Government Securities. A security backed by the
"full faith and credit" of the U.S. Government is guaranteed only as to its
stated interest rate and face value at maturity, not its current market price.
Just like other fixed-income securities, government-guaranteed securities will
fluctuate in value when interest rates change.

Credit risk is the possibility that an issuer of securities held by the
Series will be unable to make payments of either interest or principal or will
be perceived to have a diminished capacity to make such payments in the future.
The credit risk of the Series is a function of the diversification and credit
quality of its underlying securities.

14
<PAGE> 15

The Series may also be exposed to event risk, which includes the
possibility that fixed-income securities held by the Series may suffer a
substantial decline in credit quality and market value due to issuer
restructurings. Certain restructurings such as mergers, leveraged buyouts,
takeovers or similar events, are often financed by a significant expansion of
corporate debt. As a result of the added debt burden, the credit quality and
market value of a firm's existing debt securities may decline significantly.
Other types of restructurings (such as corporate spinoffs or privatizations of
governmental or agency borrowers or the termination of express or implied
governmental credit support) may also result in decreased credit quality of a
particular issuer.

Prepayment risk is the possibility that the principal of the mortgage loans
underlying mortgage-backed securities may be prepaid at any time. As a general
rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates the Series may be required to reinvest
its assets in securities with lower interest rates. In periods of increasing
interest rates, prepayments generally may decline, with the effect that the
mortgage-backed securities held by the Series may exhibit price characteristics
of longer-term debt securities.

The corporate substitution strategy used by the Series (discussed above)
may increase or decrease the Series' exposure to the foregoing risks relative to
those of the Aggregate Bond Index.

Investments in Small Companies. The Merrill Lynch Small Cap Index Series
will invest primarily in securities of smaller capitalization issuers.
Investments in securities of smaller capitalization issuers involve special
considerations and risks not typically associated with investments in securities
of larger capitalization issuers, including an issuer's limited product lines,
markets or financial resources, or dependence on a limited management group. In
addition, many smaller capitalization stocks trade less frequently and in
smaller volume, and may be subject to more abrupt or erratic price movements,
than stocks of larger companies. The securities of smaller companies may also be
more sensitive to market changes than the securities of larger companies.

Portfolio Turnover. Although the Series will use a passive, indexing
approach to investing, each Series may engage in a substantial number of
portfolio transactions. The rate of portfolio turnover will be a limiting factor
when the Manager considers whether to purchase or sell securities for a Series
only to the extent that the Manager will consider the impact of transaction
costs on a Series' tracking error. Changes in the securities comprising a
Series' index will tend to increase that Series' portfolio turnover rate, as the
Manager restructures the Series' holdings to reflect the changes in the index.
The portfolio turnover rate is, in summary, the percentage computed by dividing
the lesser of a Series' purchases or sales of securities by the average net
asset value of the Series. High portfolio turnover involves correspondingly
greater brokerage commissions for a Series investing in equity securities and
other transaction costs which are borne directly by a Series. A high portfolio
turnover rate may also result in the realization of taxable capital gains,
including short-term capital gains taxable at ordinary income rates.

While it is impossible to predict the portfolio turnover rates for each of
the Series, it is anticipated that the portfolio turnover rates for each of the
Series will not exceed 100%.

ADDITIONAL INFORMATION CONCERNING THE INDICES

S&P 500. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard &
Poor's 500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by the Corporation and the Trust. The S&P 500 Index
Fund and the S&P 500 Index Series are not sponsored, endorsed, sold or promoted

15
<PAGE> 16

by Standard & Poor's, a division of the McGraw Hill Companies, Inc. ("Standard &
Poor's") and Standard & Poor's makes no representation regarding the
advisability of investing in the Fund or the Series.

The Fund and the Series are not sponsored, endorsed, sold or promoted by
Standard & Poor's. Standard & Poor's makes no representation or warranty,
express or implied, to the owners of shares of the Fund or the Series or any
member of the public regarding the advisability of investing in securities
generally or in the Fund or the Series particularly or the ability of the S&P
500 to track general stock market performance. Standard & Poor's only
relationship to the Fund and the Series is the licensing of certain trademarks
and trade names of Standard & Poor's and of the S&P 500 which is determined,
composed and calculated by Standard & Poor's without regard to the Fund and the
Series. Standard & Poor's has no obligation to take the needs of the Fund and
the Series or the owners of shares of the Fund and the Series into consideration
in determining, composing or calculating the S&P 500. Standard & Poor's is not
responsible for and has not participated in the determination of the prices and
amount of the Fund and the Series or the timing of the issuance of sale of
shares of the Fund and the Series or in the determination or calculation of the
equation by which the Fund and the Series is to be converted into cash. Standard
& Poor's has no obligation or liability in connection with the administration,
marketing or trading of the Fund and the Series.

Standard & Poor's does not guarantee the accuracy and/or the completeness
of the S&P 500 Index or any data included therein, and Standard & Poor's shall
have no liability for any errors, omissions, or interruptions therein. Standard
& Poor's makes no warranty, express or implied, as to results to be obtained by
the Fund, the Series, owners of shares of the Fund and the Series, or any other
person or entity from the use of the S&P 500 Index or any data included therein.
Standard & Poor's makes no express or implied warranties and expressly disclaims
all warranties of merchantability or fitness for a particular purpose or use
with respect to the S&P 500 Index or any data included therein. Without limiting
any of the foregoing, in no event shall Standard & Poor's have any liability for
any special, punitive, indirect, or consequential damages (including lost
profits), even if notified of the possibility of such damages.

Russell 2000. The Merrill Lynch Small Cap Index Fund and the Merrill Lynch
Small Cap Index Series are not promoted, sponsored or endorsed by, nor in any
way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Fund or the Series nor any associated
literature or publications and Frank Russell Company makes no representation or
warranty, express or implied, as to their accuracy, or completeness, or
otherwise.

Frank Russell Company reserves the right, at any time and without notice,
to alter, amend, terminate or in any way change the Russell 2000(R) Index. Frank
Russell Company has no obligation to take the needs of any particular fund or
its participants or any other product or person into consideration in
determining, composing or calculating the Index.

Frank Russell Company's publication of the Russell 2000(R) Index in no way
suggests or implies an opinion by Frank Russell Company as to the attractiveness
or appropriateness of investment in any or all securities upon which the Index
is based. Frank Russell company makes no representation, warranty, or guarantee
as to the accuracy, completeness, reliability, or otherwise of the Index or any
data included in the Index. Frank Russell company makes no representation or
warranty regarding the use, or the results of use, of the Index or any data
included therein, or any security (or combination thereof) comprising the Index.
Frank Russell company makes no other express or implied warranty, and expressly
disclaims any warranty, of any kind, including, without means of limitation, any
warranty of merchantability or fitness for a particular purpose with respect to
the Index or any data or any security (or combination thereof) included therein.

16
<PAGE> 17

EAFE Index. The Morgan Stanley Capital International ("MSCI") EAFE(R)
Index is the exclusive property of Morgan Stanley & Co. Incorporated ("Morgan
Stanley"). The MSCI EAFE(R) Index is a service mark of Morgan Stanley Group Inc.
and has been licensed for use by MLAM and its affiliates.

The Merrill Lynch International Index Fund and the Merrill Lynch
International Index Series are not sponsored, endorsed, sold or promoted by
Morgan Stanley. Morgan Stanley makes no representation or warranty, express or
implied, to the owners of shares of the Fund and the Series or any member of the
public regarding the advisability of investing in securities generally or in the
Fund and a the Series particularly or the ability of the EAFE Index to track
general stock market performance. Morgan Stanley is the licensor of certain
trademarks, service marks and trade names of Morgan Stanley and of the EAFE
Index. Morgan Stanley has no obligation to take the needs of the Fund and the
Series or the owners of shares of the Fund and the Series into consideration in
determining, composing or calculating the EAFE Index. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of shares of the Fund and the Series to be issued or in
the determination or calculation of the equation by which the shares of the Fund
and the Series is redeemable for cash. Morgan Stanley has no obligation or
liability to owners of shares of the Fund and the Series in connection with the
administration, marketing or trading of the Fund and the Series.

Although Morgan Stanley shall obtain information for inclusion in or for
use in the calculation of the index from sources which Morgan Stanley considers
reliable, Morgan Stanley does not guarantee the accuracy and/or the completeness
of the index or any data included therein. Morgan Stanley makes no warranty,
express or implied, as to results to be obtained by licensee, licensee's
customers and counterparties, owners of shares of the Fund and the Series, or
any other person or entity from the use of the index or any data included
therein in connection with the rights licensed hereunder or for any other use.
Morgan Stanley makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular purpose
with respect to the index or any data included therein. Without limiting any of
the foregoing, in no event shall Morgan Stanley have any liability for any
direct, indirect, special, punitive, consequential or any other damages
(including lost profits) even if notified of the possibility of such damages.

MANAGEMENT OF THE FUNDS

BOARD OF DIRECTORS

The Board of Directors of the Corporation consists of four individuals,
three of whom are not "interested persons" of the Fund as defined in the
Investment Company Act. The Board of Directors is responsible for the overall
supervision of the operations of the Funds and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.

The Directors of the Fund are:

TERRY K. GLENN*--Executive Vice President of MLAM and Fund Asset
Management, L.P. ("FAM") since 1983; Executive Vice President and Director of
Princeton Services, Inc. since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988; and Director of
Merrill Lynch Financial Data Services, Inc. since 1985.

JACK B. SUNDERLAND--President and Director of American Independent Oil
Company, Inc. (energy company) since 1987; Member of Council on Foreign
Relations since 1971.

STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial
consultants).

17
<PAGE> 18

J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (private placement partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy, Inc.
(electric utility holding company).
- ---------------

* Interested person, as defined by the Investment Company Act, of the Fund.

The Directors of the Corporation are also Trustees of the Trust. The
Directors have adopted procedures that they believe are reasonably designed to
resolve any conflicts that arise in connection with this overlap.

ADMINISTRATION OF THE CORPORATION AND THE FUNDS

The Corporation does not have an investment adviser, since all of each
Fund's assets will be invested in its corresponding Series. The Corporation has
retained the services of MLAM as administrator of the Funds (the
"Administrator"). Under the Administration Agreement, the Administrator provides
the Funds with administrative services.

ADVISORY ARRANGEMENTS OF THE TRUST AND THE SERIES

MLAM, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: Box 9011, Princeton, New Jersey 08543-9011) also acts as
manager for the Trust and each Series and provides them with management and
investment advisory services.

MLAM is owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), a
financial services holding company and the parent of Merrill Lynch. MLAM or its
affiliate, FAM, acts as the manager and investment adviser for more than 130
other registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of October 31,
1996, MLAM and FAM had a total of approximately $217.6 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of MLAM.

Eric Mitofsky is primarily responsible for the day-to-day management of the
investments of the Merrill Lynch S&P 500 Index Series, Merrill Lynch Small Cap
Index Series and Merrill Lynch International Index Series. Mr. Mitofsky has been
associated with MLAM since 1987, and has been a Vice President of MLAM since
1992. Jay C. Harbeck and Gregory M. Maunz are primarily responsible for the
day-to-day management of the investments of the Merrill Lynch Aggregate Bond
Index Series. Mr. Harbeck has been a Vice President of MLAM since 1986, and Mr.
Maunz has been a Vice President of MLAM since 1985.

EXPENSES

The Funds pay the Administrator monthly compensation at the annual rates of
the average daily net assets of each Fund as follows:

<TABLE>
<CAPTION>
NAME OF FUND ADMINISTRATION FEE
----------------------------------------------------------------- ------------------
<S> <C>
Merrill Lynch S&P 500 Index Fund................................. 0.20%
Merrill Lynch Small Cap Index Fund............................... 0.22%
Merrill Lynch Aggregate Bond Index Fund.......................... 0.14%
Merrill Lynch International Index Fund........................... 0.24%
</TABLE>

18
<PAGE> 19

In addition, the administration agreement with the Administrator (the
"Administration Agreement") obligates the Corporation to pay certain expenses
incurred in its operations including, among other things, legal and audit fees,
registration fees, unaffiliated Directors' fees and expenses, custodian and
transfer agency fees, accounting costs, the costs of issuing and redeeming
shares and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to each Fund by the Administrator, and each Fund reimburses the
Administrator for its costs in connection with such services on a semi-annual
basis.

The Series of the Trust pay the Manager monthly compensation at the annual
rates of the average daily net assets of each Series as follows:

<TABLE>
<CAPTION>
NAME OF SERIES MANAGEMENT FEE
------------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch S&P 500 Index Series................................ 0.05%
Merrill Lynch Small Cap Index Series.............................. 0.08%
Merrill Lynch Aggregate Bond Index Series......................... 0.06%
Merrill Lynch International Index Series.......................... 0.11%
</TABLE>

In addition, the management agreement with the Manager (the "Management
Agreement") obligates the Trust to pay certain expenses incurred in its
operations including, among other things, legal and audit fees, registration
fees, unaffiliated trustees' fees and expenses, custodian and transfer agency
fees, accounting costs, the costs of issuing and redeeming shares and certain of
the costs of printing proxies, shareholder reports, prospectuses and statements
of additional information. Accounting services are provided to the Trust by the
Manager, and each Series reimburses the Manager for its costs in connection with
such services on a semi-annual basis.

The Directors of the Corporation believe that the aggregate per share
expenses of each Fund and corresponding Series should not be significantly
greater than the expenses which each Fund would incur if it retained the
services of an investment adviser and the assets of each Fund were invested
directly in the type of securities held by the corresponding Series.

TRANSFER AGENCY SERVICES

Merrill Lynch Financial Data Services, Inc. ("MLFDS" or the "Transfer
Agent"), which is a wholly-owned subsidiary of ML & Co., acts as the
Corporation's Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives a fee for its services and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. MLFDS also acts as the transfer agent to the Trust.

CODES OF ETHICS

The Board of Directors of the Corporation has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act which incorporates the
Codes of Ethics of the Trust and of MLAM (together, the "Ethics Codes"). The
Ethics Codes significantly restrict the personal investing activities of all
employees of

19
<PAGE> 20

the Manager and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.

The Ethics Codes require that all employees of the Manager preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Ethics Codes provide for trading "blackout periods"
which prohibit trading by investment personnel of the Trust within periods of
trading by the Series in the same (or equivalent) security (15 or 30 days
depending upon the transaction).

PURCHASE OF SHARES

Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both MLAM and Merrill Lynch, acts as the distributor of the shares of the Fund.

The Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of the Fund are offered at a price equal to the next determined
net asset value per share without the imposition of any front-end or deferred
sales charge, and are not subject to any ongoing account maintenance or
distribution fee. Distribution of Class A shares of the Fund is limited to
certain eligible investors. Class D shares of each Fund are offered at a price
equal to the next determined net asset value per share without the imposition of
any front-end or deferred sales charge and are not subject to any ongoing
distribution fee, but are subject to an ongoing account maintenance fee at an
annual rate of 0.25% of average daily net assets.

Class A shares are offered to a limited group of investors who participate
in certain investment programs which charge a fee for participation, including
the Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares are
offered to ML & Co. and its subsidiaries and their directors and employees and
to members of the Boards of MLAM-advised investment companies, including the
Corporation. For more information about these programs, contact the Distributor
at 1-800-MER-FUND.

Shares may be purchased directly from the Distributor, P.O. Box 9081,
Princeton, New Jersey 08543-9081 (609) 282-2800, which has entered into a dealer
agreement with Merrill Lynch. Shareholders may redeem their shares at any time
at the next determined net asset value. The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial investment is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (currently $4.85) for
confirming purchases and repurchases. Purchase and redemptions directly through
the Corporation's transfer agent are not subject to processing fees.

The Distributor also acts as the placement agent for the Trust.

ACCOUNT MAINTENANCE PLAN

Pursuant to a plan adopted by the Corporation with respect to the Class D
shares of each Fund pursuant to Rule 12b-1 under the Investment Company Act (the
"Plan"), the Class D shares of each Series pay the

20
<PAGE> 21

Distributor an ongoing account maintenance fee, accrued daily and paid monthly,
at the annual rate of 0.25% of the average daily net assets attributable to such
shares. Pursuant to a sub-agreement with the Distributor, Merrill Lynch also
provides account maintenance services in respect of the Class D shares of each
Fund. The ongoing account maintenance fee compensates the Distributor and
Merrill Lynch for providing account maintenance services to Class D
shareholders.

REDEMPTION OF SHARES

Each Fund is required to redeem all full and fractional shares of the Fund
upon receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of proper
notice of redemption. There will be no additional charge for redemption if the
redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive upon redemption all dividends reinvested
through the date of redemption. The value of shares at the time of redemption
may be more or less than the shareholder's cost, depending on the market value
of the securities held by the Fund at such time. The Corporation will generally
pay redemptions in cash; however, if requested by a shareholder, at the
discretion of the Administrator the Corporation may pay a redemption or
repurchase of shares in an amount of $10,000,000 or more (which amount may be
decreased or increased by the Administrator from time to time) with portfolio
securities.

REDEMPTION

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., Transfer Agency Operations Department, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Redemption requests
should not be sent to the Corporation. Proper notice of redemption in the case
of shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. The
notice in either event requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the notice must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. "Eligible guarantor institution(s)" include
certain banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings association. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents, such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice of
redemption.

At various times a Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.

21
<PAGE> 22

REPURCHASE

Each Fund also will repurchase shares through a shareholder's listed
securities dealer. The Funds normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received, and such request is received by a Fund
from such dealer not later than 30 minutes after the close of business on the
New York Stock Exchange (generally 4:00 P.M., New York time), on the same day.
Dealers have the responsibility to submit such repurchase requests to the Fund
not later than 30 minutes after the close of business on the New York Stock
Exchange in order to obtain that day's closing price.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by a Fund. Securities firms which do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares to such customers. Redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee. The
Corporation reserves the right to reject any order for repurchase, which right
of rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by a
Fund, however, may redeem shares as set forth above.

SHAREHOLDER SERVICES

The Corporation offers a number of shareholder services and investment
plans designed to facilitate investment in its shares. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various plans and services, or to change options
with respect thereto, can be obtained from the Corporation, the Distributor or
Merrill Lynch. Included in such services are the following:

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statement will also show any
other activity in the account since the preceding statements. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchase and the reinvestment of ordinary income
dividends and long-term capital gains distribution. Shareholders may make
additions to their Investment Account at any time by mailing a check directly to
the Transfer Agent. Shareholders may also maintain their accounts through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name will be
opened automatically, without charge, at the Transfer Agent. Shareholders
interested in transferring their shares from Merrill Lynch and who do not wish
to have an Investment Account maintained for such shares at the Transfer Agent
may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares, and then must turn the certificates over

22
<PAGE> 23

to the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring from Merrill Lynch to another brokerage
firm or financial institution should be aware that, if the firm to which the
account is to be transferred will not take delivery of shares of a Fund, a
shareholder must either redeem the shares so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue to
maintain an account at Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Funds at the net asset value per share next
determined on the ex-dividend date of such dividends and distributions. A
shareholder may at any time, by written notification or by telephone
(1-800-MER-FUND) or by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch, or the Transfer Agent,
if the shareholder's account is maintained with the Transfer Agent, elect to
have subsequent dividends, or both dividends and capital gains distributions,
paid in cash rather than reinvested, in which event payment will be mailed on or
about the payment date.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to receive systematic withdrawal payments from such
shareholder's Investment Account in the form of payments by check or through
automatic payment by direct deposit to such shareholder's bank account on either
a monthly or quarterly basis. Shareholders whose shares are held within a
CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program, subject to certain conditions.

AUTOMATIC INVESTMENT PLANS

Regular additions of shares may be made in an investor's Investment Account
by prearranged charges of $50 or more to such investor's regular bank account.
Investors who maintain CMA(R) accounts may arrange to have periodic investments
made in the Funds in their CMA(R) account or in certain related accounts in
amounts of $100 or more through the CMA(R) Automated Investment Program.

RETIREMENT PLANS

Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Funds and in certain of the other mutual funds sponsored by Merrill Lynch as
well as in other securities. Merrill Lynch charges an initial establishment fee
and an annual custodial fee for each account. In addition, eligible shareholders
of a Fund may participate in a variety of qualified employee benefit plans which
are available from the Distributor. The minimum initial purchase to establish
any such plan is $100 and the minimum subsequent purchase is $1.

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<PAGE> 24

PERFORMANCE DATA

From time to time a Fund may include its average annual total return and/or
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed in accordance with formulas specified by the Securities
and Exchange Commission.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses.

Each Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return generally will be lower
than average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. A Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.

Total return figures are based on a Fund's historical performance and are
not intended to indicate future performance. A Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a Fund
will fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.

Each Fund will generally compare its performance to the index it attempts
to replicate. A Fund may also compare its performance to data contained in
publications such as Lipper Analytical Services, Inc., or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News and World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. From time to time, a Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered representative of a Fund's relative performance for any future
period.

The Funds' annual report will contain additional performance information
and will be available upon request and without charge.

24
<PAGE> 25

TAXES

The Funds and Their Shareholders. Each Fund intends to qualify for the
special tax treatment afforded regulated investment companies ("RICs") under the
Code. If it so qualifies, in any taxable year in which it distributes (in cash
or additional shares of the Fund) at least 90% of its taxable net income, the
Fund will not be subject to Federal income tax to the extent that it distributes
its net investment income and realized capital gains to its shareholders. Each
Fund intends to distribute substantially all of such income.

Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from a Fund's net realized long-term capital gains (including
long-term gains from certain transactions in futures and options)("capital gains
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gains
distributions received by the shareholder with respect to such shares.
Distributions in excess of a Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).

Dividends are taxable to shareholders even though they are reinvested in
additional shares of a Fund. Not later than 60 days after the close of its
taxable year, the Funds will provide shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
dividends. A portion of the ordinary income dividends paid by the S&P 500 Index
Fund and the Small Cap Index Fund may be eligible for the 70% dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. Distributions paid by the Aggregate Bond Index Fund and the International
Index Fund will not be eligible for the dividends received deduction. If a Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.

Ordinary income dividends paid by a Fund to shareholders who are
nonresident aliens or foreign entities generally will be subject to a 30% United
States withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under the applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.

Foreign source income received by the International Index Fund and the
Aggregate Bond Index Fund may give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the International
Index Fund may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held by the Fund. The International Index Fund
expects to be eligible, and intends, to file an election with the IRS pursuant
to which shareholders of the Fund will be required to include their
proportionate share of such withholding taxes in their U.S. income tax returns
as gross income, treat such proportionate shares as taxes paid by them, and
deduct such proportionate shares in computing their taxable incomes or,
alternatively, subject to certain restrictions, use them as foreign tax credits
against their U.S.

25
<PAGE> 26

income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The International Index Fund will report annually to its shareholders the amount
per share of such withholding taxes.

Redemptions and exchanges of a Fund's shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such events. A loss
realized on a sale or exchange of shares of a Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.

Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Funds or who, to the Funds' knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and these Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.

Ordinary income and capital gains dividends, as well as gains on the sale
or exchange of shares, may also be subject to state and local taxes.

This summary does not discuss the state or local income tax, or the estate
or inheritance tax, consequences of an investment in a Fund.

Shareholders are urged to consult their advisers as to specific questions
regarding Federal, foreign, state or local taxes.

The Series. The Trust and each Fund have received a private letter ruling
from the IRS, in which the IRS has ruled that each Series is classified as a
partnership for tax purposes and, based upon that ruling, that each Fund will be
entitled to look to the underlying assets of the Series in which it has invested
for purposes of satisfying the diversification and other requirements of the
Code applicable to RICs. If any of the facts upon which such ruling is premised
change in any material respect (e.g., if the Trust were required to register its
interests under the Securities Act) and the Trust is unable to obtain a revised
private letter ruling from the IRS indicating that each Series will continue to
be classified as a partnership, then the Board of Directors of the Corporation
will determine, in its discretion, the appropriate course of action for the
Funds. One possible course of action would be to withdraw the Funds' investments
from the Series and to retain an investment adviser to manage the Funds' assets
in accordance with the investment policies applicable to the respective Fund.
See "Investment Objectives and Policies."

26
<PAGE> 27

ADDITIONAL INFORMATION

DIVIDENDS AND DISTRIBUTIONS

It is each Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income will be paid at least annually
with respect to each of the S&P 500 Index Fund, Small Cap Index Fund and
International Index Fund. Dividends with respect to the Aggregate Bond Fund will
be declared daily and paid monthly. All net realized long- or short-term capital
gains, if any, are distributed to Fund shareholders at least annually. Dividends
will be reduced by account maintenance and transfer agency fees payable by the
shareholders of a Fund. Dividends and distributions will be reinvested
automatically in shares of the Funds, at net asset value. Shareholders may elect
in writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholder whether they are
reinvested in shares of a Fund or received in cash. From time to time, a Fund
may declare a special distribution at or about the end of the calendar year in
order to comply with a Federal income tax requirement that certain percentages
of its ordinary income and capital gains be distributed during the calendar
year.

See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.

DETERMINATION OF NET ASSET VALUE

Net asset value per share is determined once daily as of 15 minutes after
the close of business on the New York Stock Exchange (generally 4:00 P.M., New
York time) on days during which the New York Stock Exchange is open for trading
(a "Pricing Day"). The net asset value is computed by dividing the market value
of the securities held by a Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Administrator and the
Distributor, and the advisory fees payable indirectly by the Series of the Trust
to the Manager, are accrued daily.

The principal assets of each Fund will normally be its interest of the
underlying Series, which will be valued at its net asset value. A Series'
securities which are traded on stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the closing bid price. Securities traded in the
over-the-counter market are valued at the last quoted bid prices as at the close
of trading on the New York Stock Exchange on each day by brokers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Other investments, including futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair market
value, as determined in good faith by or under the direction of the Trustees of
the Trust.

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<PAGE> 28

the percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Series as of the time or determination on such
day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the aggregate investments in the Series by all investors in the
Series effected on such day, and (ii) the denominator of which is the aggregate
net asset value of the Series as of such time on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Series by all investors in the Series. The
percentage so determined will then be applied to determine the value of the
investor's interest in such Series as of 15 minutes after the close of business
of the New York Stock Exchange on the next Pricing Day of the Series.

ORGANIZATION OF THE CORPORATION

The Corporation is a Maryland corporation incorporated on October 25, 1996.
It has an authorized capital of 1,000,000,000 shares of Common Stock, par value
$0.0001 per share, divided into 125,000,000 shares each of Class A and Class D
shares for each of the four Funds: Merrill Lynch S&P 500 Index Fund, Merrill
Lynch Small Cap Index Fund, Merrill Lynch Aggregate Bond Index Fund and Merrill
Lynch International Index Fund. Class A and Class D shares of a Fund represent
interests in the same assets of the Series and are identical in all respects
except that the Class D shares bear certain expenses related to the account
maintenance associated with such shares. Class D shares have exclusive voting
rights with respect to matters relating to the class' account maintenance
expenditures.

Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of each Fund have equal voting rights, except that each
Fund has exclusive voting rights to matters affecting only such Fund, and except
that as noted above, Class D shares have exclusive voting rights with respect to
matters relating to the class' account maintenance expenditures. There normally
will be no meeting of shareholders for the purpose of electing Directors unless
and until such time as less than a majority of the Directors holding office have
been elected by the shareholders, at which time the Directors then in office
will call a shareholders' meeting for the election of Directors. Shareholders
may, in accordance with the terms of the Articles of Incorporation, cause a
meeting of shareholders to be held for the purpose of voting on the removal of
Directors. Also, the Corporation will be required to call a special meeting of
shareholders in accordance with the requirements of the Investment Company Act
to seek approval of new management and advisory arrangements, of a material
increase in account maintenance fees or of a change in fundamental policies,
objectives or restrictions. Except as set forth above, the Directors shall
continue to hold office and appoint successor Directors. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except that, as noted
above, Class D shares bear certain additional expenses. Shares issued are
fully-paid and non-assessable by the Fund. Voting rights for Directors are not
cumulative.

The Trust consists of four Series, and is organized as a Delaware business
trust. Whenever investors in a Series are requested to vote on a fundamental
policy of a Series, the Corporation will hold a meeting of its shareholders and
will cast its vote as instructed by such shareholders.

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<PAGE> 29

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Funds at the address or
telephone number set forth on the cover page of this Prospectus.

SHAREHOLDER REPORTS

Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:

Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida
32232-5289

The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.

29
<PAGE> 30

[This page is intentionally left blank.]
<PAGE> 31

APPENDIX A

The Series are authorized to use certain instruments, including indexed
securities, options, futures and swaps, as described below. Such instruments,
which may be regarded as derivatives, are referred to collectively herein as
"Strategic Instruments."

INDEXED SECURITIES

The Series may invest in securities the potential return of which is based
on the change in particular measurements of value or rate (an "index"). As an
illustration, a Series may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities, or based on the relative changes of two indices. If a
Series invests in such securities, it may be subject to reduced or eliminated
interest payments or loss of principal in the event of an adverse movement in
the relevant index or indices.

OPTIONS ON SECURITIES AND SECURITIES INDICES

Purchasing Options. Each Series is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially replicated by securities held in its portfolio. When a Series
purchases a put option, in consideration for an upfront payment (the "option
premium") the Series acquires a right to sell to another party specified
securities owned by the Series at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Series' risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Series will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.

Each Series is also authorized to purchase call options on securities it
intends to purchase or securities indices. When a Series purchases a call
option, in consideration for the option premium the Series acquires the right to
purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The purchase of a call option may
protect the Series from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the Series
is contemplating its purchase, in the case of an option on a security, or
attempting to identify specific securities in which to invest in a market the
Series believes to be attractive, in the case of an option on an index (an
"anticipatory hedge"). In the event the Series determines not to purchase a
security underlying a call option, however, the Series may lose the entire
option premium.

Each Series is also authorized to purchase put or call options in
connection with closing out put or call options it has previously sold.

Writing Options. Each Series is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices the
performance of which is substantially replicated by securities held in its

A-1
<PAGE> 32

portfolio. When a Series writes a call option, in return for an option premium
the Series gives another party the right to buy specified securities owned by
the Series at the exercise price on or before the expiration date, in the case
of an option on securities, or agrees to pay to another party an amount based on
any gain in a specified securities index beyond a specified level on or before
the expiration date, in the case of an option on a securities index. In the
event the party to which a Series has written an option fails to exercise its
rights under the option because the value of the underlying securities is less
than the exercise price, the Series will partially offset any decline in the
value of the underlying securities through the receipt of the option premium. By
writing a call option, however, a Series limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.

Each Series may also write put options on securities or securities indices.
When a Series writes a put option, in return for an option premium the Series
gives another party the right to sell to the Series a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. In the event the party to
which the Series has written an option fails to exercise its rights under the
option because the value of the underlying securities is greater than the
exercise price, the Series will profit by the amount of the option premium. By
writing a put option, however, a Series will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Series writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Series for writing the put option. A Series will write a put option on a
security or a securities index only if the Series would be willing to purchase
the security at the exercise price for investment purposes (in the case of an
option on a security) or is writing the put in connection with trading
strategies involving combinations of options--for example, the sale and purchase
of options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").

Each Series is also authorized to sell call or put options in connection
with closing out call or put options it has previously purchased.

Other than with respect to closing transactions, the Series will only write
call or put options that are "covered." A call or put option will be considered
covered if a Series has segregated assets with respect to such option in the
manner described in "Risk Factors in Strategic Instruments" below. A call option
will also be considered covered if a Series owns the securities it would be
required to deliver upon exercise of the option (or, in the case of option on a
securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.

Types of Options. Each Series may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the

A-2
<PAGE> 33

buyer and seller, but generally do not require the parties to post margin and
are subject to greater risk of counterparty default. See "Additional Risk
Factors of OTC Transactions" below.

FUTURES

Each Series may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts which obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of a
commodity at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Series is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures position is closed, the Series will pay additional margin
representing any loss experienced as a result of the futures position the prior
day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day. The Series will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Series from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.

SWAPS

The Series are authorized to enter into equity swap agreements, which are
OTC contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of securities or equity index. Swap agreements may also be used
to obtain exposure to an equity or market without owning or taking physical
custody of securities in circumstances in which direct investment is restricted
by local law or is otherwise impractical.

RISK FACTORS IN STRATEGIC INSTRUMENTS

The Series intend to enter into transactions involving Strategic
Instruments only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC transactions,
such instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC Transactions." However, there can be no assurance that, at any
specific time, either a liquid secondary market will exist for a Strategic
Instrument or a Series will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Strategic Instrument without incurring substantial losses, if at all.

Certain transactions in Strategic Instruments (e.g., futures transactions,
sales of put options) may expose a Series to potential losses which exceed the
amount originally invested by the Series in such instruments. When a Series
engages in such a transaction, the Series will deposit in a segregated account
at its custodian liquid securities with a value at least equal to the Series'
exposure, on a mark-to-market basis, to the transaction (as calculated pursuant
to requirements of the Securities and Exchange Commission). Such segregation
will ensure that the Series has assets available to satisfy its obligations with
respect to the transaction, but will not limit the Series' exposure to loss.

A-3
<PAGE> 34

ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS

Certain Strategic Instruments traded in OTC markets, including indexed
securities, swaps and OTC options, may be substantially less liquid than other
instruments in which a Series may invest. The absence of liquidity may make it
difficult or impossible for a Series to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Series to ascertain a market value for such instruments. A Series will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager anticipates
the Series can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.

The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Series have therefore adopted an investment policy
pursuant to which they will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Series, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Series and margin deposits on the
Series' outstanding OTC options exceeds 15% of the total assets of the Series,
taken at market value, together with all other assets of the Series which are
deemed to be illiquid or are otherwise not readily marketable. However, if an
OTC option is sold by the Series to a dealer in U.S. government securities
recognized as a "primary dealer" by the Federal Reserve Bank of New York and the
Series has the unconditional contractual right to repurchase such OTC option at
a predetermined price, then the Series will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's exercise price).

Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that a Series has unrealized gains in such instruments or
has deposited collateral with its counterparty the Series is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Series will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Series with a
third-party guaranty or other credit enhancement.

ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS

The Series may not use any Strategic Instrument to gain exposure to an
asset or class of assets that it would be prohibited by its investment
restrictions from purchasing directly.

A-4
<PAGE> 35

APPENDIX B -- DESCRIPTION OF COMMERCIAL
PAPER AND BOND RATINGS

COMMERCIAL PAPER

Description of relevant commercial paper ratings of Standard & Poor's
Ratings Group ("S&P") are as follows:

A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.

A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.

A-3: Issues carrying this designation have an adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.

Description of the relevant commercial paper ratings of Moody's Investors
Service, Inc. ("Moody's") are as follows:

PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:

-- Leading market positions in well-established industries.

-- High rates of return on funds employed.

-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.

-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.

-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.

PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurement and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.

A-5
<PAGE> 36

CORPORATE BONDS

Descriptions of the bond ratings of S&P are:

AAA-- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.

A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.

BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.

BB, B, CCC, CC or C--Debt rated BB, B, CCC, CC or C is regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
debt conditions.

C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.

D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.

The ratings from AA to CC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.

Descriptions of the bond ratings of Moody's are as follows:

Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are more unlikely to impair the
fundamentally strong position of such issues.

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat greater than the Aaa securities.

A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.

A-6
<PAGE> 37

Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.

Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.

B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.

Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.

Ca -- Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other
marked shortcomings.

C -- Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Moody's applies modifiers to each rating classification from Aa through B
to indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.

A-7
<PAGE> 38

[This page is intentionally left blank.]

A-8
<PAGE> 39

MERRILL LYNCH INDEX FUNDS, INC.--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------

NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares Class D shares

of the following Funds of Merrill Lynch Index Funds, Inc.

<TABLE>
<S> <C>
[ ] Merrill Lynch S&P 500 Index Fund [ ] Merrill Lynch Aggregate Bond Index Fund
[ ] Merrill Lynch Small Cap Index Fund [ ] Merrill Lynch International Index Fund
</TABLE>

and establish an Investment Account as described in the Prospectus. In the event
that I am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.

I enclose a check for $.......... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000 per Fund). I understand
that this purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.

Name............................................................................
First Name Initial Last Name

Name of Co-Owner (if any).......................................................
First Name Initial Last Name

Address.........................................................................

................................................................................
(Zip Code)

Occupation......................................................................

................................................................................
Signature of Owner

Name and Address of Employer....................................................

................................................................................

................................................................................
Signature of Co-Owner (if any)

(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION

<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>

If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.

IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account

IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:

I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Index Funds, Inc. Authorization Form.

SPECIFY TYPE OF ACCOUNT (CHECK ONE): [ ] checking [ ] savings

Name on your Account............................................................

Bank Name.......................................................................

Bank Number ................................................... Account
Number..........................................................................

Bank Address....................................................................

I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.

Signature of Depositor..........................................................

Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)

NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.

A-9
<PAGE> 40

- --------------------------------------------------------------------------------

3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER

Social Security Number or Taxpayer Identification Number

Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.

INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.

<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>

- --------------------------------------------------------------------------------

5. FOR DEALER ONLY

- --- Branch Office, Address, Stamp
- ---

- -
- -

- -
- -
- ---
- ---

This form, when completed, should be mailed to:

ML Index Funds
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289

We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.

...............................................................
Dealer Name and Address

By .............................................................................
Authorized Signature of Dealer

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------

..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------

- --------- ---------------
Dealer's Customer Account No.
</TABLE>

A-10
<PAGE> 41

- --------------------------------------------------------------------------------
MERRILL LYNCH INDEX FUNDS, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------

NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------

1. ACCOUNT REGISTRATION

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------

Name of Owner..................................................
------------------------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)......................................
Address........................................................ Account Number ............................................
(if existing account)
...............................................................
</TABLE>

- --------------------------------------------------------------------------------

2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)

MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares of the following Funds of
Merrill Lynch Index Funds, Inc.

<TABLE>
<S> <C>
[ ] Merrill Lynch S&P 500 Index Fund [ ] Merrill Lynch Aggregate Bond Index Fund
[ ] Merrill Lynch Small Cap Index Fund [ ] Merrill Lynch International Index Fund
</TABLE>

at cost or current offering price. Withdrawals to be made either (check one) [
] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or holiday,
the next succeeding business day will be utilized. Begin systematic withdrawal
on ............. (month), or as soon as possible thereafter.

SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$............. or [ ] .............% of the current value of [ ] Class A or [
] Class D shares in the account.

SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):

DRAW CHECKS PAYABLE (CHECK ONE)

(A) I HEREBY AUTHORIZE PAYMENT BY CHECK
[ ] as indicated in Item 1.
[ ] to the order of..........................................................

Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................

Address ...................................................................

......................................................................

Signature of Owner
..............................................................................
Date ....................................................................

Signature of Co-Owner (if any) .......................................

(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.

Specify type of Account (check one): [ ] checking [ ] savings

Name on your account............................................................

Bank Name.......................................................................

Bank Number .............................................................
Account Number..................................................................

Bank Address....................................................................

................................................................................

Signature of Depositor
..............................................................................
Date............................................................................

Signature of Depositor..........................................................
(If joint account, both must sign)

NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.

A-11
<PAGE> 42

- --------------------------------------------------------------------------------

3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN

I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase (choose one):

[ ] Class A shares [ ] Class D shares

of the following Funds of Merrill Lynch Index Funds, Inc.

<TABLE>
<S> <C>
[ ] Merrill Lynch S&P 500 Index Fund [ ] Merrill Lynch Aggregate Bond Index Fund
[ ] Merrill Lynch Small Cap Index Fund [ ] Merrill Lynch International Index Fund
</TABLE>

subject to the terms set forth below. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.

MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Index Funds, Inc. as indicated below:

Amount of each ACH debit $...................................................

Account Number...............................................................

Please date and invest ACH debits on the 20th of each month beginning
.............................. or as soon thereafter as possible.
(month)

I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.

................. .......................................
Date Signature of Depositor

.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO
HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH
FINANCIAL DATA SERVICES, INC.

To..........................................................................Bank
(Investor's Bank)

Bank Address....................................................................

City .......... State .......... Zip Code.......................................

As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. . I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.

.................... .......................................
Date Signature of Depositor

.................... .......................................
Bank Account Number Signature of Depositor

(If joint account, both must sign)

NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.

A-12
<PAGE> 43

ADMINISTRATOR OF THE CORPORATION AND MANAGER OF THE TRUST
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey

Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Merrill Lynch S&P 500 Index Fund
Merrill Lynch Small Cap Index Fund
Merrill Lynch Aggregate Bond Index Fund

Merrill Lynch Trust Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Merrill Lynch International Index Fund

State Street Bank Trust Company
P.O. Box 351
Boston Massachusetts 02101

TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.

Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32246-5289

INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400

COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE> 44

- ------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................... 2
Investment Objectives and Policies...... 4
Management of the Funds................. 17
Purchase of Shares...................... 20
Redemption of Shares.................... 21
Shareholder Services.................... 22
Performance Data........................ 24
Taxes................................... 25
Additional Information.................. 27
Appendix A.............................. A-1
Appendix B.............................. A-5
Authorization Form...................... A-9
Code #19003-0197
</TABLE>

MERRILL LYNCH
INDEX FUNDS, INC.

PROSPECTUS mlynch compass
January 31, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 45

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH INDEX FUNDS, INC.

P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800

------------------------

Merrill Lynch Index Funds, Inc. (the "Corporation") currently consists of
four portfolios or series: Merrill Lynch S&P 500 Index Fund ("S&P 500 Index
Fund"), Merrill Lynch Small Cap Index Fund ("Small Cap Index Fund"), Merrill
Lynch Aggregate Bond Index Fund ("Aggregate Bond Index Fund") and Merrill Lynch
International Index Fund ("International Index Fund") (collectively, the
"Funds," and each, a "Fund"). Each Fund is a non-diversified mutual fund whose
investment objective is to provide investment results that, before expenses,
seek to replicate the total return (i.e., the combination of capital changes and
income) of a specified securities index. Each Fund will seek to achieve its
objective by investing all of its assets in the series (collectively, the
"Series," and each, a "Series") of Merrill Lynch Index Trust (the "Trust") that
has the same investment objective as the Fund. Each Fund's investment experience
will correspond directly to the investment experience of the respective Series
in which it invests. There can be no assurance that the investment objectives of
the Funds will be achieved.

This Statement of Additional Information for the Funds is not a prospectus
and should be read in conjunction with the prospectus of the Funds, dated
January 31, 1997 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or by
writing the Funds at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.

------------------------

MERRILL LYNCH ASSET MANAGEMENT, L.P. - ADMINISTRATOR
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. - DISTRIBUTOR

------------------------

The date of this Statement of Additional Information is January 31, 1997
<PAGE> 46

INVESTMENT OBJECTIVES AND POLICIES

Merrill Lynch Index Funds, Inc. currently consists of four series: Merrill
Lynch S&P 500 Index Fund, Merrill Lynch Small Cap Index Fund, Merrill Lynch
Aggregate Bond Index Fund and Merrill Lynch International Index Fund. Each Fund
is a non-diversified mutual fund whose investment objective is to provide
investment results that, before expenses, seek to replicate the total return
(i.e., the combination of capital changes and income) of a specified securities
index. Each Fund will seek to achieve its objective by investing all of its
assets in the Series of Merrill Lynch Index Trust that has the same investment
objective as the Fund. Each Fund's investment experience will correspond
directly to the investment experience of the respective Series in which it
invests. Reference is made to the discussion under "Investment Objectives and
Policies" in the Prospectus for information with respect to each Fund's and each
Series' investment objective and policies. There can be no assurance that the
investment objectives of the Funds will be achieved.

INVESTMENT RESTRICTIONS

The Corporation has adopted the following restrictions and policies
relating to the investment of each Fund's assets and activities, which are
fundamental policies and may not be changed with respect to a Fund without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares). Provided that
none of the following restrictions shall prevent a Fund from investing all of
its assets in shares of another registered investment company with the same
investment objective (in a master/feeder structure), each Fund may not:

1. Make any investment inconsistent with the Fund's classification as a
non-diversified company under the Investment Company Act.

2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S. Government
and its agencies and instrumentalities); provided, that in replicating the
weighting of a particular industry in its target index, a Series or Fund may
invest more that 25% of its total assets in securities of issuers in that
industry.

3. Make investments for the purpose of exercising control or management.

4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, a Fund may invest in securities directly or indirectly secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.

5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar instruments
shall not be deemed to be

2
<PAGE> 47

the making of a loan, and except further that a Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be made only
in accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended from
time to time.

6. Issue senior securities to the extent such issuance would violate
applicable law.

7. Borrow money, except that (i) a Fund may borrow from banks (as defined
in the Investment Company Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) a Fund may borrow up to an additional 5%
of its total assets for temporary purposes, (iii) a Fund may obtain such short-
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. A Fund may not pledge its assets other than
to secure such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.

8. Underwrite securities of other issuers except insofar as a Fund
technically may be deemed an underwriter under the Securities Act in selling
portfolio securities.

9. Purchase or sell commodities or contracts on commodities, except to the
extent that a Fund may do so in accordance with applicable law and the Fund's
Prospectus and Statement of Additional Information, as they may be amended from
time to time, and without registering as a commodity pool operator under the
Commodity Exchange Act.

The Trust has adopted investment restrictions substantially identical to
the foregoing, which are fundamental policies of the Trust and may not be
changed with respect to any Series without the approval of the holders of a
majority of the interests of the Series.

In addition, the Trust and the Corporation have adopted as an operating
policy, which may be changed by the Trustees and the Directors without
shareholder approval, that no Series or Fund, respectively, will make any
additional investments if the amount of its borrowings exceeds 5% of its total
assets. Borrowings do not include the use of investment techniques that may be
deemed to create leverage, including, but not limited to, such techniques as
dollar rolls, when-issued securities, options and futures.

Portfolio securities of each Fund's underlying Series generally may not be
purchased from, sold or loaned to Merrill Lynch Asset Management, L.P. ("MLAM")
or its affiliates or any of their directors, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under the Investment
Company Act.

Because of the affiliation of MLAM with the Corporation, the Series are
prohibited from engaging in certain transactions involving MLAM's affiliate,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order, the Series are
prohibited from engaging in portfolio transactions with Merrill Lynch or its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firms
or any of their affiliates participate as an underwriter or dealer.

3
<PAGE> 48

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The Directors and executive officers of the Corporation and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.

TERRY K. GLENN (56) -- President and Director(1)(2) -- Executive Vice
President of MLAM and Fund Asset Management, L.P. ("FAM") since 1983; Executive
Vice President and Director of Princeton Services, Inc. since 1993; President of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988; and Director of Merrill Lynch Financial Data Services, Inc. since 1985.

JACK B. SUNDERLAND (68) -- Director(2) -- P.O. Box 7, West Cornwall,
Connecticut. 06796. President and Director of American Independent Oil Company,
Inc. (energy company) since 1987; Member of Council on Foreign Relations since
1971.

STEPHEN B. SWENSRUD (63) -- Director(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Principal of Fernwood Associates (financial
consultants).

J. THOMAS TOUCHTON (58) -- Director(2) -- Suite 3405, One Tampa City
Center, Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and
its predecessor The Witt Co. (private placement partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy, Inc.
(electric utility holding company).

NORMAN R. HARVEY (63) -- Senior Vice President(1)(2) -- Senior Vice
President of MLAM and FAM since 1982.

JOSEPH T. MONAGLE, JR. (48) -- Senior Vice President(1)(2) -- Senior Vice
President of MLAM since 1990; Vice President of MLAM from 1978 to 1990.

GREGORY MAUNZ (44) -- Vice President(1)(2) -- Vice President of MLAM since
1985; Portfolio Manager of MLAM since 1984.

ERIC MITOFSKY (42) -- Vice President(1)(2) -- Vice President of MLAM since
1992; Senior Desk Analyst with Merrill Lynch Program Trading Desk from 1987 to
1992.

JAY C. HARBECK (62) -- Vice President(1)(2) -- Vice President of MLAM and
FAM since 1986.

GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of MLAM since 1984; Senior Vice President and Treasurer of FAM since
1984; Treasurer of the Distributor since 1984 and Vice President since 1981.

MARK B. GOLDFUS (50) -- Secretary(1)(2) -- Vice President of MLAM and FAM
since 1985.
- ---------------

(1) Interested person, as defined in the Investment Company Act, of the
Corporation.

(2) Such Director or officer is a director, trustee or officer of other
investment companies for which MLAM or FAM acts as investment adviser.

4
<PAGE> 49

As of the date of this Statement of Additional Information, the officers
and Directors of the Corporation as a group (nine persons) owned an aggregate of
less than 1/4 of 1% of the outstanding shares of Common Stock of Merrill Lynch &
Co., Inc. and owned an aggregate of less than 1% of the outstanding shares of
any of the Funds.

Pursuant to the terms of the Administration Agreement with the Corporation,
MLAM pays all compensation of officers of the Corporation as well as the fees of
all Directors who are affiliated persons of MLAM. The Corporation and the Trust
pay each individual who serves as a Director/Trustee not affiliated with MLAM a
fee of $2,500 per year plus $250 per meeting attended, together with such
individual's out-of-pocket expenses relating to attendance at meetings. The
Corporation and the Trust also compensate members of the Audit and Nominating
Committee, which consists of all of the Directors/Trustee who are not interested
persons of the Funds and the Series, with a fee of $1,000 per year.

COMPENSATION OF DIRECTORS

The following table sets forth the aggregate compensation the Corporation
and the Trust expect to pay to the non-interested Directors/Trustees for the
current fiscal year and the total compensation paid by all investment companies
advised by MLAM and its affiliate, FAM ("MLAM/FAM-Advised Funds") to the
non-interested Directors/Trustees for the calendar year ended December 31, 1996
(the most recent year for which such information is available).

<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM FUNDS/SERIES AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM
COMPENSATION FROM BENEFITS ACCRUED AS ADVISED FUNDS PAID
NAME OF DIRECTOR FUNDS/SERIES PART OF FUND/SERIES EXPENSES TO DIRECTORS(1)
- ----------------------------- ----------------- ---------------------------- ---------------------
<S> <C> <C> <C>
Jack B. Sunderland........... $ 4,500 None $ 128,100
Stephen B. Swensrud.......... $ 4,500 None $ 154,250
J. Thomas Touchton........... $ 4,500 None $ 128,100
</TABLE>

- ---------------
(1) In addition to the Corporation, the Directors served on other MLAM/FAM
Advised Funds as follows: Mr. Sunderland (20 registered investment companies
consisting of 29 portfolios); Mr. Swensrud (20 registered investment
companies consisting of 49 portfolios); Mr. Touchton (20 registered
investment companies consisting of 29 portfolios).

ADMINISTRATION ARRANGEMENTS

MLAM is owned and controlled by Merrill Lynch & Co., Inc., a financial
services holding company and the parent of Merrill Lynch. Reference is made to
"Management of the Funds" in the Prospectus for certain information concerning
the administration arrangements of the Corporation and the management and
advisory arrangements of the Trust.

5
<PAGE> 50

The Corporation has entered into an administration agreement with MLAM as
Administrator (the "Administration Agreement"). As discussed in the Prospectus,
the Administrator receives for its services to the Funds monthly compensation at
the annual rates of the average daily net assets of each Fund as follows:

<TABLE>
<CAPTION>
NAME OF FUND ADMINISTRATION FEE
- ---------------------------------------- ------------------
<S> <C> <C>
Merrill Lynch S&P 500 Index Fund...................................... 0.20%
Merrill Lynch Small Cap Index Fund.................................... 0.22%
Merrill Lynch Aggregate Bond Index Fund............................... 0.14%
Merrill Lynch International Index Fund................................ 0.24%
</TABLE>

The Administration Agreement obligates the Administrator to provide certain
administrative services to the Corporation and the Funds and to pay all
compensation of and furnish office space for officers and employees of the
Corporation as well as the fees of all Directors who are affiliated persons of
the Administrator or any of their affiliates. Each Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of additional
information (except to the extent paid by the Distributor), charges of the
Custodian, any Sub-custodian and Transfer Agent, expenses of redemption of
shares, Securities and Exchange Commission fees, expenses of registering the
shares under federal, state or foreign laws, fees and expenses of unaffiliated
Directors, accounting and pricing costs (including the daily calculation of net
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Corporation or the Fund. Merrill Lynch Funds Distributor, Inc. (the
"Distributor") will pay the promotional expenses of the Funds incurred in
connection with the offering of its shares.

Duration and Termination. Unless earlier terminated as described below,
the Administration Agreement will remain in effect for two years from the date
of its adoption. Thereafter, it will remain in effect from year to year with
respect to each Fund if approved annually (a) by the Board of Trustees and (b)
by a majority of the Trustees who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such party. Such
contract is not assignable and may be terminated with respect to a Fund without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.

6
<PAGE> 51

MANAGEMENT AND ADVISORY ARRANGEMENTS

Each Fund invests all of its assets in shares of the corresponding Series
of the Trust. Accordingly, the Funds do not invest directly in portfolio
securities and do not require investment advisory services. All portfolio
management occurs at the level of the Trust. The Trust has entered into a
management agreement with MLAM as Manager (the "Management Agreement"). As
discussed in the Prospectus, the Manager receives for its services to the Series
monthly compensation at the annual rates of the average daily net assets of each
Series as follows:

<TABLE>
<CAPTION>
NAME OF SERIES MANAGEMENT FEE
- ------------------------------------------ --------------
<S> <C> <C>
Merrill Lynch S&P 500 Index Series...................................... 0.05%
Merrill Lynch Small Cap Index Series.................................... 0.08%
Merrill Lynch Aggregate Bond Index Series............................... 0.06%
Merrill Lynch International Index Series................................ 0.11%
</TABLE>

The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees of
all Trustees who are affiliated persons of the Manager or any of their
affiliates. Each Series pays all other expenses incurred in the operation of the
Series, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor), charges of the Custodian, any Sub-custodian and Transfer
Agent, expenses of redemption of shares, Securities and Exchange Commission
fees, expenses of registering the shares under federal, state or foreign laws,
fees and expenses of unaffiliated Trustees, accounting and pricing costs
(including the daily calculation of net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Trust or the Series. The Distributor
will pay the promotional expenses of the Trust incurred in connection with the
offering of its shares.

Securities held by the Series of the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Manager or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Manager for the Series or other funds for which it
acts as investment adviser or for its advisory clients arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.

Duration and Termination. Unless earlier terminated as described below,
the Management Agreement will remain in effect for two years from the date of
its adoption. Thereafter, it will remain in effect from year to year with
respect to each Series if approved annually (a) by the Board of Trustees or by a
majority of the outstanding shares of the Series and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contract is not

7
<PAGE> 52

assignable and may be terminated with respect to a Series without penalty on 60
days' written notice at the option of either party thereto or by the vote of the
shareholders of the Series.

PURCHASE OF SHARES

Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.

The Corporation has entered into a distribution agreement with the
Distributor in connection with the offering of shares of the Funds (the
"Distribution Agreement"). The Distribution Agreement obligates the Distributor
to pay certain expenses in connection with the offering of the shares of the
Funds. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreement is subject to the same renewal requirements and termination provisions
as the Management Agreement described above.

The Corporation reserves the right to suspend the offering of its shares at
any time.

Account Maintenance Plan. Reference is made to "Purchase of
Shares--Account Maintenance Plan" in the Prospectus for certain information with
respect to the Account Maintenance Plan (the "Plan") of the Class D shares of
the Funds.

The payment of the account maintenance fee is subject to the provisions of
Rule 12b-1 under the Investment Company Act. Among other things, the Plan
provides that the Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the account maintenance fees paid to
the Distributor. In their consideration of the Plan, the Directors must consider
all factors they deem relevant, including information as to the benefits of the
Plan to the Funds and their shareholders. The Plan further provides that, so
long as the Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Funds, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the discretion
of the Independent Directors then in office. In approving the Plan in accordance
with Rule 12b-1, the Independent Directors concluded that there is reasonable
likelihood that the Plan will benefit the Fund and its shareholders. The Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or with respect to any Fund by the vote of the holders of
a majority of the outstanding Class D shares of the Fund. The Plan cannot be
amended to increase materially the amount to be spent by the Class D shares of a
Fund without shareholder approval, and all material amendments are required to
be approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Plan, cast in
person at a meeting called for that purpose. Rule 12b-1 further requires that
the Fund preserve copies of the Plan and any report made pursuant to such plan
for a period of not less than six years from the date of the Plan or such
report, the first two years in an easily accessible place.

REDEMPTION OF SHARES

Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.

8
<PAGE> 53

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Securities and Exchange Commission as a result of which disposal of portfolio
securities or determination of the net asset value of a Fund is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of the Fund.

The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund and the Series at that time.

Shares are redeemable at the option of the Corporation if, in the opinion
of the Corporation, ownership of the shares has or may become concentrated to
the extent which would cause the Corporation or a Fund to be deemed a personal
holding company within the meaning of the Code.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Because the Funds will invest exclusively in shares of their corresponding
Series it is expected that all transactions in portfolio securities will be
entered into by the Series. The Manager is responsible for making the Series'
portfolio decisions, placing the Series' brokerage business, evaluating the
reasonableness of brokerage commissions and negotiating the amount of any
commissions paid subject to a policy established by the Trust's Trustees and
officers. The Trust has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. Orders for
transactions in portfolio securities are placed for the Trust with a number of
brokers and dealers, including Merrill Lynch. In placing orders, it is the
policy of the Trust to obtain the most favorable net results, taking into
account various factors, including price, commissions, if any, size of the
transaction and difficulty of execution. Where practicable, the Manager surveys
a number of brokers and dealers in connection with proposed portfolio
transactions and selects the broker or dealer which offers the Trust the best
price and execution or other services which are of benefit to the Trust.
Securities firms also may receive brokerage commissions on transactions
including covered call options written by the Trust and the sale of underlying
securities upon the exercise of such options. In addition, consistent with the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and policies established by the Trustees, the Manager may consider sales of
shares of the Funds as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Trust.

The Trust does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Trust. Such supplemental research services ordinarily
consist of, quantitative and modeling information, assessments and analyses of
the business or prospects of a company, industry or economic sector. Information
so received will be in addition to and not in lieu of the services required to
be performed by the Manager under the Management Agreement. If in the judgment
of the Manager the Trust will be benefited by supplemental research services,
the Manager is authorized to pay brokerage commissions to a broker furnishing
such services which are in excess of commissions which another broker may have
charged for effecting the same transaction. The expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information, and the Manager may use such information in servicing its other
accounts.

9
<PAGE> 54

The Trust anticipates that brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Trust will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.

The Trust invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust as
principal in purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Trust, including
Merrill Lynch, will not serve as the Trust's dealer in such transactions.
However, affiliated persons of the Trust may serve as its broker in the
over-the-counter transactions conducted on an agency basis.

Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Trust on the floor of
any national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Trust at
least annually setting forth the compensation it has received in connection with
such transactions.

The Trustees have considered the possibility of recapturing for the benefit
of the Trust brokerage commissions, dealer spreads and other expenses of
possible portfolio transactions, such as underwriting commissions, by conducting
such portfolio transactions through affiliated entities, including Merrill
Lynch. For example, brokerage commissions received by Merrill Lynch could be
offset against the management fee paid by the Trust to the Manager. After
considering all factors deemed relevant, the Trustees made a determination not
to seek such recapture. The Trustees will reconsider this matter from time to
time.

Portfolio Turnover. Although the Series will use a passive, indexing
approach to investing, each Series may engage in a substantial number of
portfolio transactions. The rate of portfolio turnover will be a limiting factor
when the Manager considers whether to purchase or sell securities for a Series
only to the extent that the Manager will consider the impact of transaction
costs on a Series' tracking error. Changes in the securities comprising a
Series' index will tend to increase that Series' portfolio turnover rate, as the
Manager restructures the Series' holdings to reflect the changes in the index. A
high rate of portfolio turnover would result in correspondingly greater
brokerage commission expenses. Portfolio turnover rate is calculated by dividing
the lesser of the Series' annual sales or purchases of portfolio securities
(exclusive of purchases and sales of Government securities and of all other
securities, including options, whose maturity or expiration dates at the time of
acquisition were one year or less) by the monthly average value of the
securities in the Series during the fiscal year.

DETERMINATION OF NET ASSET VALUE

Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.

10
<PAGE> 55

The net asset value of the shares of the Funds is determined once daily
Monday through Friday as of 15 minutes after the close of business on the New
York Stock Exchange (generally 4:00 P.M., New York time) on each day the New
York Stock Exchange is open for trading (a "Pricing Day"). The New York Stock
Exchange is not open for trading on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value is computed by dividing the value of the
securities held by a Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Administrator and the Distributor, and the
advisory fees payable indirectly by the Series of the Trust to the Manager, are
accrued daily.

Each investor in the Trust may add to or reduce its investment in any
Series on each Pricing Day. The value of each investor's (including the
respective Funds') interest in a Series will be determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally 4:00 p.m.,
New York Time) by multiplying the net asset value of the Series by the
percentage, effective for that day, that represents that investor's share of the
aggregate interests in such Series. Any additions or withdrawals, which are to
be effected on that day, will then be effected. The investor's percentage of the
aggregate beneficial interests in a Series will then be re-computed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Series as of the time or determination on such day
plus or minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in the Series effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Series as of such
time on such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in the Series by all
investors in the Series. The percentage so determined will then be applied to
determine the value of the investor's interest in such Series as of 15 minutes
after the close of business of the New York Stock Exchange on the next Pricing
Day of the Series.

SHAREHOLDER SERVICES

The Funds offer a number of shareholder services described below which are
designed to facilitate investment in their shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Funds, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.

INVESTMENT ACCOUNT

11
<PAGE> 56

confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions. The
statement will also show any other activity in the account since the preceding
statements. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchase and
the reinvestment of ordinary income dividends and long-term capital gains
distribution. Shareholders may make additions to their Investment Account at any
time by mailing a check directly to the Transfer Agents. Shareholders may also
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the Transfer
Agent. Shareholders interested in transferring their shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares, and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the account is
to be transferred will not take delivery of shares of a Fund, a shareholder must
either redeem the shares so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain an
account at Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares of an Investment Account may be requested by a
shareholder directly from Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent").

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Funds. Such reinvestment
will be at the net asset value of shares of a Fund, without sales charge, as of
the close of business on the ex-dividend date of the dividend or distribution.
Shareholders may elect in writing or by telephoning (1-800-MER-FUND) to receive
either their income dividends or capital gains distributions, or both, in cash,
in which event payment will be mailed on or about the payment date. Shareholders
may, at any time, notify the Transfer Agent in writing that they no longer wish
to have their dividends and/or distributions reinvested in shares of the Fund or
vice versa and, commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected.

SYSTEMATIC WITHDRAWAL PLANS

12
<PAGE> 57

AUTOMATIC INVESTMENT PLANS

RETIREMENT PLANS

Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in a
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.

Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

It is the Corporation's intention to distribute all of its net investment
income, if any. Dividends from such net investment income will be paid at least
annually with respect to each of the S&P 500 Index Fund, Small Cap Index Fund
and International Index Fund. Dividends with respect to the Aggregate Bond Index
Fund will be declared daily and paid monthly. All net realized long- or
short-term capital gains, if any, are distributed to Fund shareholders at least
annually. From time to time, a Fund may declare a special distribution at or
about the end of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains be
distributed during the taxable year. See "Shareholder Services -- Reinvestment
of Dividends and Capital Gains Distributions" for information concerning the
manner in which dividends and distributions may be reinvested automatically in
shares of the Funds. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash.

TAXES

The Funds intend to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Internal Revenue Code of 1986,
as amended (the "Code"). As a RIC, a Fund will not be subject to Federal income
tax on the part of its net ordinary income and net realized capital gains which
it distributes to shareholders. In order to qualify, the Fund must among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale of
securities, or other income (including but not limited to gains from options or
futures) derived with respect to its business of investing in such stock or
securities; (ii) derive less than 30% of its gross income from gains from the
sale or other disposition of stock, securities, options or futures held for less
than 3 months; (iii) distribute at least 90% of its dividend, interest and
certain other taxable income each year; (iv) at the end of each fiscal quarter
maintain at least 50% of the value of its total assets in cash, government
securities, securities of other RICs, and other securities of issuers which
represent, with respect to each issuer, no more

13
<PAGE> 58

than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer; and (v) at the end of each fiscal quarter have
no more than 25% of its assets invested in the securities (other than those of
the government or other RICs) of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the same, similar or related trades
and businesses.

Dividends paid by a Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from a Fund's net realized long-term capital gains (including
long-term gains from certain transactions in futures and options) are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gains distributions received by the
shareholder with respect to such shares. Distributions in excess of a Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).

Dividends and distributions are taxable to shareholders even though they
are reinvested in additional shares of a Fund. Not later than 60 days after the
close of its taxable year, the Funds will provide shareholders with a written
notice designating the amounts of any ordinary income dividends or capital gains
dividends. A portion of the ordinary income dividends paid by the S&P 500 Index
Fund and Small Cap Index Fund may be eligible for the 70% dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. For this purpose, the Funds will allocate dividends eligible for the
dividends received deduction between the Class A and Class D shareholders
according to a method that is based upon the gross income that is allocable to
the Class A and Class D shareholders during the taxable year, or such other
method as the Internal Revenue Service may prescribe. Distributions paid by the
Aggregate Bond Index Fund and the International Index Fund will not be eligible
for the dividends received deduction. If a Fund pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.

Dividends and interest received by the International Index Fund and the
Aggregate Bond Index Fund may give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the International
Index Fund may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and

14
<PAGE> 59

limitations contained in the Code. For example, certain retirement accounts
cannot claim foreign tax credits on investments in foreign securities held by
the Fund. The International Index Fund expects to be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate share
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate share as taxes paid by them, and deduct such
proportionate share in computing their taxable incomes or, alternatively,
subject to certain restrictions, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporation shareholder who do not itemize deductions. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The International Equity Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A and Class D
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. For purposes of determining its distribution
requirements, each Fund will account for its share of items of income, gain,
loss and deductions of the Series as they are taken into account by the Series.
While each Fund intends to distribute its income and capital gains in the manner
necessary to avoid imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such event, the Fund
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.

Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Corporation or who, to the Corporation's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

Each Fund may purchase or sell options and futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by a Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.

Code Section 1092, which applies to certain "straddles", may affect the
taxation of each Fund's transactions in options and futures contracts. Under
Section 1092, a Fund may be required to postpone recognition for tax purposes of
losses incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with "wash sales," may cause a Fund to
postpone recognition of certain losses

15
<PAGE> 60

for tax purposes; and Code Section 1258, which deals with "conversion
transactions," may apply to recharacterize certain capital gains as ordinary
income for tax purposes.

One of the requirements for qualification as a RIC is that less than 30% of
a Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Funds may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.

SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS

In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether a Series qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to a Series.

Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, a Series may elect capital gain or loss
treatment for such transactions. In general, however, Code Section 988 gains or
losses will increase or decrease the amount of a Fund's investment company
taxable income available to be distributed to shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital gains.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares.

THE SERIES

The Trust and each Fund have received a private letter ruling from the
Internal Revenue Service ("IRS"), in which the IRS has ruled that each Series is
classified as a partnership for tax purposes and, based upon that ruling, that
each Fund will be entitled to look to the underlying assets of the Series in
which it has invested for purposes of satisfying the diversification
requirements and other requirements of the Code applicable to RICs. If any of
the facts upon which such ruling is premised change in any material respect
(e.g., if the Trust were required to register its interests under the Securities
Act) and the Trust is unable to obtain a revised private letter ruling from the
IRS indicating that each Series will continue to be classified as a partnership,
then the Board of Directors of the Corporation will determine, in its
discretion, the appropriate course of action for the Funds. One possible course
of action would be to withdraw the Funds' investments from the Series and to
retain an investment adviser to manage the Funds' assets in accordance with the
investment policies applicable to the respective Fund. See "Investment
Objectives and Policies."

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, and does
not address the state and local tax, or estate or inheritance

16
<PAGE> 61

tax, consequences of an investment is a Fund. For the complete provisions,
reference should be made to the pertinent Code sections and the Treasury
regulations promulgated thereunder. The Code and the Treasury regulations are
subject to change by legislative or administrative action either prospectively
or retroactively.

Dividends and capital gains distributions and gain on the sale or exchange
of shares in a Fund may also be subject to state and local taxes.

Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes or estate or inheritance
tax. Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in a Fund.

PERFORMANCE DATA

From time to time a Fund may include its Fund's average annual total
return, other total return data and/or yield in advertisements or information
furnished to present or prospective shareholders. Total return figures are based
on a Fund's historical performance and are not intended to indicate future
performance. Average annual total return and yield are determined in accordance
with a formula specified by the Securities and Exchange Commission.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses.

Each Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment. Such data will be
computed as described above, except that as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted. Actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.

From time to time, a Fund may include its Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature.

17
<PAGE> 62

GENERAL INFORMATION

DESCRIPTION OF SHARES

Stock certificates are issued by the Transfer Agent only on specific
request. Certificates for fractional shares are not issued in any case.

The Trust consists of four Series, and is organized as a Delaware business
trust. Whenever a Fund is requested to vote on a fundamental policy of a Series,
the Corporation will hold a meeting of the investing Fund's shareholders and
will cast its vote as instructed by such Fund's shareholders.

MLAM provided the initial capital for each Fund by purchasing 2,500 Class A
shares of each Fund (10,000 total) and 2,500 Class D shares of each Fund (10,000
total), for an aggregate of $50,000 per Fund. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Corporation will be paid by the Corporation and amortized over a
period not exceeding five years. The proceeds realized by MLAM upon redemption
of any of such shares will be reduced by the proportionate amount of the
unamortized organizational expenses which the number of shares redeemed bears to
the number of shares initially purchased.

18
<PAGE> 63

COMPUTATION OF OFFERING PRICE PER SHARE

Based upon the projected value of each Fund's estimated assets and
projected number of shares of each class outstanding on the date its shares are
first offered to the public, the initial offering price of the shares of each
class of each Fund is expected to be $10.00 ($25,000 net assets divided by 2,500
shares outstanding).

INDEPENDENT AUDITORS

Deloitte & Touche, LLP, has been selected as the independent auditors of
the Corporation and the Trust. The selection of the Corporation's independent
auditors is subject to ratification by shareholders in years when an annual
meeting of shareholders is held. In addition, employment of such auditors may be
terminated without any penalty by vote of a majority of the outstanding shares
of the Corporation at a meeting called for the purpose of terminating such
employment. The independent auditors are responsible for auditing the annual
financial statements of the Funds.

CUSTODIAN

Merrill Lynch Trust Company, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, acts of custodian of the assets of Merrill Lynch S&P 500 Index Series,
Merrill Lynch Small Cap Index Series and Merrill Lynch Aggregate Bond Index
Series. State Street Bank and Trust Company ("State Street"), P.O. Box 351,
Boston Massachusetts 02101, acts as custodian of the assets of Merrill Lynch
International Index Series. Under its contract with the Trust, State Street is
authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the International Index Series to be held in its
offices outside the United States and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling cash
and securities, handling the receipt and delivery of securities and collecting
interest and dividends on investments. Each Custodian is responsible for
safeguarding and controlling cash and securities, handling the receipt and
delivery of the securities and collecting interest and dividends on investments.

TRANSFER AGENT

Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Transfer Agent of the Corporation
and the Trust. The Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening, maintenance and servicing of shareholder
accounts. See "Management of the Funds -- Transfer Agency Services" in the
Prospectus.

LEGAL COUNSEL

Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Corporation and the Trust.

REPORTS TO SHAREHOLDERS

The Corporation sends to its shareholders at least quarterly reports
showing the Funds' portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.

19
<PAGE> 64

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Corporation has filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Act and the
Investment Company Act, to which reference is hereby made.

Under separate agreements Merrill Lynch has granted the Corporation and the
Trust the right to use the "Merrill Lynch" name and has reserved the right to
withdraw its consent to the use of such name by the Corporation and the Trust at
any time or to grant the use of such name to any other company, and the
Corporation and the Trust have granted Merrill Lynch, under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by Merrill Lynch.

20
<PAGE> 65

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder,
Merrill Lynch Index Funds, Inc.:

We have audited the accompanying statements of assets and liabilities of the
Merrill Lynch S&P 500 Index Fund, Merrill Lynch SmallCap Index Fund, Merrill
Lynch Aggregate Bond Index Fund and Merrill Lynch International Index Fund of
Merrill Lynch Index Funds, Inc. as of January 17, 1997. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such statements of assets and liabilities present fairly, in all
material respects, the financial position of the Merrill Lynch S&P 500 Index
Fund, Merrill Lynch SmallCap Index Fund, Merrill Lynch Aggregate Bond Index Fund
and Merrill Lynch International Index Fund of Merrill Lynch Index Funds, Inc. as
of January 17, 1997, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Princeton, New Jersey
January 22, 1997

21
<PAGE> 66

MERRILL LYNCH INDEX FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 17, 1997

<TABLE>
<CAPTION>
MERRILL
MERRILL MERRILL LYNCH MERRILL
LYNCH LYNCH AGGREGATE LYNCH
S&P 500 SMALL CAP BOND INTERNATIONAL
INDEX FUND INDEX FUND INDEX FUND INDEX FUND
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash in Bank................................... $ 25,000 $ 25,000 $ 25,000 $ 25,000
Prepaid registration fees (Note 3)............. 173,685 43,421 28,947 28,947
Deferred organization expenses (Note 4)........ 84,211 21,053 14,035 14,035
------------ ------------ ------------ ------------
Total Assets................................. 282,896 89,474 67,982 67,982
Liabilities:
Liabilities and accrued expenses............... 257,896 64,474 42,982 42,982
------------ ------------ ------------ ------------
Net Assets (equivalent to $0.0001 per share on
1,250 Class A shares of Common Stock (par value
$0.0001), 1,250 Class D shares of Common Stock
(par value $0.0001) outstanding with
1,000,000,000 shares authorized) (Note 1)...... $ 25,000 $ 25,000 $ 25,000 $ 25,000
============= ============= ============= =============
Net Assets Consist of:
Class A Shares of Common Stock, $0.0001 par
value, 125,000,000 shares authorized......... $ 1 $ 1 $ 1 $ 1
Class D Shares of Common Stock, $0.0001 par
value, 125,000,000 shares authorized......... 1 1 1 1
Paid-in Capital in excess of par............... 24,998 24,998 24,998 24,998
------------ ------------ ------------ ------------
Net Assets....................................... $ 25,000 $ 25,000 $ 25,000 $ 25,000
============= ============= ============= =============
Net Asset Value:
Class A -- Based on net assets of $12,500 and
1,250 shares outstanding....................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
============= ============= ============= =============
Class D -- Based on net assets of $12,500 and
1,250 shares outstanding....................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
============= ============= ============= =============
</TABLE>

- ---------------

Notes to Statement of Assets and Liabilities.

(1) Merrill Lynch Index Funds, Inc. (the "Corporation") was organized as a
Maryland corporation on October 25, 1996 and consists of four portfolios or
series; Merrill Lynch S&P 500 Index Fund, Merrill Lynch Small Cap Index
Fund, Merrill Lynch Aggregate Bond Index Fund and Merrill Lynch
International Index Fund. The Corporation is registered under the investment
Company Act of 1940 as a non-diversified mutual fund. To date, the
Corporation has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
D shares of Common Stock to Merrill Lynch Asset Management, L.P. (the
"Administrator").

(2) The Corporation has entered into an administration agreement (the
"Administration Agreement") with the Administrator, and a distribution
agreement (the "Distribution Agreement") with Merrill Lynch Funds
Distributor, Inc. (the "Distributor"). (See "Management of the
Funds -- Administration Arrangements" in the Statement of Additional
Information.) Certain officers and/or directors of the Corporation are
officers and/or directors of the Administrator and the Distributor.

(3) Prepaid registration fees are charged to income as the related shares are
issued.

(4) Deferred organization expenses will be amortized over a period from the date
the Corporation commences operations not exceeding five years. In the event
that the Administrator (or any subsequent holder) redeems any of its
original shares prior to the end of the five-year period, the proceeds of
the redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares redeemed
to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the date
of such redemption. In the event that the Corporation is liquidated prior to
the end of the five-year period, the Administrator (or any subsequent
holder) shall bear the unamortized deferred organization expenses.

22
<PAGE> 67

- ------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
IN THIS
STATEMENT
---------
<S> <C>
Investment Objectives and
Policies....................... 2
Investment Restrictions........ 2
Management of the Funds.......... 4
Directors and Officers......... 4
Compensation of Directors...... 5
Administration Arrangements.... 5
Management and Advisory
Arrangements................ 7
Purchase of Shares............... 8
Redemption of Shares............. 8
Portfolio Transactions and
Brokerage...................... 9
Determination of Net Asset
Value.......................... 10
Shareholder Services............. 11
Investment Account............. 11
Automatic Reinvestment of
Dividends and Capital Gains
Distributions............... 12
Systematic Withdrawal
Plans..................... 12
Automatic Investment
Plans..................... 13
Retirement Plans............ 13
Dividends, Distributions and
Taxes....................... 13
Dividends and
Distributions............. 13
Taxes....................... 13
Tax Treatment of Options and
Futures Transactions........ 15
Special Rules for Certain
Foreign Currency
Transactions................ 16
The Series..................... 16
Performance Data................. 17
General Information.............. 18
Description of Shares....... 18
Computation of Offering
Price per Share........... 19
Independent Auditors........ 19
Custodian................... 19
Transfer Agent.............. 19
Legal Counsel............... 19
Reports to Shareholders..... 19
Additional Information...... 20
Report of Independent Auditors... 21
Financial Statements............. 22
Code 19004-0197
</TABLE>

MERRILL LYNCH
INDEX FUNDS, INC.

STATEMENT OF mlynch compass
ADDITIONAL
INFORMATION
January 31, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 68
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.

<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>