RYDEX DYNAMIC FUNDS, 497, 2000-10-10

RYDEX DYNAMIC FUNDS
497, 2000-10-10

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<PAGE>

RYDEX
DYNAMIC FUNDS
C CLASS SHARES

PROSPECTUS
OCTOBER 9, 2000

TITAN 500 FUND

VELOCITY 100 FUND

RYDEX SERIES FUNDS
U.S. GOVERNMENT MONEY MARKET FUND
(DATED AUGUST 1, 2000 AS SUPPLEMENTED OCTOBER 9, 2000)

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
TRUST'S SHARES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

[LOGO]

<PAGE>

TABLE OF CONTENTS

2 RYDEX DYNAMIC FUNDS OVERVIEW

2 Titan 500 Fund

4 Velocity 100 Fund

6 RYDEX SERIES FUNDS OVERVIEW

6 U.S. Government Money Market Fund

8 ADDITIONAL FUND INFORMATION

8 The Funds' Investment Objectives

8 Advisor's Investment Strategy in Managing the Dynamic Funds

9 Master-Feeder Investment Structure

10 Who May Want to Invest in the Rydex Dynamic Funds

11 Risks of Investing in the Funds

16 SHAREHOLDER INFORMATION GUIDE

16 Purchasing C Class Shares

16 Purchasing Shares By Exchange Transactions

17 Determination of Net Asset Value

17 Minimum Investment

18 Making Investments by Mail, Telephone, or Fax

20 Tax-Qualified Retirement Plans

20 Exchanges

21 Redeeming Fund Shares

22 Sales Charges

22 Distribution and Shareholder Services Plan

23 Procedures for Exchanges and Redemptions

24 Management of the Funds

26 DIVIDENDS, DISTRIBUTIONS, AND TAXES

26 Dividends and Distributions

26 Tax Information

28 FINANCIAL HIGHLIGHTS

31 BENCHMARK INFORMATION

<PAGE>

PROSPECTUS

RYDEX DYNAMIC FUNDS

C CLASS SHARES

9601 BLACKWELL ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850

800.820.0888 - 301.296.5100 - www.rydexfunds.com

Rydex Dynamic Funds (the "Trust") is a mutual fund with eight separate
investment portfolios, two of which are described in this Prospectus (the
"Dynamic Funds"). In addition, Rydex U.S. Government Money Market Fund (the
"Money Market Fund") is a portfolio within Rydex Series Funds, a separate mutual
fund in the Rydex Family of Funds (together with the Dynamic Funds, the
"Funds"). C Class Shares of the Funds are sold primarily through broker-dealers
and other financial institutions whose clients take part in certain strategic
and tactical asset allocation investment programs. Investors may exchange and
redeem shares of the Funds through the Rydex Web site - www.rydexfunds.com - and
over the phone.

THE FUNDS' INVESTMENT OBJECTIVES
Each Fund has a separate investment objective. The investment objective of each
Dynamic Fund is non-fundamental and may be changed without shareholder approval.

RISKS OF INVESTING IN THE FUNDS

The value of the Funds may fluctuate. In addition, Fund shares:

- MAY DECLINE IN VALUE, AND YOU MAY LOSE MONEY

- ARE NOT FEDERALLY INSURED

- ARE NOT GUARANTEED BY ANY GOVERNMENT AGENCY

- ARE NOT BANK DEPOSITS

- ARE NOT GUARANTEED TO ACHIEVE THEIR OBJECTIVES

1
<PAGE>

RYDEX DYNAMIC FUNDS OVERVIEW

TITAN 500 FUND
--------------------------------------------------------------------------------

FUND OBJECTIVE
The Titan 500 Fund seeks to provide investment results that will match the
performance of a specific benchmark on a daily basis. The Fund's current
benchmark is 200% of the performance of the S&P 500-Registered Trademark-
Index (the "S&P 500 Index").

If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the S&P 500
Index. When the value of the S&P 500 Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Index (e.g., if the S&P 500 Index goes down by 5%, the value of
the Fund's shares should go down by 10% on that day).

INVESTMENT STRATEGY
The Fund employs as its investment strategy a program of investing in leveraged
instruments, such as equity index swaps, futures contracts and options on
securities, futures contracts, and stock indices. Equity index swaps and futures
and options contracts enable the Fund to pursue its objective without investing
directly in the securities included in the benchmark, or in the same proportion
that those securities are represented in that benchmark. On a day-to-day basis,
the Fund holds U.S. Government securities or cash equivalents to collateralize
these futures and options contracts. The Fund also may purchase equity
securities and enter into repurchase agreements.

RISK CONSIDERATIONS
The Fund is subject to a number of risks that will affect the value of its
shares, including:

EQUITY RISK - The equity markets are volatile, and the value of the Fund's
futures and options contracts and other securities may fluctuate significantly
from day to day. This volatility may cause the value of your investment in the
Fund to decrease.

LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments.

SWAP COUNTERPARTY CREDIT RISK - The Fund is subject to credit risk on the amount
it expects to receive from swap agreement counterparties. If a swap counterparty
defaults on its payment obligations to the Fund, this default will cause the
value of your investment in the Fund to decrease.

TRACKING ERROR RISK - The Advisor may not be able to cause the Fund's
performance to match that of the Fund's benchmark, either on a daily or
aggregate basis. Tracking Error may cause the Fund's performance to be less than
you expect.

TRADING HALT RISK - If a trading halt occurs, the Fund may temporarily be unable
to purchase or sell options or futures contracts. Such a trading halt near the
time the Fund prices its shares may limit the Fund's ability to use leverage and
may prevent the Fund from achieving its investment objective.

2
<PAGE>

PROSPECTUS

TITAN 500 FUND
--------------------------------------------------------------------------------

INVESTOR PROFILE
Investors who expect the S&P 500 Index to go up and want highly accelerated
investment gains when the Index does so. These investors must also be willing to
bear the risk of equally accelerated losses if the S&P 500 Index goes down.

PERFORMANCE
The Fund is new and therefore does not have a performance history for a full
calendar year.

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
C Class Shares of the Fund.

<TABLE>
<S> <C>
SHAREHOLDER FEES* ......................................... None

MAXIMUM DEFERRED SALES CHARGE (LOAD)
(AS A PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS) .............................. 1.00%

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)

MANAGEMENT FEES ........................................... .90%

DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES ......... 1.00%

OTHER EXPENSES** .......................................... .60%

TOTAL ANNUAL FUND OPERATING EXPENSES ...................... 2.50%
</TABLE>

* THE FUND MAY IMPOSE A WIRE TRANSFER CHARGE OF $15 ON CERTAIN
REDEMPTIONS UNDER $5,000.

** OTHER EXPENSES ARE ESTIMATED.

EXAMPLE
This Example is intended to help you compare the cost of investing in the C
Class Shares of the Fund with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time period
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's estimated operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions your cost would be:

<TABLE>
<CAPTION>
TITAN 500 FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
IF YOU SELL YOUR SHARES
AT THE END OF THE PERIOD: $363 $806 $1,376 $2,924

IF YOU DO NOT SELL YOUR
SHARES AT THE END OF
THE PERIOD: $263 $806 $1,376 $2,924
</TABLE>

3
<PAGE>

RYDEX DYNAMIC FUNDS OVERVIEW

VELOCITY 100 FUND
--------------------------------------------------------------------------------

FUND OBJECTIVE
The Velocity 100 Fund seeks to provide investment results that will match the
performance of a specific benchmark on a daily basis. The Fund's current
benchmark is 200% of the performance of the NASDAQ 100 Index-Registered
Trademark- (the "NASDAQ 100 Index").

If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the NASDAQ 100
Index. When the value of the NASDAQ 100 Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Index (e.g., if the NASDAQ 100 Index goes down by 5%, the value
of the Fund's shares should go down by 10% on that day).

RISK CONSIDERATIONS
The Fund is subject to a number of risks that will affect the value of its
shares, including:

LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments.

4
<PAGE>

PROSPECTUS

VELOCITY 100 FUND
--------------------------------------------------------------------------------

INVESTOR PROFILE
Investors who expect the S&P 500 Index to go down and want highly accelerated
investment gains when the Index does so. These investors must also be willing to
bear the risk of equally accelerated losses if the S&P 500 Index goes up.

PERFORMANCE
The Fund is new and therefore does not have a performance history for a full
calendar year.

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
C Class Shares of the Fund.

<TABLE>
<S> <C>
SHAREHOLDER FEES*........................................... NONE

MAXIMUM DEFERRED SALES CHARGE (LOAD)
(AS A PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, WHICHEVER IS LESS)................................ 1.00%

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)

MANAGEMENT FEES............................................. .90%

DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES........... 1.00%

OTHER EXPENSES**............................................ .60%

TOTAL ANNUAL FUND OPERATING EXPENSES........................ 2.50%
</TABLE>

* THE FUND MAY IMPOSE A WIRE TRANSFER CHARGE OF $15 ON CERTAIN REDEMPTIONS
UNDER $5,000.
** OTHER EXPENSES ARE ESTIMATED.

EXAMPLE
This Example is intended to help you compare the cost of investing in the C
Class Shares of the Fund with the cost of investing in other mutual funds.

VELOCITY 100 FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------

IF YOU SELL YOUR SHARES
AT THE END OF THE PERIOD: $363 $806 $1,376 $2,924

IF YOU DO NOT SELL YOUR
SHARES AT THE END OF
THE PERIOD: $263 $806 $1,376 $2,924

5
<PAGE>

RYDEX SERIES FUNDS OVERVIEW

U.S. GOVERNMENT MONEY MARKET FUND
--------------------------------------------------------------------------------

FUND OBJECTIVE
The U.S. Government Money Market Fund seeks to provide security of principal,
high current income, and liquidity.

INVESTMENT STRATEGY
The Fund invests primarily in money market instruments issued or guaranteed as
to principal and interest by the U.S. Government, its agencies or
instrumentalities, and enters into repurchase agreements fully collateralized by
U.S. Government securities. The Fund operates under Securities and Exchange
Commission ("SEC") rules which impose certain liquidity, maturity, and
diversification requirements. All securities purchased by the Fund must have
remaining maturities of 397 days or less, and must be found by the Advisor to
represent minimal credit risk and be of eligible quality.

RISK CONSIDERATIONS
The Fund is subject to the following risks that will potentially affect the
value of its shares:

INTEREST RATE RISK - Interest Rate Risk involves the potential for decline in
the rate of dividends the Fund pays in the event of declining interest rates.

STABLE PRICE PER SHARE RISK - The Fund's assets are valued using the amortized
cost method, which enables the Fund to maintain a stable price of $1.00 per
share. ALTHOUGH THE FUND IS MANAGED TO MAINTAIN A STABLE PRICE PER SHARE OF
$1.00, THERE IS NO GUARANTEE THAT THE PRICE WILL BE CONSTANTLY MAINTAINED, AND
IT IS POSSIBLE TO LOSE MONEY.

PERFORMANCE
The following bar chart and table provide some indication of the risks of
investing in the Fund by showing both the year-to-year performance of the Fund's
Investor Class Shares and the Fund's average annual returns, compared to the
performance of an appropriate broad-based index, over different periods of time.
Performance of the Fund's C Class Shares would differ only to the extent that
each Class has different expenses. Past performance is no guarantee of future
results.

U.S. GOVERNMENT MONEY MARKET FUND

[CHART]

HIGHEST QUARTER RETURN 1.27%
(QUARTER ENDED 6/30/95)

LOWEST QUARTER RETURN 0.50%
(QUARTER ENDED 3/31/94)

*THE YEAR-TO-DATE RETURN FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH JUNE 30,
2000 IS 2.51%.

6
<PAGE>

PROSPECTUS

U.S. GOVERNMENT MONEY MARKET FUND
--------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURN(1)(FOR PERIODS ENDED DECEMBER 31, 1999)

<TABLE>
<CAPTION>
1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------------------------
<S> <C> <C> <C>
INVESTOR CLASS SHARES(2) 4.25% 4.60% 4.31%
90-DAY TREASURY COMPOSITE(3) 4.64% 5.00% 4.84%
</TABLE>

(1) THESE FIGURES ASSUME THE REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS.

(2) THE 90-DAY TREASURY COMPOSITE INDEX IS AN UNMANAGED INDEX THAT IS A
WIDELY RECOGNIZED INDICATOR OF GENERAL MONEY MARKET PERFORMANCE.

YIELD

Call (800) 820-0888 or visit www.rydexfunds.com for the Fund's current yield.

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
C Class Shares of the Fund.

<TABLE>
<S> <C>
SHAREHOLDER FEES*

MAXIMUM DEFERRED SALES CHARGE (LOAD)
(AS A PERCENTAGE OF ORIGNINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS, WHICHEVER IS LESS) ..................... 1.00%

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)

MANAGEMENT FEES ............................................. .50%

DISTRIBUTION (12b-1) AND SHAREHOLDER SERVICE FEES ........... 1.00%

OTHER EXPENSES .............................................. .38%

TOTAL ANNUAL FUND OPERATING EXPENSES ........................ 1.88%
</TABLE>

* THE FUND MAY IMPOSE A WIRE TRANSFER CHARGE OF $15 ON CERTAIN REDEMPTIONS
UNDER $5,000.

EXAMPLE
This example is intended to help you compare the cost of investing in the C
Class Shares of the Fund with the cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund for the time period
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

US. GOVERNMENT MONEY
MARKET FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------

IF YOU SELL YOUR SHARES
AT THE END OF THE PERIOD: $297 $610 $1,049 $2,266

IF YOU DO NOT SELL YOUR
SHARES AT THE END OF
THE PERIOD: $197 $610 $1,049 $2,266

7
<PAGE>

ADDITIONAL FUND INFORMATION

THE FUNDS' INVESTMENT OBJECTIVES
Each Dynamic Fund's objective is to provide investment results that match the
performance of a specific benchmark. The current benchmark used by each Dynamic
Fund is set forth below:

FUND NAME BENCHMARK

TITAN 500 FUND 200% OF THE PERFORMANCE, MEASURED ON A DAILY BASIS, OF
THE S&P 500 INDEX

VELOCITY 100 FUND 200% OF THE PERFORMANCE, MEASURED ON A DAILY BASIS, OF
THE NASDAQ 100 INDEX

A BRIEF GUIDE TO THE BENCHMARKS
The S&P 500. The S&P 500 Index is a capitalization-weighted index composed of
500 common stocks, which are chosen by the Standard & Poor's Corporation ("S&P")
on a statistical basis.

The NASDAQ 100 INDEX. The NASDAQ 100 Index is a modified capitalization-weighted
index composed of 100 of the largest non-financial companies listed on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ").

ADVISOR'S INVESTMENT STRATEGY IN MANAGING THE DYNAMIC FUNDS
In managing the Dynamic Funds, Rydex Global Advisors (the "Advisor") uses a
"passive" investment strategy to manage each Fund's portfolio, meaning that the
Advisor does not attempt to select securities based on their individual
potential to perform better than the market. The Advisor's primary objective is
to match the performance of each Fund's benchmark as closely as possible on a
daily basis. The Advisor uses quantitative analysis techniques to structure each
Fund to obtain the highest correlation to its particular benchmark. The Advisor
does not engage in temporary defensive investing, keeping each Fund's assets
fully invested in all market environments. The Advisor monitors each Fund on an
ongoing basis, and makes adjustments to its portfolio, as necessary, to minimize
tracking error and to maximize liquidity.

8
<PAGE>

PROSPECTUS

The Advisor pursues the Dynamic Funds' investment objectives by regularly
utilizing leveraged instruments, such as equity index swap agreements and
futures contracts and options on securities, futures contracts, and stock
indices.

MASTER-FEEDER INVESTMENT STRUCTURE
Each Dynamic Fund reserves the right to pursue its investment objective
indirectly by investing through what is sometimes referred to as a
"master-feeder arrangement." However, none of the Funds currently invest through
a master-feeder arrangement and each Fund anticipates that it will pursue its
investment objective directly by following the investment strategy previously
described in its respective "Dynamic Funds Overview" section. A Dynamic Fund is
permitted to change its investment strategy in order to pursue its investment
objective through a master-feeder arrangement without shareholder approval, if
the Trust determines that doing so would be in the best interests of
shareholders.

Under a master-feeder arrangement, a Fund's investment portfolio is composed
solely of shares of a "master fund," which is a separate mutual fund that has an
identical investment objective (e.g., you would hold shares of a "feeder fund"
that holds shares of its master fund as its only investment). As a result, the
feeder fund has an indirect interest in all of the securities owned by the
master fund. Because of this indirect interest, the Fund's investment returns
should be the same as those of the master fund, adjusted for Fund expenses.

If a Fund pursues its investment objective through a master-feeder arrangement,
the Advisor would manage the investment portfolios of both the Fund and its
corresponding master fund. Under such an arrangement, the Advisor would adjust
its fees in order to avoid any "layering" of fees, e.g., a Fund's Total Annual
Operating Expenses would not increase as a result of investing through a
master-feeder arrangement. In addition, the Advisor may choose to discontinue
investing through the master-feeder arrangement and resume managing the Fund
directly if the Trust determines that doing so would be in the best interests of
shareholders.

9
<PAGE>

ADDITIONAL FUND INFORMATION

WHO MAY WANT TO INVEST IN THE RYDEX DYNAMIC FUNDS
The Dynamic Funds may be appropriate for investors who believe that over the
long term, the value of a particular index will increase or decrease, and that
by investing with the objective of doubling the index's daily return they will
achieve superior results over time. Investors should understand that since each
Fund seeks to double the daily performance of the index underlying its
benchmark, it should have twice the daily volatility of a conventional index
fund. This increases the potential risk of loss.

[SIDENOTE] INVESTORS SEEK TO UTILIZE "CONSISTENTLY APPLIED LEVERAGE"

The Dynamic Funds may be appropriate for investors who use an investment
strategy that relies on frequent buying, selling, or exchanging among stock
mutual funds, since the Funds do not limit how often an investor may exchange
among Funds. In addition, the Funds do not impose any transaction fees (other
than wire fees for redemptions under $5,000) when investors buy, sell, or
exchange shares. The Funds provide multiple opportunities for investors to
capitalize on market trends and to capture market momentum with intra-day Fund
share pricing and trading. Dynamic asset allocators may also utilize intra-day
trading as a defensive strategy to react to market movements before investments
are adversely affected.

[SIDENOTE] DYNAMIC ASSET ALLOCATORS

The Dynamic Funds may be appropriate for investors who use an investment
strategy that involves the strategic allocation of investments among different
asset classes. By utilizing consistently applied leverage, the Funds' investment
strategy can create alternative investment opportunities for strategic asset
allocators who seek to match the S&P 500's or NASDAQ 100's daily return because
less capital is needed to achieve a desired exposure. For example, an investor
might invest $50,000 in a conventional S&P 500 Index fund. Alternatively, that
same investor could invest half that amount - $25,000 - in the Titan 500 Fund
and target the same daily return. This increased cash position could then be
used for a tactical overlay, such as the introduction of an additional asset
class or an undervalued market sector.

[SIDENOTE] STRATEGIC ASSET ALLOCATORS

10
<PAGE>

PROSPECTUS

RISKS OF INVESTING IN THE FUNDS
As indicated below, the Funds are subject to a number of risks that may affect
the value of the Funds' shares.

ALL DYNAMIC FUNDS - The Funds invest primarily in instruments that attempt to
track the price movement of equity indices as well as equity securities,
including common stocks. Investments in equity securities and equity derivatives
in general are subject to market risks that may cause their prices to fluctuate
over time. Fluctuations in the value of equity securities in which the Funds
invest will cause the net asset value of the Funds to fluctuate. Historically,
the equity markets have moved in cycles, and the value of the Funds' equity
securities and equity derivatives may fluctuate drastically from day to day.
This price volatility is the principal risk of investing in equity securities.
Because of their link to the equity markets, an investment in the Funds may be
more suitable for long-term investors who can bear the risk of short-term
principal fluctuations.

[SIDENOTE] EQUITY RISK

ALL DYNAMIC FUNDS - Each Fund is non-diversified and may invest in the
securities of a limited number of issuers. To the extent that a Fund invests a
significant percentage of its assets in a limited number of issuers, the Fund is
subject to the risks of investing in those few issuers, and may be more
susceptible to a single adverse economic or regulatory occurrence.

[SIDENOTE] NON-DIVERSIFICATION RISK

ALL DYNAMIC FUNDS - None of the Funds will invest 25% or more of the value of
the Fund's total assets in the securities of one or more issuers conducting
their principal business activities in the same industry; except that, to the
extent the index underlying a Fund's benchmark is concentrated in a particular
industry, a Fund will necessarily be concentrated in that industry. Currently,
the index underlying the Velocity 100 Fund's benchmark--the NASDAQ 100 Index--is
concentrated in technology companies. The risk of concentrating Fund investments
in a limited number of issuers conducting business in the same industry or group
of industries is that the Fund will be more susceptible to the risks associated
with that industry or group of industries than a fund that does not concentrate
its investments.

[SIDENOTE] INDUSTRY CONCENTRATION RISK

11
<PAGE>

ADDITIONAL FUND INFORMATION

ALL DYNAMIC FUNDS - While the Funds do not expect returns to deviate
significantly from their respective benchmarks on a daily basis, certain factors
may affect their ability to achieve close correlation. These factors may include
Fund expenses, imperfect correlation between the Funds' investments and those of
their benchmarks, rounding of share prices, changes to the benchmark, regulatory
policies, and leverage. The cumulative effect of these factors may over time
cause the Funds' returns to deviate from their respective benchmarks on an
aggregate basis. The magnitude of any tracking error may be affected by a higher
portfolio turnover rate.

[SIDENOTE] TRACKING ERROR RISK

ALL DYNAMIC FUNDS - The Funds typically will hold short-term options and futures
contracts. The major exchanges on which these contracts are traded, such as the
Chicago Mercantile Exchange ("CME"), have established limits on how much an
option or futures contract may decline over various time periods within a day.
If an option or futures contract's price declines more than the established
limits, trading on the exchange is halted on that instrument. If a trading halt
occurs, the Fund may temporarily be unable to purchase or sell options or
futures contracts. Such a trading halt near the time the Fund prices its shares
may limit the Fund's ability to use leverage and may prevent the Fund from
achieving its investment objective. In such an event, a Fund also may be
required to use a "fair-value" method to price its outstanding contracts.

[SIDENOTE] TRADING HALT RISK

ALL DYNAMIC FUNDS - The Funds will invest a percentage of their assets in
futures and options contracts. The Funds may use futures contracts and related
options for bona fide hedging purposes to offset changes in the value of
securities held or expected to be acquired. They may also be used to gain
exposure to a particular market or instrument, to create a synthetic money
market position, and for certain other tax-related purposes. The Funds will only
enter into futures contracts traded on a national futures exchange or board of
trade. Futures and options contracts are described in more detail to the right:

[SIDENOTE] FUTURES AND OPTIONS RISK

12
<PAGE>

PROSPECTUS

- Futures contracts and options on futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and at a specified price. An
option on a futures contract gives the purchaser the right, in exchange for a
premium, to assume a position in a futures contract at a specified exercise
price during the term of the option. Index futures are futures contracts for
various indices that are traded on registered securities exchanges.

[SIDENOTE] FUTURES CONTRACTS

- The buyer of an option acquires the right to buy (a call option) or sell (a
put option) a certain quantity of a security (the underlying security) or
instrument at a certain price up to a specified point in time. The seller or
writer of an option is obligated to sell (a call option) or buy (a put
option) the underlying security. When writing (selling) call options on
securities, the Funds may cover its positions by owning the underlying
security on which the option is written or by owning a call option on the
underlying security. Alternatively, the Funds may cover its position by
maintaining in a segregated account cash or liquid securities equal in value
to the exercise price of the call option written by the Funds.

[SIDENOTE] OPTIONS

- A Fund experiencing losses over certain ranges in the market that exceed
losses experienced by a fund that does not use futures contracts and options.

- There may be an imperfect correlation between the changes in market value of
the securities held by a Fund and the prices of futures and options on
futures.

- Although the Funds will only purchase exchange-traded futures, due to market
conditions there may not always be a liquid secondary market for a futures
contract. As a result, the Funds may be unable to close out their futures
contracts at a time which is advantageous.

- Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in futures contracts and options.

- Because option premiums paid or received by the Funds are small in relation
to the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing directly
in securities.

[SIDENOTE] THE RISKS ASSOCIATED WITH THE FUNDS' USE OF FUTURES AND OPTIONS
CONTRACTS INCLUDE:

13
<PAGE>

ADDITIONAL FUND INFORMATION

ALL DYNAMIC FUNDS - The normal close of trading of securities listed on NASDAQ
and the New York Stock Exchange ("NYSE") is 4:00 p.m., Eastern Time.
Unanticipated early closings may result in a Fund being unable to sell or buy
securities on that day. If an exchange closes early on a day when one or more of
the Funds needs to execute a high volume of securities trades late in a trading
day, a Fund might incur substantial trading losses.

[SIDENOTE] EARLY CLOSING RISK

ALL DYNAMIC FUNDS - The Funds may enter into equity index or interest rate swap
agreements for purposes of attempting to gain exposure to a particular group of
stocks or to an index of stocks without actually purchasing those stocks, or to
hedge a position. The Funds will use short-term swap agreements to exchange the
returns (or differentials in rates of return) earned or realized in particular
predetermined investments or instruments. A Fund will not enter into any swap
agreement unless the Advisor believes that the other party to the transaction is
creditworthy. The use of equity swaps involves risks that are different from
those associated with ordinary portfolio securities transactions. Swap
agreements may be considered to be illiquid. A Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.

[SIDENOTE] SWAPS

14
<PAGE>

PROSPECTUS

ROLE OF THE MONEY MARKET FUND
--------------------------------------------------------------------------------
In order to purchase shares of the Dynamic Funds, investors may first have to
purchase shares of the Money Market Fund. The Money Market Fund shares may then
be exchanged for shares of the Dynamic Funds. Investors may make subsequent
exchanges directly from one or more Dynamic Funds to other Dynamic Funds.
Investors wishing to exchange Dynamic Fund shares for shares of other Rydex
Funds, not included in the Dynamic Funds complex, must first exchange shares of
the Dynamic Funds for shares of the Money Market Fund. For additional
information, please see "Purchasing Shares by Exchange Transactions."

C Class Shares of the Money Market Fund are primarily utilized by individuals
investing through certain financial intermediaries, who provide distribution
and/or shareholder services to their customers. To find out if shares of the
Dynamic Funds may be purchased directly, without first purchasing shares of the
Money Market Fund, investors should check with their financial intermediaries.
--------------------------------------------------------------------------------

15
<PAGE>

SHAREHOLDER INFORMATION GUIDE

PURCHASING C CLASS SHARES
You may acquire C Class Shares of the Dynamic Funds either through a financial
intermediary or directly through the transfer agent. You are encouraged to
consult with a financial intermediary who can open an account for you and help
you with your financial decisions. In most cases, you may only invest in a
Dynamic Fund through an exchange transaction as described below. Nonetheless,
you may be able to purchase shares of the Dynamic Funds through your financial
intermediary, without first purchasing shares of the Money Market Fund. Please
contact your financial intermediary directly for more information and to
determine if this option is available to you.

PURCHASING SHARES BY EXCHANGE TRANSACTIONS

- Investors generally need to make two separate transactions to acquire shares
of the Dynamic Funds. First, you must purchase shares of the Money Market
Fund. Then, you may acquire shares of the Dynamic Funds by exchanging your
Money Market Fund shares. There are no fees for these transactions.

[SIDENOTE] SHARES OF THE FUNDS ARE AVAILABLE PRIMARILY THROUGH EXCHANGES.

- You can acquire shares through exchange transactions among the Dynamic Funds
or with the Money Market Fund.

- Investors may purchase shares of the Money Market Fund and make exchanges on
any day that the NYSE is open for business (a "Business Day").

- You may purchase shares of the Money Market Fund by check or bank wire
transfer. Once you open an account, you may make subsequent wire purchases by
telephone. Procedures for purchasing shares of the Money Market Fund by mail,
telephone or fax are discussed in more detail in the "Making Investments by
Mail, Telephone or Fax" section.

[SIDENOTE] PROCEDURES FOR SUBSEQUENT EXCHANGES FROM THE MONEY MARKET FUND INTO
THE DYNAMIC FUNDS (AND EXCHANGES AMONG THE DYNAMIC FUNDS) ARE DISCUSSED IN MORE
DETAIL IN THE "EXCHANGES" SECTION.

- Shareholders may acquire shares of the Funds through exchange transactions by
using the Rydex Web site - www.rydexfunds.com. By using this option, you can
direct your requests for exchange transactions to the transfer agent by
following the directions described on the Rydex Web site.

- You may only purchase shares of the Dynamic Funds by exchange at any Business
Day's afternoon NAV if your investment in the Money Market Fund is processed
at that Business Day's midday NAV.

- Initial applications and investments, as well as subsequent investments, in
the Money Market Fund must be received in good form

16
<PAGE>

PROSPECTUS

by the transfer agent, on any Business Day, at or prior to 1:00 p.m., Eastern
Time in order to be processed at that Business Day's midday NAV. An initial
application that is sent to the transfer agent does not constitute a purchase
order until the application has been processed and correct payment by check
or wire transfer has been received by the transfer agent.

DETERMINATION OF NET ASSET VALUE
The price per share (the offering price) will be the net asset value per share
("NAV") next determined after your exchange request is processed by the transfer
agent. NAV is calculated by (1) taking the current market value of a Fund's
total assets, (2) subtracting the liabilities, and (3) dividing the amount by
the total number of shares owned by shareholders. No sales charges are imposed
on initial or subsequent investments in a Fund.

The Dynamic Funds calculate NAV twice each Business Day, first in the morning
and again in the afternoon. The morning NAV is calculated at 10:45 a.m., Eastern
Time and the afternoon NAV is calculated at the close of the New York Stock
Exchange (currently 4:00 p.m., Eastern Time). The Money Market Fund calculates
its NAV twice each Business Day, first at midday and again in the afternoon. The
midday NAV is calculated at 1:00 p.m., Eastern Time and the afternoon NAV is
calculated at the close of the New York Stock Exchange (currently 4:00 p.m.,
Eastern Time).

If the exchange or market where a Fund's securities or other investments are
primarily traded closes early, NAV may be calculated earlier. On days when the
exchange or market is scheduled to close early, such as the day before a
holiday, the Funds will only calculate NAV once at the close of the exchange or
market. For more information on these early closings, please call 800.820.0888
or visit the Rydex Web site. To receive the current NAV, the transfer agent must
receive your purchase order before the cutoff times specified in the "Exchanges"
section for each method of investing. Intermediaries may have earlier cutoff
times. In addition, intermediaries may not offer intra-day trading or pricing
regardless of when you place your order with your intermediary.

MINIMUM INVESTMENT
The minimum initial investment in C Class Shares is $1,000 for all IRA, Roth IRA
and other retirement accounts and $2,500 for all other accounts. The transfer
agent, at its discretion, may accept lesser amounts in certain circumstances.
There is no minimum amount for subsequent investments in the Funds. The Funds
reserve the right to modify the minimum investment requirements at any time. The
Funds also reserve the right to reject or refuse, at the Fund's discretion, any
order for the purchase of a Fund's shares in whole or in part.

17
<PAGE>

SHAREHOLDER INFORMATION GUIDE

MAKING INVESTMENTS BY MAIL, TELEPHONE, OR FAX
You may open an account in the Money Market Fund by mail or fax and, once you
open an account, make subsequent purchases by telephone. You may make initial
investments in the Money Market Fund by printing out the Account Application
Agreement located on the Rydex Web site, completing it offline and sending it by
mail or fax to the transfer agent. You may also obtain an Account Application
Agreement by calling 800.820.0888 or 301.296.5100. Investors must also make
arrangements for payment by either bank wire transfer or check using the
procedures described below.

Investments by mail, telephone or fax for both initial investments and
subsequent investments in the Money Market Fund must be received in good form by
the transfer agent, on any Business Day, at or prior to 1:00 p.m. to be
processed in the Money Market Fund at that Business Day's midday NAV and at or
prior to 3:45 p.m. to be processed at that Business Day's afternoon NAV.
Intermediaries may have earlier cutoff times for purchases. For more information
about how to purchase through an intermediary, you should contact that
intermediary directly.

Procedures for payment by either bank wire transfer or check are as follows:

First, fill out the Account Application Agreement and send the completed
application, along with a request for a shareholder account number, to the
transfer agent. You do not need to fill out an Account Application Agreement to
make subsequent investments in the Money Market Fund. Then, request that your
bank wire transfer the purchase amount to our custodian by using the following
instructions:

[SIDENOTE] BY BANK WIRE TRANSFER

FIRSTAR
CINCINNATI, OHIO
ROUTING NUMBER: 0420-00013
FOR ACCOUNT OF: RYDEX SERIES FUNDS - U.S. GOVERNMENT MONEY MARKET FUND
ACCOUNT NUMBER: 48038-9030
[YOUR NAME]
[YOUR SHAREHOLDER ACCOUNT NUMBER]

18
<PAGE>

PROSPECTUS

After instructing your bank to transfer money by wire for both initial and
subsequent purchases into the Money Market Fund, you MUST contact the transfer
agent by telephone at 800.820.0888 and inform the transfer agent as to the
amount that you have transferred and the name of the bank sending the transfer
in order to obtain same-day or midday pricing or credit. For initial purchases,
you MUST also supply the time the wire was sent and the Fed Wire reference
number. If the purchase is canceled because your wire transfer is not received,
you may be liable for any loss that the Fund incurs.

First, fill out the Account Application Agreement and send the completed
application, along with a request for a shareholder account number, to the
transfer agent. Then mail your check, payable to: Rydex Series Funds - U.S.
Government Money Market Fund, along with the application, to:

[SIDENOTE] BY CHECK

RYDEX SERIES FUNDS
U.S. GOVERNMENT MONEY MARKET FUND
ATTN: OPERATIONS DEPARTMENT
9601 BLACKWELL ROAD, SUITE 500
ROCKVILLE, MARYLAND 20850

The transfer agent will not process your request until it receives your check.
You may avoid a delay in processing your purchase request by purchasing shares
by wire. In addition to charges described elsewhere in this prospectus, the
transfer agent also may charge $50 for checks returned for insufficient or
uncollectible funds.

19
<PAGE>

SHAREHOLDER INFORMATION GUIDE

TAX-QUALIFIED RETIREMENT PLANS
Investors may purchase shares of the Money Market Fund (and make subsequent
exchanges) through any of the following types of tax-qualified retirement plans:

- Individual Retirement Accounts (IRAs, including Roth IRAs)

- Keogh Accounts - Defined Contribution Plans (Profit Sharing Plans)

- Keogh Accounts - Pension Plans (Money Purchase Plans)

- Internal Revenue Code Section 403(b) Plans

Retirement plans are charged an annual $15.00 maintenance fee and a $15.00
account closing fee. Additional information regarding these accounts, including
the annual maintenance fee, may be obtained by calling 800.820.0888 or
301.296.5100.

EXCHANGES
You may exchange C Class Shares of any Dynamic Fund for C Class Shares of any
other Dynamic Fund that currently offers shares on the basis of the respective
net asset values of the shares involved. You may also acquire shares of the
Dynamic Funds through exchanges with the Money Market Fund. Exchanges may be
made subject to the procedures set forth below.

To exchange your shares, you need to provide certain information, including the
name on the account, the account number (or your taxpayer identification
number), the number or dollar value of shares (or the percentage of the total
value of your account) you want to exchange, and the names of the Funds involved
in the exchange transaction. Electronic investors should review the instructions
on the Rydex Web site for more information regarding procedures for exchanges
made via the Internet.

Exchange requests are processed at the NAV next determined after their receipt
by the transfer agent. Exchange requests received before 10:30 a.m. by the
transfer agent will be processed and communicated to a Dynamic Fund in time for
its 10:45 a.m. determination of NAV. Exchange requests received before 3:45 p.m.
by the transfer agent (3:55 p.m. for electronic investors) will be processed and
communicated to a Fund in time for its 4:00 p.m. determination of NAV. The
exchange privilege may be modified or discontinued at any time.

20
<PAGE>

PROSPECTUS

REDEEMING FUND SHARES
You may redeem all or any portion of your Fund shares at the next determined NAV
after the transfer agent receives your redemption request (subject to applicable
account minimums). Each Fund may allow you to redeem your shares via the
Internet by following the procedures set forth on the Rydex web site. Your
redemption proceeds normally will be sent within five Business Days of the
transfer agent's receipt of your request. For investments made by check, payment
on redemption requests may be delayed until the transfer agent is reasonably
satisfied that payment has been collected (which may require up to 10 Business
Days). If you invest by check, you may not wire out any redemption proceeds for
the 30 calendar days following the purchase. You may avoid a delay in receiving
redemption proceeds by purchasing shares by wire. Telephone redemptions will be
sent only to your address or your bank account (as listed in the transfer
agent's records). Each Fund may charge $15.00 for certain wire transfers of
redemption proceeds.

[SIDENOTE] GENERAL

YOU MAY ALSO REDEEM YOUR SHARES BY LETTER OR BY TELEPHONE SUBJECT TO THE
PROCEDURES AND FEES SET FORTH IN "PROCEDURES FOR EXCHANGES AND REDEMPTIONS."

The proceeds of redemption requests will be sent directly to your address (as
listed in the transfer agent's records). If you request payment of redemption
proceeds to a third party or to a location other than your address or your bank
account (as listed in the transfer agent's records), this request must be in
writing and must include an original signature guarantee. You may have to
transmit your redemption request to your intermediary at an earlier time in
order for your redemption to be effective that Business Day. Please contact your
intermediary to find out their specific requirements for written and telephone
requests for redemptions and signature guarantees.

Because of the administrative expense of handling small accounts, any request
for a redemption when your account balance (a) is below the currently applicable
minimum investment, or (b) would be below that minimum as a result of the
redemption, will be treated as a request for the complete redemption of that
account. If, due to withdrawals or transfers, your account balance across all
Funds advised by the Advisor drops below the required minimum, each Fund
reserves the right to redeem your remaining shares without any additional
notification to you.

[SIDENOTE] INVOLUNTARY REDEMPTIONS

21
<PAGE>

SHAREHOLDER INFORMATION GUIDE

With respect to each Fund, and as permitted by the Securities and Exchange
Commission ("Commission"), the right of redemption may be suspended, or the date
of payment postponed: (1) for any period during which the NYSE is closed (other
than customary weekend or holiday closings) or trading on the NYSE is
restricted; (2) for any period during which an emergency exists so that disposal
of Fund investments or the determination of NAV is not reasonably practicable;
or (3) for such other periods as the Commission, by order, may permit for
protection of fund investors. In cases where NASDAQ, the CME or Chicago Board
Options Exchange ("CBOE") is closed or trading is restricted, a Fund may ask the
Commission to permit the right of redemption to be suspended. On any day that
the New York Fed or the NYSE closes early, the principal government securities
and corporate bond markets close early (such as on days in advance of holidays
generally observed by participants in these markets), or as permitted by the
Commission, the right is reserved to advance the time on that day by which
purchase and redemption orders must be received.

[SIDENOTE] SUSPENSION OF REDEMPTIONS

SALES CHARGES
You can buy C Class Shares at the offering price, which is the net asset value
per share, without any up-front sales charge so that the full amount of your
purchase is invested in the Funds. If you sell your shares within 12 months of
purchase, you will normally have to pay a 1% CDSC based on your purchase or sale
price, whichever is lower. You do not pay a CDSC on any C Class Shares you
purchase by reinvesting dividends.

DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
The Funds have adopted a Distribution and Shareholder Services Plan (the "C
Class Plan") applicable to its C Class Shares that allows the Funds to pay
annual distribution and service fees of 1.00% of the Funds' average daily net
assets. The annual .25% service fee compensates your financial advisor for
providing on-going services to you. Rydex Distributors, Inc. (the "Distributor")
retains the service and distribution fees on accounts with no authorized dealer
of record. The annual .75% distribution fee reimburses the Distributor for
paying your financial advisor an on-going sales commission. The Distributor
advances the first year's service and distribution fees. Because the Fund pays
these fees out of assets on an on-going basis, over time these fees may cost you
more than other types of sales charges.

22
<PAGE>

PROSPECTUS

PROCEDURES FOR EXCHANGES AND REDEMPTIONS
You should follow the procedures described on the Rydex Web site for all
exchanges and redemptions allowed via the Internet. The transfer agent
anticipates that most shareholders will make exchange and redemption requests
via the Internet through the Rydex Web site.

You may also request redemptions and exchanges by mail or telephone. Written
requests for redemptions and exchanges should be sent to:

RYDEX DYNAMIC FUNDS
ATTN: OPERATIONS DEPARTMENT
9601 BLACKWELL ROAD, SUITE 500
ROCKVILLE, MARYLAND 20850
(REQUESTS SHOULD BE SIGNED BY THE RECORD OWNER OR OWNERS.)

Telephone redemption and exchange requests may be made by calling 800.820.0888
or 301.296.5100 by the cutoff time specified in the "Exchanges" section for
exchanges between Funds, on any Business Day. The transfer agent's offices are
open between 8:30 a.m. and 5:30 p.m., Eastern Time on each Business Day. The
Funds reserve the right to suspend the right of redemption as described in the
previous section.

If you own shares that are registered in your intermediary's name, and you want
to either transfer the registration to another intermediary or register the
shares in your name, contact your intermediary for instructions to make this
change.

You will receive confirmation of your investment transactions. The transfer
agent may allow you to choose to receive your confirmation either electronically
or through the mail by following the instructions made available on the Rydex
Web site. If you consent to receive electronic confirmation of your
transactions, you may print a copy of the electronic confirmation you receive
for your records. Shareholders who consent to receive all communications (such
as trade confirmations; prospectuses and shareholder reports; etc.) from the
Funds through the Rydex Web site or other electronic means must:

[SIDENOTE] CONFIRMATION OF SHAREHOLDER TRANSACTIONS

- Have and maintain access to the Rydex Web site and provide the transfer agent
with a valid and current e-mail address.

- Notify the transfer agent immediately if they no longer have access to the
Rydex Web site, change their e-mail address or wish to revoke their consent
to receive all communications from the Funds through the Rydex Web site or
other electronic means.

23
<PAGE>

SHAREHOLDER INFORMATION GUIDE

You may revoke your consent to receive electronic confirmations and other
communications from the Funds through the Rydex Web site or other electronic
means at any time by informing the transfer agent in writing.

Internet and telephone redemption and exchange transactions are extremely
convenient, but are not risk-free. To ensure that your Internet and telephone
transactions are safe, secure, and as risk-free as possible, the transfer agent
has instituted certain safeguards and procedures for determining the identity of
Web site users (including the use of secure passwords and 128-bit encryption
technology) and of telephone callers and authenticity of instructions. As a
result, neither the Funds nor the transfer agent will be responsible for any
loss, liability, cost, or expense for following Internet, telephone or wire
instructions they reasonably believe to be genuine. If you or your intermediary
make exchange or redemption requests via the Internet or telephone, you will
generally bear the risk of any loss. If you are unable to reach the transfer
agent by Internet or by calling 800.820.0888 or 301.296.5100, you may want to
try to reach the transfer agent by other means.

[SIDENOTE] TRANSACTIONS OVER THE INTERNET OR TELEPHONE

MANAGEMENT OF THE FUNDS
Rydex Global Advisors with offices at 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850, serves as investment advisor and manager of the Funds.

[SIDENOTE] THE INVESTMENT ADVISOR

Albert P. Viragh, Jr., owns a controlling interest in the Advisor. From 1985
until the incorporation of the Advisor, Mr. Viragh was a Vice President of Money
Management Associates ("MMA"), a Maryland-based registered investment advisor.
From 1992 to June 1993, Mr. Viragh was the portfolio manager of The Rushmore
Nova Portfolio, a series of The Rushmore Fund, Inc., an investment company
managed by MMA.

[SIDENOTE] CHAIRMAN OF THE BOARD AND THE PRESIDENT OF THE ADVISOR

The Advisor makes investment decisions for the assets of the Funds and
continuously reviews, supervises, and administers each Fund's investment
program.

The Trustees of both, the Trust and the Rydex Series Funds, supervise the
Advisor and establish policies that the Advisor must follow in its day-to-day
management activities.

24
<PAGE>

PROSPECTUS

Under investment advisory agreements with the Advisor, the Funds pay the Advisor
a fee at an annualized rate, based on the average daily net assets for each
Fund, as set forth below:

<TABLE>
<CAPTION>
FUND ADVISORY FEE
<S> <C>
TITAN 500 FUND ....................................... .90%
VELOCITY 100 FUND .................................... .90%
U.S. GOVERNMENT MONEY MARKET FUND .................... .50%
</TABLE>

- Each Dynamic Fund is managed by a team and no one person is responsible for
making investment decisions for a Fund.

- The Advisor bears all of its own costs associated with providing these
advisory services and the expenses of the Trustees which are affiliated with
the Advisor. The Advisor may make payments from its own resources to
broker-dealers and other financial institutions in connection with the sale
of fund shares.

- The Advisor has voluntarily agreed to maintain the actual Total Annual
Operating Expenses of the C Class Shares of the Dynamic Funds at an "expense
cap" of 2.50% (before sales charge). This means that the Advisor will
reimburse certain expenses of the class so that expenses do not exceed 2.50%
(before sales charge). Because the Advisor's agreement to maintain an expense
cap is voluntary, the Advisor may discontinue all or part of its
reimbursements at any time. In addition, if at any point during the first
three years of Fund operations it becomes unnecessary for the Advisor to make
reimbursements, the Advisor may retain the difference between the Total
Annual Operating Expenses of C Class Shares of any Fund and 2.50% (before
sales charge) to recapture any of its prior reimbursements.

25
<PAGE>

DIVIDENDS, DISTRIBUTIONS, AND TAXES

DIVIDENDS AND DISTRIBUTIONS
Income dividends, if any, are paid at least annually by each of the Funds,
except the Money Market Fund, which declares dividends daily and pays them
monthly. If you own Fund shares on a Fund's record date, you will be entitled to
receive the dividend. The Funds may declare and pay dividends on the same date.
The Funds make distributions of capital gains, if any, at least annually. Each
Fund, however, may declare a special capital gains distribution if the Trustees
believe that such a distribution would be in the best interest of the
Shareholders of a Fund.

You will receive dividends and distributions in the form of additional fund
shares unless you have elected to receive payment in cash. If you have not
already elected to receive cash payments on your application, you must notify
the transfer agent in writing prior to the date of distribution. Your election
will become effective for dividends paid after the transfer agent receives your
written notice. To cancel your election, simply send written notice to the
transfer agent.

Dividends and distributions from a Fund are taxable to you whether they are
reinvested in additional shares of the Fund or are received in cash. You will
receive an account statement at least quarterly.

TAX INFORMATION
The following is a summary of some important tax issues that affect the Funds
and their shareholders. The summary is based on current tax laws, which may be
changed by legislative, judicial or administrative action. This is not intended
to present a detailed explanation of the tax treatment of the Funds, or the tax
consequences of an investment in the Funds. More information about taxes is
located in each Statement of Additional Information ("SAI"). You are urged to
consult your tax advisor regarding specific questions as to federal, state and
local income taxes.

Each Fund is treated as a separate entity for federal tax purposes, and intends
to qualify for the special tax treatment afforded regulated investment
companies. As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to Shareholders.

[SIDENOTE] TAX STATUS OF EACH FUND

Each Fund will distribute substantially all of its income. The income dividends
you receive from the Funds will be taxed as ordinary income whether you receive
the dividends in cash or in additional shares.

[SIDENOTE] TAX STATUS OF DISTRIBUTIONS

26
<PAGE>

PROSPECTUS

Corporate shareholders may be entitled to a dividends-received deduction for the
portion of dividends they receive which are attributable to dividends received
by a fund from U.S. corporations.

Capital gains distributions will result from gains on the sale or exchange of
capital assets held for more than one year.

Distributions paid in January but declared by a Fund in October, November or
December of the previous year, may be taxable to you in the previous year.

Each sale, exchange, or redemption of Fund shares is a taxable event to you. You
should consider the tax consequences of any redemption or exchange before making
such a request, especially with respect to redemptions, if you invest in the
Funds through a tax-qualified retirement plan.

[SIDENOTE] TAX STATUS OF SHARE TRANSACTIONS

A Fund is not liable for any income or franchise tax in Delaware as long as it
qualifies as a regulated investment company for federal income tax purposes.

[SIDENOTE] STATE TAX CONSIDERATIONS

Distributions by the Funds may be subject to state and local taxation. You
should verify your tax liability with your tax advisor.

27
<PAGE>

FINANCIAL HIGHLIGHTS

U.S. GOVERNMENT MONEY MARKET FUND
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the Money
Market Fund's financial performance for the past five years. Certain information
reflects financial results for a single Investor Class Share. The total returns
in the table represent the rate that an investor would have earned (or lost) on
an investment in an Investor Class Share of the Fund (assuming reinvestment of
all dividends and distributions). C Class Shares of the Funds were not offered
as of 3/31/00 and therefore no financial highlights are presented for that
class. Because C Class Shares are subject to different sales charges and expense
levels, total return will ordinarily differ for the same period. This
information has been audited by Deloitte & Touche LLP, whose report, along with
the financial statements and related notes, appears in the Rydex Series Funds'
2000 Annual Report. The 2000 Annual Report is available by telephoning the
transfer agent at 800.820.0888 or 301.296.5100. The Annual Report is
incorporated by reference in the SAI.

<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

INVESTOR CLASS - YEAR YEAR YEAR PERIOD YEAR
U.S. GOVERNMENT ENDED ENDED ENDED ENDED ENDED
MONEY MARKET FUND 3/31/00 3/31/99 3/31/98 3/31/97* 6/30/96
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE++:
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------
NET INVESTMENT INCOME .04 .04 .04 .03 .04
-----------------------------------------------------------------------------------
NET INCREASE IN NET
ASSET VALUE RESULTING
FROM OPERATIONS .04 .04 .04 .03 .04
DISTRIBUTIONS TO
SHAREHOLDERS FROM NET
INVESTMENT INCOME (.04) (.04) (.04) (.03) (.04)
NET INCREASE IN NET ASSET VALUE .00 .00 .00 .00 .00
-----------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================
TOTAL INVESTMENT RETURN (%) 4.48 4.55 4.69 4.39** 4.60
===================================================================================
RATIOS TO AVERAGE NET ASSETS
GROSS EXPENSES (%) .89 .84 .89 .86** -
NET EXPENSES (%) .88 .83 .89 .86** .99
NET INVESTMENT INCOME (%) 4.36 4.37 4.37 4.06 4.18
-----------------------------------------------------------------------------------
SUPPLEMENTARY DATA
NET ASSETS, END OF YEAR $686,198 $949,802 $253,295 $283,553 $153,925
(000'S OMITTED)
----------------------------------------------------------------------------------
</TABLE>
++ CALCULATED USING THE AVERAGE DAILY SHARES OUTSTANDING FOR THE YEAR.
* DURING 1997, THE TRUST CHANGED ITS FISCAL YEAR END FROM JUNE 30 TO MARCH 31.
ACCORDINGLY, THE PERIOD ENDED MARCH 31, 1997 REFLECTS NINE MONTHS OF
ACTIVITY.
** ANNUALIZED

28
<PAGE>

FINANCIAL HIGHLIGHTS PROSPECTUS

TITAN 500 FUND
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single E Class Share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in an E Class Share of the Fund (assuming reinvestment of all dividends and
distributions). C Class Shares of the Funds were not offered as of 3/31/00 and
therefore no financial highlights are presented for that class. Because C Class
Shares are subject to different sales charges and expense levels, total return
will ordinarily differ for the same period. This information has not been
audited. The 2000 Semi-Annual Report is available by telephoning the transfer
agent at 800.820.0888 or 301.296.5100. The Semi-Annual Report is incorporated by
reference in the SAI.

<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD
INVESTOR CLASS - ENDED
TITAN 500 FUND* 6/30/00
---------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE++:
NET ASSET VALUE,
BEGINNING OF PERIOD $25.00
---------------------------------------------------------------------------
NET INVESTMENT INCOME 0.06

NET REALIZED AND UNREALIZED
GAINS (LOSSES) ON SECURITIES 1.01
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSET VALUE RESULTING FROM
OPERATIONS 1.07
DISTRIBUTIONS TO SHAREHOLDERS -
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSET VALUE 1.07
---------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $26.07
===========================================================================
TOTAL INVESTMENT RETURN (%) 4.28
RATIOS TO AVERAGE NET ASSETS
GROSS EXPENSES (%)** 8.18
NET EXPENSES (%)** 1.75
NET INVESTMENT
INCOME (%)** 2.02
---------------------------------------------------------------------------
SUPPLEMENTARY DATA
PORTFOLIO TURNOVER RATE*** 0%
NET ASSETS, END OF PERIOD $16,311
(000'S OMITTED)
---------------------------------------------------------------------------
</TABLE>
* COMMENCEMENT OF OPERATIONS: MAY 19, 2000 - TITAN 500 FUND
** ANNUALIZED
*** PORTFOLIO TURNOVER RATIO IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.
++ CALCULATED USING THE AVERAGE DAILY SHARES OUTSTANDING FOR THE PERIOD.

29
<PAGE>

FINANCIAL HIGHLIGHTS

VELOCITY 100 FUND
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the Fund's
financial performance for its period of operations. Certain information reflects
financial results for a single E Class Share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in an E Class Share of the Fund (assuming reinvestment of all dividends and
distributions). C Class Shares of the Funds were not offered as of 3/31/00 and
therefore no financial highlights are presented for that class. Because C Class
Shares are subject to different sales charges and expense levels, total return
will ordinarily differ for the same period. This information has not been
audited. The 2000 Semi-Annual Report is available by telephoning the transfer
agent at 800.820.0888 or 301.296.5100. The Semi-Annual Report is incorporated by
reference in the SAI.

<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD
INVESTOR CLASS - ENDED
VELOCITY 100 FUND* 6/30/00
----------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERORMANCE++:
NET ASSET VALUE,
BEGINNING OF PERIOD $25.00
----------------------------------------------------------------------------
NET INVESTMENT INCOME 0.10

NET REALIZED AND UNREALIZED
GAINS (LOSSES) ON SECURITIES 8.29
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSET VALUE RESULTING FROM
OPERATIONS 8.39
DISTRIBUTIONS TO SHAREHOLDERS -
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSET VALUE 8.39
----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $33.39
============================================================================
TOTAL INVESTMENT RETURN (%) 33.56
RATIOS TO AVERAGE NET ASSETS
GROSS EXPENSES (%)** 4.88
NET EXPENSES (%)** 1.74
NET INVESTMENT
INCOME (%)** 3.19
----------------------------------------------------------------------------
SUPPLEMENTARY DATA
PORTFOLIO TURNOVER RATE*** 0%
NET ASSETS, END OF PERIOD $49,303
(000'S OMITTED)
----------------------------------------------------------------------------
</TABLE>

* COMMENCEMENT OF OPERATIONS: MAY 24, 2000 - VELOCITY 100 FUND
** ANNUALIZED
*** PORTFOLIO TURNOVER RATIO IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.
++ CALCULATED USING THE AVERAGE DAILY SHARES OUTSTANDING FOR THE PERIOD.

30
<PAGE>

BENCHMARK INFORMATION PROSPECTUS

The Titan 500 Fund is not sponsored, endorsed, sold, or promoted by S&P; and the
Velocity 100 Fund is not sponsored, endorsed, sold, or promoted by NASDAQ or any
of NASDAQ's affiliates (NASDAQ and its affiliates hereinafter collectively
referred to as "NASDAQ").

Neither S&P nor NASDAQ make any representation or warranty, implied
or express, to the investors in the Funds, or any member of the public,
regarding the advisability of investing in index funds or the ability of the S&P
500 Index or the NASDAQ 100 Index, respectively, to track general stock market
performance.

Neither S&P nor NASDAQ guarantees the accuracy and/or the completeness of the
S&P 500 Index and NASDAQ 100 Index, respectively, or any date included therein.

Neither S&P nor NASDAQ make any warranty, express or implied, as to results to
be obtained by any of the Funds, the investors in the Funds, or any person or
entity from the use of the S&P 500 Index or the NASDAQ 100 Index, respectively,
or any data included therein.

Neither S&P nor NASDAQ makes any express or implied warranties of
merchantability or fitness for a particular purpose for use with respect to the
S&P 500 Index or the NASDAQ 100 Index, respectively, or any data included
therein.

31
<PAGE>

Additional information about the Dynamic Funds is included in a Statement of
Additional Information dated March 1, 2000 (an "SAI"), which contains more
detailed information about the Dynamic Funds. Additional information about the
Money Market Fund is included in an SAI dated August 1, 2000, as supplemented
October 9, 2000, which contains more information about the Rydex Series Funds.
Each SAI has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated by reference into this Prospectus and, therefore, legally forms
a part of this Prospectus.

The SEC maintains the EDGAR database on its Web site ("http://www.sec.gov") that
contains each SAI, material incorporated by reference, and other information
regarding registrants that file electronically with the SEC.

You may also review and copy documents at the SEC Public Reference room in
Washington, D.C. (for information on the operation of the Public Reference Room,
call 202.942.8090). You may request documents by mail from the SEC, upon payment
of a duplication fee, by writing to: Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102. You may also obtain this
information, upon payment of a duplicating fee, by e-mailing the SEC at the
following address: [email protected].

You may obtain a copy of each SAI or the annual or semi-annual reports, without
charge by calling 800.820.0888 or by writing to Rydex Dynamic Funds, at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850. Additional information
about the Funds' investments is available in the annual and semi-annual reports.
Also, in the Funds' annual reports, you will find a discussion of the market
conditions and investment strategies that significantly affected the Funds'
performance during its last fiscal year.

No one has been authorized to give any information or to make any
representations not contained in this Prospectus or each SAI in connection with
the offering of Fund Shares. Do not rely on any such information or
representations as having been authorized by the Funds or Rydex Global Advisors.
This prospectus does not constitute an offering by the Funds in any jurisdiction
where such an offering is not lawful.

The Dynamic Funds' SEC registration number is 811-9525. The Rydex Series Funds'
SEC registration number is 811-7584.

[LOGO]

9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850

www.rydexfunds.com
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

RYDEX DYNAMIC FUNDS

C CLASS SHARES

9601 BLACKWELL ROAD, SUITE 500,
ROCKVILLE, MARYLAND 20850

1 - 800 - 820 - 0888
301- 296-5100

www.rydexfunds.com

This Statement of Additional Information ("SAI") relates to the C Class Shares
of the following portfolios (the "Funds") of Rydex Dynamic Funds (the "Trust"):

TITAN 500 FUND
VELOCITY 100 FUND

This SAI is not a prospectus. It should be read in conjunction with the Trust's
C Class Shares Prospectus, dated October 9, 2000. A copy of the Trust's
Prospectus is available, without charge, upon request to the Trust at the
address above or by telephoning the Trust at the telephone number above.

The date of this SAI is October 9, 2000.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION ABOUT THE TRUST.......................................................................3

INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS..........................................................3

INVESTMENT RESTRICTIONS...................................................................................11

PORTFOLIO TRANSACTIONS AND BROKERAGE......................................................................13

MANAGEMENT OF THE TRUST...................................................................................14

DETERMINATION OF NET ASSET VALUE..........................................................................18

PERFORMANCE INFORMATION...................................................................................19

CALCULATION OF RETURN QUOTATIONS..........................................................................20

PURCHASE AND REDEMPTION OF SHARES.........................................................................21

DIVIDENDS, DISTRIBUTIONS, AND TAXES.......................................................................22

OTHER INFORMATION.........................................................................................24

COUNSEL...................................................................................................25

AUDITORS AND CUSTODIAN....................................................................................25

FINANCIAL STATEMENTS......................................................................................25
</TABLE>

2
<PAGE>

GENERAL INFORMATION ABOUT THE TRUST

The Trust was organized as a Delaware business trust on August 6, 1999. The
Trust is permitted to offer separate portfolios and different classes of shares.
All payments received by the Trust for shares of any Fund belong to that Fund.
Each Fund has its own assets and liabilities. Currently, the Trust is composed
of the following series: Titan 500, Tempest 500, Velocity 100, Venture 100,
Titan 500 Master, Tempest 500 Master, Velocity 100 Master, and Venture 100
Master (collectively, the "Dynamic Funds"). The Titan 500 Master, Tempest 500
Master, Velocity 100 Master, and Venture 100 Master Funds are not currently
offering shares and at which time each does offer shares, each will only do so
through a master-feeder arrangement with the Titan 500, Tempest 500, Velocity
100, and Venture 100 Funds, respectively.

The Trust currently offers E Class Shares and C Class Shares. The different
classes provide for variations in certain shareholder servicing and distribution
expenses and in the minimum initial investment requirement. In addition, a
contingent deferred sales load is imposed on the redemption of C Class Shares.
Sales charges and minimum investment requirements are described in the
prospectus. For more information on shareholder servicing and distribution
expenses, see "Distributor." Additional Funds and/or classes may be created from
time to time.

INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS

GENERAL
Each Fund's investment objective and principal investments are described in the
Prospectus. The following information supplements, and should be read in
conjunction with, those sections of the Prospectus.

The investment strategies of the Funds discussed below and in the Prospectus may
be used by a Fund if, in the opinion of the Advisor, these strategies will be
advantageous to that Fund. A Fund is free to reduce or eliminate its activity in
any of those areas without changing the Fund's fundamental investment policies.
There is no assurance that any of these strategies or any other strategies and
methods of investment available to a Fund will result in the achievement of that
Fund's objectives.

BORROWING
The Funds may borrow money, including borrowing for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
substantially all of a Fund's assets will fluctuate in value, whereas the
interest obligations on borrowings may be fixed, the net asset value per share
of the Fund will increase more when the Fund's portfolio assets increase in
value and decrease more when the Fund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, the Funds
might have to sell portfolio securities to meet interest or principal payments
at a time investment considerations would not favor such sales. The Funds intend
to use leverage during periods when the Advisor believes that the respective
Fund's investment objective would be furthered.

Each Fund may also borrow money to facilitate management of the Fund's portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such borrowing
is not for investment purposes and will be repaid by the borrowing Fund
promptly.

3
<PAGE>

As required by the 1940 Act, a Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the
value of the Fund's assets should fail to meet this 300% coverage test, the
Fund, within three days (not including Sundays and holidays), will reduce the
amount of the Fund's borrowings to the extent necessary to meet this 300%
coverage. Maintenance of this percentage limitation may result in the sale of
portfolio securities at a time when investment considerations otherwise indicate
that it would be disadvantageous to do so.

In addition to the foregoing, the Funds are authorized to borrow money as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of the Fund's total assets. This borrowing is not
subject to the foregoing 300% asset coverage requirement The Funds are
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowings.

ILLIQUID SECURITIES
While none of the Funds anticipates doing so, each Fund may purchase illiquid
securities, including securities that are not readily marketable and securities
that are not registered ("restricted securities") under the Securities Act of
1933, as amended (the "1933 Act"), but which can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund will
not invest more than 15% of the Fund's net assets in illiquid securities. If the
percentage of a Fund's net assets invested in illiquid securities exceeds 15%
due to market activity, the Fund will take appropriate measures to reduce its
holdings of illiquid securities. Each Fund will adhere to a more restrictive
limitation on the Fund's investment in illiquid securities as required by the
securities laws of those jurisdictions where shares of the Fund are registered
for sale. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Under the
current guidelines of the staff of the Securities and Exchange Commission (the
"Commission"), illiquid securities also are considered to include, among other
securities, purchased over-the-counter options, certain cover for
over-the-counter options, repurchase agreements with maturities in excess of
seven days, and certain securities whose disposition is restricted under the
federal securities laws. The Fund may not be able to sell illiquid securities
when the Advisor considers it desirable to do so or may have to sell such
securities at a price that is lower than the price that could be obtained if the
securities were more liquid. In addition, the sale of illiquid securities also
may require more time and may result in higher dealer discounts and other
selling expenses than does the sale of securities that are not illiquid.
Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on net asset value.

Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and meet other selection criteria, a Fund may make such investments
whether or not such securities are "illiquid" depending on the market that
exists for the particular security. The trustees of the Trust (the "Trustees")
have delegated the responsibility for determining the liquidity of Rule 144A
restricted securities, which may be invested in by a Fund, to the Advisor.

INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Funds presently may invest in the securities of other investment companies
to the extent that such an investment would be consistent with the requirements
of Section 12(d)(1) of the 1940

4
<PAGE>

Act. A Fund, therefore, may invest in the securities of another investment
company (the "acquired company") provided that the Fund, immediately after such
purchase or acquisition, does not own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of the Fund; or (iii) securities issued by the acquired
company and all other investment companies (other than Treasury stock of the
Fund) having an aggregate value in excess of 10% of the value of the total
assets of the Fund. A Fund may also invest in the securities of other investment
companies if such securities are the only investment securities held by the
Fund, such as through a master-feeder arrangement.

If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund's shareholders will indirectly bear the Fund's proportionate
share of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
Fund to the Fund's own investment adviser and the other expenses that the Fund
bears directly in connection with the Fund's own operations.

LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the Funds may
lend portfolio securities to brokers, dealers, and financial institutions,
provided that cash equal to at least 100% of the market value of the securities
loaned is deposited by the borrower with the Fund and is maintained each
business day in a segregated account pursuant to applicable regulations. While
such securities are on loan, the borrower will pay the lending Fund any income
accruing thereon, and the Fund may invest the cash collateral in portfolio
securities, thereby earning additional income. A Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which the Fund's shares are qualified for sale, and the Funds
will not lend more than 33 1/3% of the value of the Fund's total assets. Loans
would be subject to termination by the lending Fund on four business days'
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
lending Fund and that Fund's shareholders. A lending Fund may pay reasonable
finders, borrowers, administrative, and custodial fees in connection with a
loan.

OPTIONS TRANSACTIONS

OPTIONS ON SECURITIES. The Funds may buy call options and write (sell) put
options on securities for the purpose of realizing the Fund's investment
objective. By writing a call option on securities, a Fund becomes obligated
during the term of the option to sell the securities underlying the option at
the exercise price if the option is exercised. By writing a put option, a
Fund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the option is
exercised.

During the term of the option, the writer may be assigned an exercise notice by
the broker-dealer through whom the option was sold. The exercise notice would
require the writer to deliver, in the case of a call, or take delivery of, in
the case of a put, the underlying security against payment of the exercise
price. This obligation terminates upon expiration of the option, or at such
earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date as the one previously sold. Once an option
has been exercised, the writer may not execute a closing purchase transaction.
To secure the obligation to deliver the underlying security in the case of a

5
<PAGE>

call option, the writer of a call option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Option
Clearing Corporation (the "OCC"), an institution created to interpose itself
between buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction.

A Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are illiquid.

OPTIONS ON SECURITY INDICES. The Funds may purchase call options and write
put options on stock indices listed on national securities exchanges or
traded in the over-the-counter market as an investment vehicle for the
purpose of realizing the Fund's investment objective.

Options on indices are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash equal
to the difference between the closing price of the securities index and the
exercise price of the option. When a Fund writes a covered option on an index,
the Fund will be required to deposit and maintain with a custodian cash or
liquid securities equal in value to the aggregate exercise price of a put or
call option pursuant to the requirements and the rules of the applicable
exchange. If, at the close of business on any day, the market value of the
deposited securities falls below the contract price, the Fund will deposit with
the custodian cash or liquid securities equal in value to the deficiency.

OPTIONS ON FUTURES CONTRACTS. Under Commodities Futures Trading Commission
("CFTC") Regulations, a Fund may engage in futures transactions, either for
"bona fide hedging" purposes, as this term is defined in the CFTC Regulations,
or for non-hedging purposes to the extent that the aggregate initial margins and
option premiums required to establish such non-hedging positions do not exceed
5% of the liquidation value of the Fund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (I.E., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security, or the amount by which the current market
value of the underlying security exceeds the exercise price of the call option),
the in-the-money amount may be excluded in calculating this 5% limitation.

When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a Fund
may maintain with its custodian bank (and marked-to-market on a daily basis), a
segregated account consisting of cash or liquid securities that, when added to
any amounts deposited with a futures commission merchant as margin, are equal to
the market value of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities trading practices and
properly segregates assets, the segregated account will function as a practical
limit on the amount of leverage which the Fund may undertake and on the
potential increase in the speculative character of the Fund's outstanding
portfolio securities. Additionally, such segregated accounts will generally
assure the

6
<PAGE>

availability of adequate funds to meet the obligations of the Fund arising from
such investment activities.

A Fund may cover its long position in a futures contract by purchasing a put
option on the same futures contract with a strike price (I.E., an exercise
price) as high or higher than the price of the futures contract. In the
alternative, if the strike price of the put is less than the price of the
futures contract, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. A Fund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments with prices which
are expected to move relatively consistently with the futures contract. A Fund
may cover its short position in a futures contract by taking a long position in
the instruments underlying the futures contracts, or by taking positions in
instruments with prices which are expected to move relatively consistently with
the futures contract.

A Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long position
in the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, the Fund will maintain in a segregated
account cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the futures contract. A Fund may also
cover its sale of a call option by taking positions in instruments with prices
which are expected to move relatively consistently with the call option. A Fund
may cover its sale of a put option on a futures contract by taking a short
position in the underlying futures contract at a price greater than or equal to
the strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of the
written put, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. A Fund may also cover its sale of a put
option by taking positions in instruments with prices which are expected to move
relatively consistently with the put option.

SWAP AGREEMENTS
The Funds may enter into equity index or interest rate swap agreements for
purposes of attempting to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year. In
a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested in a
"basket" of securities representing a particular index. Forms of swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
dollars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.

Most swap agreements entered into by the Funds calculate the obligations of the
parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the

7
<PAGE>

agreement based on the relative values of the positions held by each party to
the agreement (the "net amount").

A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by segregating assets
determined to be liquid. Obligations under swap agreements so covered will not
be construed to be "senior securities" for purposes of a Fund's investment
restriction concerning senior securities. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for the Fund illiquid investment limitations. A
Fund will not enter into any swap agreement unless the Advisor believes that the
other party to the transaction is creditworthy. A Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.

Each Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable. The
counterparty to any swap agreement will typically be a bank, investment banking
firm or broker/dealer. The counterparty will generally agree to pay the Fund the
amount, if any, by which the notional amount of the swap agreement would have
increased in value had it been invested in the particular stocks, plus the
dividends that would have been received on those stocks. The Fund will agree to
pay to the counterparty a floating rate of interest on the notional amount of
the swap agreement plus the amount, if any, by which the notional amount would
have decreased in value had it been invested in such stocks. Therefore, the
return to the Fund on any swap agreement should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the Fund
on the notional amount.

Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap agreement or periodically during its term. Swap agreements
do not involve the delivery of securities or other underlying assets.
Accordingly, the risk of loss with respect to swap agreements is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to a swap agreement defaults, a Fund's risk of loss consists of the
net amount of payments that such Fund is contractually entitled to receive, if
any. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate net asset value at
least equal to such accrued excess will be maintained in a segregated account by
a Fund's custodian. Inasmuch as these transactions are entered into for hedging
purposes or are offset by segregated cash of liquid assets, as permitted by
applicable law, the Funds and their Advisor believe that these transactions do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to a Fund's borrowing restrictions.

The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments, which are traded in the over-the-counter market. The Advisor, under
the supervision of the Board of Trustees, is responsible for determining and
monitoring the liquidity of Fund transactions in swap agreements.

The use of equity swaps is a highly specialized activity, which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.

8
<PAGE>

PORTFOLIO TURNOVER
The Trust anticipates that investors in the Funds, as part of an asset
allocation investment strategy, will frequently purchase and/or redeem shares of
the Funds. The nature of the Funds as asset allocation tools will cause the
Funds to experience substantial portfolio turnover. (See "Risks of Investing in
the Funds" in the Trust's Prospectus). Because each Fund's portfolio turnover
rate to a great extent will depend on the purchase, redemption, and exchange
activity of the Fund's investors, it is very difficult to estimate what the
Fund's actual turnover rate will be in the future.

"Portfolio Turnover Rate" is defined under the rules of the SEC as the value of
the securities purchased or securities sold, excluding all securities whose
maturities at the time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. Based on this
definition, instruments with remaining maturities of less than one year are
excluded from the calculation of the portfolio turnover rate. Instruments
excluded from the calculation of portfolio turnover generally would include the
futures contracts and option contracts in which the Funds invest since such
contracts generally have remaining maturities of less than one year. The Funds
expect to hold most of their investments in short-term options and futures
contracts, which are excluded for purposes of computing portfolio turnover.
Therefore, based on the above formula, each Fund expects a portfolio turnover
rate of approximately 0%.

REPURCHASE AGREEMENTS
As discussed in the Trust's Prospectus, each of the Funds may enter into
repurchase agreements with financial institutions. The Funds each follow certain
procedures designed to minimize the risks inherent in such agreements. These
procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions whose condition
will be continually monitored by the Advisor. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial
institution, a Fund will seek to liquidate such collateral. However, the
exercising of each Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of each of the Funds not to
invest in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of the Fund's total assets. The investments of each of the Funds
in repurchase agreements, at times, may be substantial when, in the view of the
Advisor, liquidity or other considerations so warrant.

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SHORT SALES

The Funds each may engage in short sales if, at the time of the short sale,
the Fund owns or has the right to acquire an equal amount of the security
being sold at no additional cost. While none of the Funds currently expect to
do so, the Funds may make a short sale when a Fund wants to sell the security
it owns at a current attractive price, in order to hedge or limit the
exposure of a Fund's position.

STOCK INDEX FUTURES CONTRACTS
A Fund may buy and sell stock index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. A stock index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.

At the time a Fund purchases a futures contract, an amount of cash, U.S.
Government securities or other liquid securities equal to the market value of
the futures contract will be deposited in a segregated account with the Fund's
custodian. When writing a futures contract, the Fund will maintain with its
custodian liquid assets that, when added to the amounts deposited with a futures
commission merchant or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, a Fund may "cover" its
position by owning the instruments underlying the contract (or, in the case of
an index futures contract, a portfolio with a volatility substantially similar
to that of the index on which the futures contract is based), or holding a call
option permitting the Fund to purchase the same futures contract at a price no
higher than the price of the contract written by the Fund (or at a higher price
if the difference is maintained in liquid assets with the Fund's custodian).

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TRACKING ERROR
The following factors may affect the ability of the Funds to achieve correlation
with the performance of their respective benchmarks: (1) Fund expenses,
including brokerage (which may be increased by high portfolio turnover); (2) a
Fund holding less than all of the securities in the benchmark and/or securities
not included in the benchmark; (3) an imperfect correlation between the
performance of instruments held by a Fund, such as futures contracts and
options, and the performance of the underlying securities in the market; (4)
bid-ask spreads (the effect of which may be increased by portfolio turnover);
(5) a Fund holding instruments traded in a market that has become illiquid or
disrupted; (6) Fund share prices being rounded to the nearest cent; (7) changes
to the index underlying a benchmark that are not disseminated in advance; (8)
the need to conform a Fund's portfolio holdings to comply with investment
restrictions or policies or regulatory or tax law requirements; or (9) market
movements that run counter to a leveraged Fund's investments. Market movements
that run counter to a leveraged Fund's investments will cause some divergence
between the Fund and its benchmark over time due to the mathematical effects of
leveraging. The magnitude of the divergence is dependent upon the magnitude of
the market movement, its duration, and the degree to which the Fund is
leveraged. The tracking error of a leveraged Fund is generally small during a
well-defined up trend or downtrend in the market when measured from price peak
to price peak, absent a market decline and subsequent recovery, however, the
deviation of the Fund from its benchmark may be significant.

U.S. GOVERNMENT SECURITIES
The Funds may invest in U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities include
U.S. Treasury securities, which are backed by the full faith and credit of the
U.S. Treasury and which differ only in their interest rates, maturities, and
times of issuance. U.S. Treasury bills have initial maturities of one year or
less; U.S. Treasury notes have initial maturities of one to ten years; and U.S.
Treasury bonds generally have initial maturities of greater than ten years.
Certain U.S. Government Securities are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not limited to,
obligations of U.S. Government agencies or instrumentalities such as Fannie Mae,
the Government National Mortgage Association, the Small Business Administration,
the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration.

Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the federal agency, while other obligations issued by or
guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while
the U.S. Government provides financial support to such U.S. Government-sponsored
federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity.

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WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Fund, from time to time, in the ordinary course of business, may purchase
securities on a when-issued or delayed-delivery basis (I.E., delivery and
payment can take place between a month and 120 days after the date of the
transaction). These securities are subject to market fluctuation and no interest
accrues to the purchaser during this period. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Fund will record the transaction and thereafter reflect the value of the
securities, each day, of such security in determining the Fund's net asset
value. A Fund will not purchase securities on a when-issued or delayed-delivery
basis if, as a result, more than 15% of the Fund's net assets would be so
invested. At the time of delivery of the securities, the value of the securities
may be more or less than the purchase price. The Fund will also establish a
segregated account with the Fund's custodian bank in which the Fund will
maintain cash or liquid securities equal to or greater in value than the Fund's
purchase commitments for such when-issued or delayed-delivery securities. The
Trust does not believe that a Fund's net asset value or income will be adversely
affected by the Fund's purchase of securities on a when-issued or
delayed-delivery basis.

INVESTMENT RESTRICTIONS

FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of the Funds, which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.

A Fund shall not:

1. Borrow money in an amount exceeding 33 1/3% of the value of its
total assets, provided that, for purposes of this limitation,
investment strategies which either obligate the Fund to
purchase securities or require the Fund to segregate assets
are not considered to be borrowing. Asset coverage of a least
300% is required for all borrowing, except where the Fund has
borrowed money for temporary purposes in amounts not exceeding
5% of its total assets. The Fund will not purchase securities
while its borrowing exceeds 5% of its total assets.

2. Make loans if, as a result, more than 33 1/3% of its total
assets would be lent to other parties, except that the Fund
may (i) purchase or hold debt instruments in accordance with
its investment objective and policies; (ii) enter into
repurchase agreements; and (iii) lend its securities.

3. Act as an underwriter of securities of other issuers except as
it may be deemed an underwriter in selling a portfolio
security.

4. Invest in interests in oil, gas, or other mineral exploration
or development programs and oil, gas or mineral leases.

5. Issue senior securities (as defined in the 1940 Act) except as
permitted by rule, regulation or order of the SEC.

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6. Purchase or sell real estate, physical commodities, or
commodities contracts, except that the Fund may purchase (i)
marketable securities issued by companies which own or invest
in real estate (including real estate investment trusts),
commodities, or commodities contracts; and (ii) commodities
contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.

7. Invest 25% or more of the value of the Fund's total assets in
the securities of one or more issuers conducting their
principal business activities in the same industry; except
that, to the extent the benchmark selected for a particular
Fund is concentrated in a particular industry, the Fund will
necessarily be concentrated in that industry. This limitation
does not apply to investments or obligations of the U.S.
Government or any of its agencies or instrumentalities.

NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board of Trustees.

Each Fund may not:

1. Invest in warrants.

2. Invest in real estate limited partnerships.

3. Invest in mineral leases.

4. Pledge, mortgage or hypothecate assets except to secure
borrowing permitted by the Fund's fundamental limitation on
borrowing.

5. Invest in companies for the purpose of exercising control.

6. Purchase securities on margin or effect short sales, except
that a Fund may (i) obtain short-term credits as necessary for
the clearance of security transactions; (ii) provide initial
and variation margin payments in connection with transactions
involving futures contracts and options on such contracts; and
(iii) make short sales "against the box" or in compliance with
the SEC's position regarding the asset segregation
requirements imposed by Section 18 of the 1940 Act.

7. Invest its assets in securities of any investment company,
except as permitted by the 1940 Act or any rule, regulation or
order of the SEC.

8. Purchase or hold illiquid securities, I.E., securities that
cannot be disposed of for their approximate carrying value in
seven days or less (which term includes repurchase agreements
and time deposits maturing in more than seven days) if, in the
aggregate, more than 15% of its net assets would be invested
in illiquid securities.

The foregoing percentages: (i) are based on total assets (except for the
limitation on illiquid securities, which is based on net assets); (ii) will
apply at the time of the purchase of a security;

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and (iii) shall not be considered violated unless an excess or deficiency occurs
or exists immediately after and as a result of a purchase of such security.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the Funds, the selection of
brokers and dealers to effect the transactions, and the negotiation of brokerage
commissions, if any. The Advisor expects that the Funds may execute brokerage or
other agency transactions through registered broker-dealers, for a commission,
in conformity with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.

The Advisor may serve as an investment manager to a number of clients, including
other investment companies. It is the practice of the Advisor to cause purchase
and sale transactions to be allocated among the Funds and others whose assets
the Advisor manages in such manner as the Advisor deems equitable. The main
factors considered by the Advisor in making such allocations among the Funds and
other client accounts of the Advisor are the respective investment objectives,
the relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, the size of investment commitments
generally held, and the opinions of the person(s) responsible, if any, for
managing the portfolios of the Funds and the other client accounts.

The policy of each Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, each
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. Each Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Advisor from obtaining a high quality of brokerage and
research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily subjective
and imprecise, as in most cases an exact dollar value for those services is not
ascertainable.

Purchases and sales of U.S. Government securities are normally transacted
through issuers, underwriters or major dealers in U.S. Government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.

In managing the investment portfolios of the Funds, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide the
most favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the Advisor. In addition, Section 28(e) of the
Securities Exchange Act of 1934 permits the Advisor to cause a Fund to pay
commission rates in excess of those another dealer or broker would have charged
for effecting the same transaction, if the Advisor determines, in good

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<PAGE>

faith, that the commission paid is reasonable in relation to the value of
brokerage and research services provided.

Such research services may include information on the economy, industries,
groups of securities, individual companies, statistical information, accounting
and tax law interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing and appraisal
services, credit analysis, risk measurement analysis, performance analysis,
analysis of corporate responsibility issues or in the form of access to various
computer-generated data, computer hardware and software. Such research may be
provided by brokers and dealers in the form of written reports, telephone
contacts and personal meetings with security analysts, corporate and industry
spokespersons, economists, academicians, and government representatives.
Brokerage services and equipment may facilitate the execution and monitoring of
securities transactions, for example, by providing rapid communications with
financial markets and brokers or dealers, or by providing real-time tracking of
orders, settlements, investment positions and relevant investment criteria and
restrictions applicable to the execution of securities transactions. In some
cases, brokerage and research services are generated by third parties but are
provided to the Advisor by or through brokers and dealers. The Advisor may
allocate brokerage for research services that are also available for cash, where
appropriate and permitted by law. The Advisor may also pay cash for certain
research services received from external sources.

In addition, the information and services received by the Advisor from brokers
and dealers may not in all cases benefit a Fund directly. For example, such
information and services received by the Advisor as a result of the brokerage
allocation of one of the Funds may be of benefit to the Advisor in the
management of other accounts of the Advisor, including other Funds of the Trust
and other investment companies advised by the Advisor. While the receipt of such
information and services is useful in varying degrees and would generally reduce
the amount of research or services otherwise performed by the Advisor and
thereby reduce the Advisor's expenses, this information and these services are
of indeterminable value and the management fee paid to the Advisor is not
reduced by any amount that may be attributable to the value of such information
and services.

MANAGEMENT OF THE TRUST

The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities of the
Trust's officers. The names and addresses (and ages) of the Trustees and the
officers of the Trust and the officers of the Advisor, together with information
as to their principal business occupations during the past five years, are set
forth below. Fees and expenses for non-interested Trustees will be paid by the
Trust.

TRUSTEES

(1)ALBERT P. VIRAGH, JR. (58)

Chairman of the Board of Trustees and President of Rydex Series Funds,
a registered mutual fund, 1993 to present; Chairman of the Board of
Trustees and President of Rydex Variable Trust, a registered mutual
fund, 1998 to present; Chairman of the Board of Trustees and President
of Rydex Dynamic Funds, a registered mutual fund, 1999 to

-------------------
(1) This trustee is deemed to be an "interested person" of the Trust,
within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as
this person is affiliated with the Advisor, as described herein.

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<PAGE>

present; Chairman of the Board of Directors, President, and Treasurer
of PADCO Advisors, Inc., investment adviser, 1993 to present; Chairman
of the Board of Directors, President, and Treasurer of PADCO Service
Company, Inc., shareholder and transfer agent servicer, 1993 to
present; Chairman of the Board of Directors, President, and Treasurer
of PADCO Advisors II, Inc., investment adviser, 1998 to present;
Chairman of the Board of Directors, President, and Treasurer of Rydex
Distributors, Inc., a registered broker-dealer firm, 1996 to present;
Vice President of Rushmore Investment Advisors Ltd., a registered
investment adviser, 1985 to 1993. Address: 9601 Blackwell Road, Suite
500, Rockville, MD 20850.

COREY A. COLEHOUR (54)

Trustee of Rydex Series Funds, 1993 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999
to present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address:
9601 Blackwell Road, Suite 500, Rockville, MD 20850.

J. KENNETH DALTON (58)

Trustee of Rydex Series Funds, 1995 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999
to present; Mortgage Banking Consultant and Investor, The Dalton Group,
a real estate company, 1995 to present; President, CRAM Mortgage Group,
Inc., 1966 to 1995.
Address: 9601 Blackwell Road, Suite 500, Rockville, MD 20850.

JOHN O. DEMARET (60)

Trustee of Rydex Series Funds, 1997 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999
to present; Founder and Chief Executive Officer, Health Cost Controls
America, Chicago, Illinois, 1987 to 1996; sole practitioner, Chicago,
Illinois, 1984 to 1987; General Counsel for the Chicago Transit
Authority, 1981 to 1984; Senior Partner, O'Halloran, LaVarre & Demaret,
Northbrook, Illinois, 1978 to 1981. Address: 9601 Blackwell Road, Suite
500, Rockville, MD 20850.

PATRICK T. MCCARVILLE (57)

Trustee of Rydex Series Funds, 1997 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999
to present; Founder and Chief Executive Officer, Par Industries, Inc.,
Northbrook, Illinois, 1977 to present; President and Chief Executive
Officer, American Health Resources, Northbrook, Illinois, 1984 to 1986.
Address: 9601 Blackwell Road, Suite 500, Rockville, MD 20850.

ROGER SOMERS (55)

Trustee of Rydex Series Funds, 1993 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999
to present; President, Arrow Limousine, 1963 to present. Address:
9601 Blackwell Road, Suite 500, Rockville, MD 20850.

OFFICERS

ROBERT M. STEELE (41)

Secretary and Vice President of Rydex Series Funds, 1994 to present;
Secretary and Vice President of Rydex Variable Trust, 1998 to present;
Secretary and Vice President of Rydex Dynamic Funds, 1999 to present;
Vice President of Rydex Distributors, Inc., 1996 to present; Vice
President of The Boston Company, Inc., an institutional money

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<PAGE>

management firm, 1987 to 1994. Address: 9601 Blackwell Road, Suite 500,
Rockville, MD 20850.

CARL G. VERBONCOEUR (47)

Vice President and Treasurer of Rydex Series Funds, 1997 to present;
Vice President and Treasurer of the Rydex Variable Trust, 1998 to
present; Vice President and Treasurer of Rydex Dynamic Funds, 1999 to
present; Vice President of Rydex Distributors, Inc., 1997 to present;
Senior Vice President, Crestar Bank, 1995 to 1997; Senior Vice
President, Crestar Asset Management Company, a registered investment
adviser, 1993 to 1995; Vice President of Perpetual Savings Bank, 1987
to 1993. Address: 9601 Blackwell Road, Suite 500, Rockville, MD 20850.

MICHAEL P. BYRUM (30)

Vice President and Assistant Secretary of Rydex Series Funds, 1997 to
present; Vice President and Assistant Secretary of the Rydex Variable
Trust, 1998 to present; Vice President and Assistant Secretary of the
Rydex Dynamic Funds, 1999 to present; Vice President and Senior
Portfolio Manager of PADCO Advisors, Inc., investment adviser, 1993 to
present; Vice President and Senior Portfolio Manager of PADCO Advisors
II Inc., investment adviser, 1996 to present; Secretary of Rydex
Distributors, Inc., 1996 to present; Investment Representative, Money
Management Associates, a registered investment adviser, 1992 to 1993.
Address: 9601 Blackwell Road, Suite 500, Rockville, MD 20850.

ADVISOR
PADCO Advisors, Inc., 9601 Blackwell Road, Suite 500, Rockville, MD 20850,
provides portfolio management to each Fund pursuant to an advisory contract with
the Trust. The Advisor was incorporated in the State of Maryland on February 5,
1993 and does business under the name Rydex Global Advisors (the "Advisor").
Albert P. Viragh, Jr., the Chairman of the Board of Trustees and President of
the Advisor, owns a controlling interest in the Advisor.

The Advisor manages the investment and the reinvestment of the assets of each of
the Funds, in accordance with the investment objectives, policies, and
limitations of the Fund, subject to the general supervision and control of the
Trustees and the officers of the Trust. The Advisor bears all costs associated
with providing these advisory services and the expenses of the Trustees of the
Trust who are affiliated with or interested persons of the Advisor. The Advisor,
from its own resources, including profits from advisory fees received from the
Funds, provided such fees are legitimate and not excessive, may make payments to
broker-dealers and other financial institutions for their expenses in connection
with the distribution of Fund shares, and otherwise currently pay all
distribution costs for Fund shares.

Under an investment advisory agreement the Advisor serves as the investment
adviser for each series of the Trust and provides investment advice to the Funds
and oversees the day-to-day operations of the Funds, subject to direction and
control by the Trustees and the officers of the Trust. As of June 30, 2000,
assets under management of the Advisor were approximately $8.7 billion. Pursuant
to the advisory agreement with the Advisor, the Advisor is entitled to a fee,
which is calculated daily and paid monthly, at an annual rate of 0.90% of the
average daily net assets of each Fund. The Advisor may, from time to time
reimburse certain expenses of the Funds in order to limit the Funds' operating
expenses as described in the Prospectus.

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<PAGE>

THE ADMINISTRATIVE SERVICE AGREEMENT AND ACCOUNTING SERVICE AGREEMENT
General administrative, shareholder, dividend disbursement, transfer agent, and
registrar services are provided to the Trust and the Funds by PADCO Service
Company, Inc. (the "Servicer"), 9601 Blackwell Road, Suite 500, Rockville,
Maryland 20850, subject to the general supervision and control of the Trustees
and the officers of the Trust, pursuant to a service agreement between the Trust
and the Servicer. The Servicer is wholly-owned by Albert P. Viragh, Jr., who is
the Chairman of the Board and the President of the Trust and the sole
controlling person and majority owner of the Advisor.

Under the service agreement, the Servicer provides the Trust and each Fund with
all required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general back office
services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust and each Fund under federal and
state securities laws. The Servicer also maintains the shareholder account
records for each Fund, disburses dividends and distributions payable by each
Fund, and produces statements with respect to account activity for each Fund and
each Fund's shareholders. The Servicer pays all fees and expenses that are
directly related to the services provided by the Servicer to each Fund; each
Fund reimburses the Servicer for all fees and expenses incurred by the Servicer
which are not directly related to the services the Servicer provides to the Fund
under the service agreement. In consideration for its services, the Servicer is
entitled to a fee, which is calculated daily and paid monthly, at an annual rate
of 0.35% of the average daily net assets of each Fund.

DISTRIBUTION
Pursuant to the Distribution Agreement adopted by the Trust, Rydex Distributors,
Inc. (the "Distributor"), 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, acts as distributor for the shares of the Trust under the general
supervision and control of the Trustees and the officers of the Trust. The
Distribution Agreement grants the Distributor the exclusive right to distribute
the shares of the Trust. In addition, the Distribution Agreement permits the
Distributor to receive as compensation any front-end sales load or contingent
deferred sales charge collected by the Funds or other asset-based sales charges
collected pursuant to any distribution or shareholder services plans adopted by
the Funds on behalf of the various classes of shares. Each of the Funds' current
distribution and shareholder services plans, as well as a description of the
services performed under each, are described below.

C CLASS DISTRIBUTION AND SHAREHOLDER SERVICING PLAN - Each Fund has adopted a
Distribution and Shareholder Services Plan for C Class Shares (the "C Class
Plan"). Under the C Class Plan, the Distributor, or designated Service
Providers, may receive up to 1.00% of each Fund's assets attributable to C Class
Shares as compensation for distribution and shareholder services pursuant to
Rule 12b-1 of the 1940 Act. The C Class Plan allows for payment of up to .75% of
each Fund's assets attributable to C Class Shares as compensation for
distribution services and up to .25% of each Fund's assets attributable to C
Class Shares as compensation for shareholder services.

E CLASS DISTRIBUTION PLAN - Each Fund has adopted a Distribution and
Shareholder Services Plan for E Class Shares (the "E Class Plan"). Under the
E Class Plan, the Distributor, or designated Service Providers, may receive
up to .25% of each Fund's assets attributable to E Class Shares as
compensation for distribution services pursuant to Rule 12b-1 of the 1940 Act.

DESCRIPTION OF DISTRIBUTION AND SHAREHOLDER SERVICES - Distribution services may
include: (i) services in connection with distribution assistance, or (ii)
payments to financial institutions and

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<PAGE>

other financial intermediaries, such as banks, savings and loan associations,
insurance companies, investment counselors, broker-dealers, mutual fund
"supermarkets" and the Distributor's affiliates and subsidiaries, as
compensation for services or reimbursement of expenses incurred in connection
with distribution assistance. The Distributor may, at its discretion, retain a
portion of such payments to compensate itself for distribution services and
distribution related expenses such as the costs of preparation, printing,
mailing or otherwise disseminating sales literature, advertising, and
prospectuses (other than those furnished to current shareholders of the Fund),
promotional and incentive programs, and such other marketing expenses that the
Distributor may incur.

Shareholder services may include: (i) maintaining accounts relating to clients
that invest in shares; (ii) arranging for bank wires; (iii) responding to client
inquiries relating to the services performed by the Services Provider; (iv)
responding to inquiries from clients concerning their investment in shares; (v)
assisting clients in changing dividend options, account designations and
addresses; (vi) providing information periodically to clients showing their
position in shares; (vii) forwarding shareholder communications from the Funds
such as proxies, shareholder reports, annual reports, and dividend distribution
and tax notices to clients; and (viii) processing dividend payments from the
Funds on behalf of clients.

COSTS AND EXPENSES
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
servicing fee (including administrative, transfer agent, and shareholder
servicing fees); custodian and accounting fees and expenses; legal and auditing
fees; securities valuation expenses; fidelity bonds and other insurance
premiums; expenses of preparing and printing prospectuses, confirmations, proxy
statements, and shareholder reports and notices; registration fees and expenses;
proxy and annual meeting expenses, if any; all federal, state, and local taxes
(including, without limitation, stamp, excise, income, and franchise taxes);
organizational costs; non-interested Trustees' fees and expenses; the costs and
expenses of redeeming shares of the Fund; fees and expenses paid to any
securities pricing organization; dues and expenses associated with membership in
any mutual fund organization; and costs for incoming telephone WATTS lines. In
addition, each of the Funds pays an equal portion of the Trustee fees and
expenses for attendance at Trustee meetings for the Trustees of the Trust who
are not affiliated with or interested persons of the Advisor.

DETERMINATION OF NET ASSET VALUE

The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund's shares. The net asset value per share of a Fund
is calculated by dividing the market value of the Fund's securities plus the
value of its other assets, less all liabilities, by the number of outstanding
shares of the Fund. If market quotations are not readily available, a security
will be valued at fair value by the Advisor using methods established or
ratified by the Board of Trustees.

Options on securities and indices purchased by a Fund generally are valued at
their last bid price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter ("OTC") market, the average of the last
bid price as obtained from two or more dealers unless there is only one dealer,
in which case that dealer's price is used. Futures contracts generally are
valued based upon the unrealized gain or loss on the contract determined with
reference to the first price reported by established futures exchanges after the
close of a Fund pricing cycle, or alternatively, with reference to the average
price at which futures are bought and sold by a Fund. Options on futures
contracts generally are valued with reference to the underlying futures
contract. If the market makes a limit move with respect to a particular
commodity, the

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<PAGE>

commodity will be valued at fair value by the Advisor using methods established
or ratified by the Board of Trustees.

On days when the CBOT is closed during its usual business hours, but the shares
of a Fund have been purchased, redeemed, and/or exchanged, the portfolio
securities held by a Fund which are traded on the CBOT are valued at the earlier
of (i) the time of the execution of the last trade of the day for a Fund in
those CBOT-traded portfolio securities and (ii) the time of the close of the
CBOT Evening Session. On days when the CBOT is closed during its usual business
hours and there is no need for a Fund to execute trades on the CBOT, the value
of the CBOT-traded portfolio securities held by a Fund will be the mean of the
bid and asked prices for those CBOT-traded portfolio securities at the open of
the CBOT Evening Session.

OTC securities held by a Fund shall be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used. The
portfolio securities of a Fund that are listed on national exchanges are taken
at the last sales price of such securities on such exchange; if no sales price
is reported, the mean of the last bid and asked price is used. For valuation
purposes, all assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid and
the offered quotations of such currencies against U.S. dollars as last quoted by
any recognized dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by the Advisor based on guidelines
adopted by the Trustees. Dividend income and other distributions are recorded on
the ex-dividend date, except for certain dividends from foreign securities,
which are recorded as soon as the Trust is informed after the ex-dividend date.

Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to the Advisor or the officers of
the Trust. The officers of the Trust report, as necessary, to the Trustees
regarding portfolio valuation determination. The Trustees, from time to time,
will review these methods of valuation and will recommend changes which may be
necessary to assure that the investments of the Funds are valued at fair value.

PERFORMANCE INFORMATION

From time to time, each of the Funds may include the Fund's total return in
advertisements or reports to shareholders or prospective shareholders.
Quotations of average annual total return for a Fund will be expressed in terms
of the average annual compounded rate of return on a hypothetical investment in
the Fund over a period of at least one, five, and ten years (up to the life of
the Fund) (the ending date of the period will be stated). Total return of a Fund
is calculated from two factors: the amount of dividends earned by each Fund
share and by the increase or decrease in value of the Fund's share price. See
"Calculation of Return Quotations."

Performance information for each of the Funds contained in reports to
shareholders or prospective shareholders, advertisements, and other promotional
literature may be compared to the record of various unmanaged indices.
Performance information for the Funds may be compared to various unmanaged
indices, including, but not limited to, the S&P 500 Index or the Dow Jones
Industrial Average, the NASDAQ 100 Index-TM-, and the NASDAQ Composite
Index -TM-.

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<PAGE>

Such unmanaged indices may assume the reinvestment of dividends, but generally
do not reflect deductions for operating costs and expenses. In addition, a
Fund's total return may be compared to the performance of broad groups of
comparable mutual funds with similar investment goals, as such performance is
tracked and published by such independent organizations as Lipper Analytical
Services, Inc. ("Lipper"), and CDA Investment Technologies, Inc., among others.
When Lipper's tracking results are used, the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
Performance figures are based on historical results and are not intended to
indicate future performance.

In addition, rankings, ratings, and comparisons of investment performance and/or
assessments of the quality of shareholder service appear in numerous financial
publications such as MONEY, FORBES, KIPLINGER'S MAGAZINE, PERSONAL INVESTOR,
MORNINGSTAR, INC., and similar sources.

CALCULATION OF RETURN QUOTATIONS

For purposes of quoting and comparing the performance of a Fund to that of other
mutual funds and to other relevant market indices in advertisements or in
reports to shareholders, performance for the Fund may be stated in terms of
total return. Under the rules of the Securities and Exchange Commission ("SEC
Rules"), Funds advertising performance must include total return quotes
calculated according to the following formula:

n
P(1+T) = ERV

Where: P = a hypothetical initial payment of $1,000;

T = average annual total return;

n = number of years (1, 5 or 10); and

ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5, or 10
year periods, at the end of the 1, 5, or 10 year
periods (or fractional portion thereof).

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5, and
10 year periods or a shorter period dating from the effectiveness of the
Registration Statement of the Trust. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
net asset value as described in the Trust's Prospectus on the reinvestment dates
during the period. Total return, or "T" in the formula above, is computed by
finding the average annual compounded rates of return over the 1, 5, and 10 year
periods (or fractional portion thereof) that would equate the initial amount
invested to the ending redeemable value.

PURCHASE AND REDEMPTION OF SHARES

MINIMUM INVESTMENT REQUIREMENTS
Shareholders will be informed of any increase in the minimum investment
requirements by a new prospectus or a prospectus supplement, in which the new
minimum is disclosed. Any request for a redemption (including pursuant to check
writing privileges) by an investor whose account balance is (a) below the
currently applicable minimum investment, or (b) would be below that minimum as a
result of the redemption, will be treated as a request by the investor of a
complete

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<PAGE>

redemption of that account. In addition, the Trust may redeem an account whose
balance (due in whole or in part to redemptions since the time of last purchase)
has fallen below the minimum investment amount applicable at the time of the
shareholder's most recent purchase of Fund shares (unless the shareholder brings
his or her account value up to the currently applicable minimum investment).

TAX CONSEQUENCES
Note that in the case of tax-qualified retirement plans, a redemption from such
a plan may have adverse tax consequences. A shareholder contemplating such a
redemption should consult his or her own tax advisor. Other shareholders should
consider the tax consequences of any redemption.

SUSPENSION OF THE RIGHT OF REDEMPTION
The Funds may suspend the right of redemption or the date of payment: (i) for
any period during which the NYSE is closed (other than customary weekend or
holiday closings), or trading is restricted; (ii) for any period during which an
emergency exists so that sales of a Fund's investments or the determination of
its NAV is not reasonably practicable; or (iii) for such other periods as the
SEC may permit for the protection of a Fund's investors. In cases where NASDAQ,
the CME or Chicago Board Options Exchange, or any foreign market where the
Funds' securities trade is closed or trading is restricted, a Fund may ask the
Commission to permit the right of redemption to be suspended. On any day that
any of the securities exchanges on which the Funds' securities trade close early
(such as on days in advance of holidays generally observed by participants in
these markets), or as permitted by the Commission, the right is reserved to
advance the time on that day by which purchase and redemption orders must be
received.

HOLIDAYS
The NYSE, the Federal Reserve Bank of New York, the NASDAQ, the CME, the CBOT,
and other U.S. exchanges are closed on weekends and on the following holidays:
(i) New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day (the CBOT and CME will
have abbreviated trading schedules), Thanksgiving Day, and Christmas Day; and
(ii) the preceding Friday if any of these holidays falls on a Saturday, or the
subsequent Monday if any of these holidays falls on a Sunday. Although the Trust
expects the same holiday schedules to be observed in the future, each of the
aforementioned exchanges may modify its holiday schedule at any time.

REDEMPTIONS IN-KIND
The Trust intends to pay your redemption proceeds in cash. However, under
unusual conditions that make the payment in cash unwise (and for the protection
of the remaining shareholders of the Fund) the Trust reserves the right to pay
all, or part, of your redemption proceeds in liquid securities with a market
value equal to the redemption price (redemption in-kind). The Trust has elected
to be governed by Rule 18f-1 of the 1940 Act under which the Trust is obligated
to redeem shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of a Fund's net asset value during any 90-day period. Although it
is highly unlikely that your shares would ever actually be redeemed in kind, you
would probably have to pay brokerage costs to sell the securities distributed to
you.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of net realized
capital gains from each of the Funds will be distributed as described in the
Trust's Prospectus under "Dividends and

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<PAGE>

Distributions." Normally, all such distributions of a Fund will automatically be
reinvested without charge in additional shares of the same Fund.

REGULATED INVESTMENT COMPANY ("RIC") STATUS
As a RIC, a Fund would not be subject to federal income taxes on the net
investment income and capital gains that the Fund distributes to the Fund's
shareholders. The distribution of net investment income and capital gains will
be taxable to Fund shareholders regardless of whether the shareholder elects to
receive these distributions in cash or in additional shares. Distributions
reported to Fund shareholders as long-term capital gains shall be taxable as
such, regardless of how long the shareholder has owned the shares. Fund
shareholders will be notified annually by the Fund as to the federal tax status
of all distributions made by the Fund. Distributions may be subject to state and
local taxes.

Each of the Funds will seek to qualify for treatment as a RIC under the Code.
Provided that a Fund (i) is a RIC and (ii) distributes at least 90% of the
Fund's net investment income (including, for this purpose, net realized
short-term capital gains), the Fund itself will not be subject to federal income
taxes to the extent the Fund's net investment income and the Fund's net realized
long- and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains. One of several requirements for RIC qualification is
that the Fund must receive at least 90% of the Fund's gross income each year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of securities or foreign currencies, or other
income derived with respect to the Fund's investments in stock, securities, and
foreign currencies (the "90% Test").

In the event of a failure by a Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends that
would be taxable to the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate shareholders. This
treatment would also apply to any portion of the distributions that might have
been treated in the shareholder's hands as long-term capital gains, as discussed
below, had the Fund qualified as a RIC.

If a Fund were to fail to qualify as a RIC for one or more taxable years, the
Fund could then qualify (or requalify) as a RIC for a subsequent taxable year
only if the Fund had distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the interest charge
mentioned below, if applicable) attributable to such period. The Fund might also
be required to pay to the U.S. Internal Revenue Service ("IRS") interest on 50%
of such accumulated earnings and profits. In addition, pursuant to the Code and
an interpretative notice issued by the IRS, if the Fund should fail to qualify
as a RIC and should thereafter seek to requalify as a RIC, the Fund may be
subject to tax on the excess (if any) of the fair market of the Fund's assets
over the Fund's basis in such assets, as of the day immediately before the first
taxable year for which the Fund seeks to requalify as a RIC.

If a Fund determines that it will not qualify as a RIC under Subchapter M of the
Code, the Fund will establish procedures to reflect the anticipated tax
liability in the Fund's net asset value.

TRANSACTIONS BY THE FUNDS

If a call option written by a Fund expires, the amount of the premium received
by the Fund for the option will be short-term capital gain to the Fund. If such
an option is closed by a Fund, any gain or loss realized by the Fund as a result
of the closing purchase transaction will be short-term

23
<PAGE>

capital gain or loss. If the holder of a call option exercises the holder's
right under the option, any gain or loss realized by the Fund upon the sale of
the underlying security or underlying futures contract pursuant to such exercise
will be short-term or long-term capital gain or loss to the Fund depending on
the Fund's holding period for the underlying security or underlying futures
contract. The amount of the premium received by the Fund increases the amount
realized upon the sale.

With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and will
realize short-term or long-term capital loss if the option is allowed to expire
depending on the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by the Fund for the option will be added to
the basis of the stock or futures contract so acquired.

A Fund has available to it a number of elections under the Code concerning the
treatment of option transactions for tax purposes. A Fund will utilize the tax
treatment that, in the Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will vary according to the
elections made by the Fund. These tax considerations may have an impact on
investment decisions made by the Fund.

Each of the Funds in its operations also will utilize options on stock indices.
Options on "broad based" stock indices are classified as "nonequity options"
under the Code. Gains and losses resulting from the expiration, exercise, or
closing of such nonequity options, as well as gains and losses resulting from
futures contract transactions, will be treated as long-term capital gain or loss
to the extent of 60% thereof and short-term capital gain or loss to the extent
of 40% thereof (hereinafter, "blended gain or loss"). In addition, any nonequity
option and futures contract held by a Fund on the last day of a fiscal year will
be treated as sold for market value on that date, and gain or loss recognized as
a result of such deemed sale will be blended gain or loss.

The trading strategies of each of the Funds involving nonequity options on stock
indices may constitute "straddle" transactions. "Straddles" may affect the
taxation of such instruments and may cause the postponement of recognition of
losses incurred in certain closing transactions. Each of these Funds will also
have available to the Fund a number of elections under the Code concerning the
treatment of option transactions for tax purposes. Each such Fund will utilize
the tax treatment that, in the Fund's judgment, will be most favorable to a
majority of investors in the Fund. Taxation of these transactions will vary
according to the elections made by the Fund. These tax considerations may have
an impact on investment decisions made by the Fund.

A Fund's transactions in options, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements of Subchapter M of the Code. However, it is
the intention of each Fund's portfolio management to limit gains from such
investments to less than 10% of the gross income of the Fund during any fiscal
year in order to maintain this qualification.

BACK-UP WITHHOLDING
Each Fund is required to withhold and remit to the U.S. Treasury 31% of (i)
reportable taxable dividends and distributions and (ii) the proceeds of any
redemptions of Fund shares with respect to any shareholder who is not exempt
from withholding and who fails to furnish the Trust with a correct taxpayer
identification number, who fails to report fully dividend or interest income, or
who fails to certify to the Trust that the shareholder has provided a correct
taxpayer identification number and that the shareholder is not subject to
withholding. (An individual's taxpayer identification number is the individual's
social security number.) The 31% "back-up withholding

24
<PAGE>

tax" is not an additional tax and may be credited against a taxpayer's regular
federal income tax liability.

OTHER ISSUES
Each Fund may be subject to tax or taxes in certain states where the Fund does
business. Furthermore, in those states, which have income tax laws, the tax
treatment of a Fund and of Fund shareholders with respect to distributions by
the Fund may differ from federal tax treatment.

Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this Statement of
Additional Information in light of the particular tax situations of the
shareholders and regarding specific questions as to federal, state, or local
taxes.

OTHER INFORMATION

VOTING RIGHTS
You receive one vote for every full Fund share owned. Each Fund will vote
separately on matters relating solely to that Fund. All shares of the Funds are
freely transferable.

As a Delaware business trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the Investment Company Act of
1940. However, a meeting may be called by Shareholders owning at least 10% of
the outstanding shares of the Trust. If a meeting is requested by Shareholders,
the Trust will provide appropriate assistance and information to the
Shareholders who requested the meeting. Shareholder inquiries can be made by
calling 1-800-820-0888 or 301-296-5100, or by writing to the Trust at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850.

CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Combined Code of Ethics (the
"Code") pursuant to Rule 17j-1 under the 1940 Act. The Advisor, Servicer and
Distributor are also covered by the Code. The Code applies to the personal
investing activities of trustees, directors, officers and certain employees
("access persons"). Rule 17j-1 and the Code is designed to prevent unlawful
practices in connection with the purchase or sale of securities by access
persons. Under the Code, access persons are permitted to engage in personal
securities transactions, but are required to report their personal securities
transactions for monitoring purposes. In addition, certain access persons are
required to obtain approval before investing in initial public offerings or
private placements. The Code is on file with the Securities and Exchange
Commission, and is available to the public.

REPORTING
You will receive the Trust's unaudited financial information and audited
financial statements. In addition, the Trust will send you proxy statements and
other reports. If you are a customer of a financial institution that has
purchased shares of a Fund for your account, you may, depending upon the nature
of your account, receive all or a portion of this information directly from your
financial institution.

SHAREHOLDER INQUIRIES
You may visit the Trust's Web site at www.rydexfunds.com or call 1-800-820-0888
or 301-296-5100 to obtain information on account statements, procedures, and
other related information.

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<PAGE>

COUNSEL

Morgan, Lewis & Bockius LLP serves as counsel to the Trust.

AUDITORS AND CUSTODIAN

Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540, are the auditors and the independent certified
public accountants of the Trust and each of the Funds.

Firstar (the "Custodian"), Star Bank Center, 425 Walnut Street, Cincinnati, Ohio
45202, serves as custodian for the Trust and the Funds under a custody agreement
between the Trust and the Custodian. Under the custody agreement, the Custodian
holds the portfolio securities of each Fund and keeps all necessary related
accounts and records.

FINANCIAL STATEMENTS

The Trust's financial statements for the period ended June 30, 2000 are
incorporated by reference into this SAI. A copy of the Trust's Semi-Annual
Report to Shareholders (the "Semi-Annual Report") must accompany the delivery of
this Statement of Additional Information.