THE COLONIAL FUND
Supplement to Prospectus
The Fund's Prospectus is amended as follows:
(1) The first paragraph under the caption "How the Fund Pursues its
Objectives and Certain Risk Factors" is revised in its entirety as
follows:
The Fund seeks to achieve its objectives by investing in both equity
and debt securities. The allocation at any given time will be based
on the availability of common stocks meeting the criteria described
below and on the Adviser's assessment of the relative risk and
expected performance of each market. Under normal conditions, at
least 25% of the Fund's total assets will be invested in fixed income
(debt) securities.
(2) The words "without limit" are deleted from the first sentence of
the first paragraph under the sub-caption "Equity Securities
Generally."
(3) The following additional paragraphs are added under the caption
"How the Fund Pursues its Objectives and Certain Risk Factors":
Other Investments. The Fund may invest in (i) REMICs, CMOs and other
mortgage-backed securities not issued or guaranteed by an agency but
for which the underlying mortgages are guaranteed by an agency; (ii)
similar non-agency "investment grade" mortgage- and asset-backed
securities for which the underlying mortgage or asset is not
guaranteed by an agency (such as residential mortgage loans,
manufactured housing loans, home equity loans or commercial loans);
and (iii) "investment grade" corporate debt securities. In
determining whether a security is "investment grade" the Fund will
rely on the ratings published by Moody's Investors Service, Inc.,
Standard & Poor's Corporation, Fitch Investors Service and Duff &
Phelps Corporation (the "rating services"). The Fund will not
purchase a security unless at the time of purchase (i) the security is
rated "investment grade" by each rating service that has assigned a
rating to the security, or (ii) if a rating service has assigned the
security a rating lower than "investment grade," at least two other
rating services have assigned an "investment grade" rating. The
minimum "investment grade" ratings of the rating services are: Moody's
Investors Service, Inc., Baa3; Standard & Poor's Corporation, BBB-;
Fitch Investors Service, BBB-; and Duff & Phelps Corporation, BBB-.
Certain non-agency mortgage- and asset-backed debt securities or
corporate debt securities in the lowest investment grade may be
considered to have "speculative characteristics." For a description
of the ratings of the four rating services and a discussion of certain
of the risks of these securities, see "Appendix I" and "Lower Rated
Bonds," respectively, in Part 2 of the Statement of Additional
Information. If the Fund purchases non-agency securities backed by
underlying mortgages or assets and the issuer defaults or enters
bankruptcy, the Fund may experience costs and delays in liquidating
the collateral and may experience a loss.
Financial Futures; Options. The Fund may (i) buy or sell financial
futures contracts (futures) and (ii) purchase and write call and put
options on futures and securities. The Fund will be enter into such
transactions for hedging purposes or to adjust the duration of the
Fund's fixed-income investments. A futures contract creates an
obligation by the seller to deliver and the buyer to take delivery of
a type of instrument at the time and in the amount specified in the
contract. A sale of a futures contract can be terminated in advance
of the specified delivery date by subsequently purchasing a similar
contract; a purchase of a futures contract can be terminated by a
subsequent sale. Gain or loss on a contract generally is realized
upon such termination. An option on a futures contract generally
gives the option holder the right, but not the obligation, to purchase
or sell the futures contract prior to the option's specified
expiration date. If the option expires unexercised, the holder will
lose any amount it paid to acquire the option. Transactions in
futures and related options may not precisely achieve the goals of
hedging to the extent there is an imperfect correlation between the
price movements of the contracts and of the underlying securities. In
addition, if the Adviser's prediction on interest rates is inaccurate,
the Fund may be worse off than if it had not hedged. The total market
value of securities to be acquired or delivered pursuant to options
contracts entered into by the Fund, will not exceed 5% of the Fund's
total assets. In addition, the Fund may not purchase or sell futures
contracts or purchase related options if immediately thereafter the
sum of the amount of deposits for initial margin or premiums on
existing futures and related options positions would exceed 5% of the
Fund's total assets.
Mortgage Dollar Rolls. The Fund may also engage in so-called
"mortgage dollar roll" transactions. In a mortgage dollar roll, the
Fund sells a mortgage-backed security and simultaneously enters into a
commitment to purchase a similar security at a later date. Mortgage
dollar rolls involve the risk that the counterparty will fail to
deliver the new security on the settlement date, which may deprive the
Fund of a beneficial investment. In addition, the security to be
delivered in the future may turn out to be inferior to the security
sold upon entering into the transaction. Finally, the transaction
costs may exceed the return earned by the Fund from the transaction.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements, which are contracts under which the Fund sells
a security and agrees to buy it back at a fixed price and time. The
Fund will segregate with its custodian U.S. government securities
equal in value to the Fund's obligations under the reverse repurchase
agreements.
Stripped Securities. The Fund may invest in stripped securities (e.g.
zero coupon securities) which are securities issued at a significant
discount from face value and pay interest only at maturity rather than
at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of
mortgage-backed securities (interest only/principal only), which tend
to be more volatile than other types of securities. The Fund will
accrue and distribute income from stripped securities and certificates
on a current basis and may have to sell securities to generate cash
for distributions.
When-Issued Securities and Forward Commitments. The Fund may purchase
"when-issued" securities and "forward commitments." "When-issued"
securities and "forward commitments" are contracts to purchase
securities for a fixed price on a date beyond the customary settlement
time with no interest accruing until settlement. If made through a
dealer, the contract is dependent on the dealer's consummation of the
transaction. A dealer's failure could deprive the Fund of
advantageous yields. These contracts also involve the risk that the
value of the underlying security may change prior to settlement. The
Fund currently will not purchase "when issued" securities and "forward
commitments" more than 120 days prior to settlement. The Fund will
segregate with its custodian cash or liquid securities equal in value
to its obligations under the contract.
(4) The following Vice Presidents of Colonial Management Associates,
Inc. (the "Adviser") currently serve as co-managers of the Fund:
John E. Lennon has co-managed the Fund since 1997 and has managed
other Colonial equity funds since 1982.
Leslie W. Finnemore has co-managed the Fund since 1997 and has managed
other Colonial taxable fixed-income funds since 1987.
Gordon Johnson has co-managed the Fund since 1997 and has served as a
senior equity analyst with the Adviser since 1993. Prior to joining
the Adviser in 1993, Mr. Johnson was a Doctoral candidate in Finance
at the University of Massachusetts.
William C. Hill has been a portfolio manager in the Adviser's mortgage
group since November, 1996. Prior to joining the Adviser, Mr. Hill
was a mortgage analyst with Putnam Investments, Inc.
(5) The Fund's Custodian is now The Chase Manhattan Bank, 4 Chase
MetroTech Center, Brooklyn, NY 11245.
(6) The Fund's Distributor has changed its name to "Liberty Financial
Investments, Inc." The Distributor's address and telephone number
remain unchanged.
TF-36/549E-1197 January 1, 1998
