COLONIAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
Supplement to Prospectus
dated December 29, 1995
On August 23, 1996, the Trustees voted to change the Fund's name, investment
objective and certain of its investment policies. The Fund's new name will be
"Colonial Short U.S. Government Fund." The Fund's new investment objective will
be to "seek as high a level of current income as is consistent with very low
volatility by investing primarily in short-duration U.S. government securities."
The Fund's revised investment policies are set forth below. These changes will
take effect as of December 27, 1996. Prior to such date, the Adviser may sell
adjustable rate securities with a view toward restructuring the Fund's portfolio
to comply with the revised objective and policies.
Effective December 27, 1996, the first five paragraphs under the caption How the
Fund Pursues Its Objective in the Fund's Prospectus will be revised to read as
follows:
The Fund invests primarily in short duration U.S. government securities.
"Duration" is a measure of a debt security's sensitivity to interest rate
changes. Duration takes into account the full stream and estimated timing of
payments expected to be received on the instrument, including both interest and
principal payments. A security with a short (low) duration generally will
fluctuate in value less, given a change in prevailing interest rates, than a
security with a longer (higher) duration. The Fund intends to maintain a
weighted average portfolio duration of 2.5 years or less.
U.S. government securities in which the Fund may invest consist of (1) U.S.
Treasury obligations; (2) obligations issued or guaranteed by the U.S.
government or its agencies and instrumentalities (Agency) which are supported
by: (a) the full faith and credit of the U.S. government, (b) the right of the
issuer or guarantor to borrow an amount from a line of credit with the
U.S. Treasury, (c) the discretionary power of the U.S. government to purchase
obligations of the Agencies or (d) the credit of the Agencies;
(3) collateralized mortgage obligations (CMOs) (including real estate mortgage
investment conduits (REMICs)), and other mortgage-backed securities issued or
guaranteed by an Agency; (4) "when-issued" commitments relating to the
foregoing; and (5) repurchase agreements collateralized by U.S. government
securities. The Fund may purchase U.S. government securities that pay fixed,
floating or adjustable interest rates, as well as zero coupon securities (U.S.
government securities that pay no interest currently) with maturities of 10
years or less.
Although the Fund invests in securities that are guaranteed by the U.S.
government or its Agencies, an investment in the Fund is not guaranteed. The
value of and return earned on an investment in the Fund will fluctuate as market
conditions, primarily prevailing interest rates, change. The value of Fund
shares generally will decline as prevailing short-term interest rates increase,
and vice versa. Over time, a sustained decrease in prevailing short-term
interest rates also may translate into lower income distributions paid by the
Fund.
Mortgage-backed securities are debt securities with respect to which interest
and principal payments are tied to the interest and principal payments on
underlying pools of mortgage loans. If the underlying mortgage loans are prepaid
(e.g., as a result of home mortgage refinancings), the principal on the
mortgage-backed security also will be prepaid. Refinancings (and therefore
prepayments on mortgage-backed securities) tend to increase as interest rates
decrease, and tend to slow as interest rates increase. If prepayments increase
due to a decrease in interest rates, the Fund may lose any premium paid in
purchasing the security, and may be forced to reinvest the prepaid principal at
the lower rates, which may result in lower income distributions being paid by
the Fund. If, however, prepayments slow as interest rates rise, the durations of
the mortgage-backed securities held by the Fund may lengthen, making their
values more volatile. The Adviser will actively manage the Fund's portfolio in
an effort to maintain an average weighted portfolio duration of less than 2.5
years.
The Fund may purchase U.S. government securities on a "forward" or "when-issued"
basis. In doing so, the Fund agrees to purchase such 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. The 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 agree to purchase securities more than 120 days before
settlement.
Zero coupon securities do not pay interest in cash on a current basis but rather
are purchased at a discount and increase in value as they approach maturity.
Their market price may change more because of changes in interest rates than
similar securities paying interest currently. The Fund may be required to
distribute interest currently, and may have to sell securities to generate cash
for distributions.
AF-36/612C-0996 September 23, 1996
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