<PAGE>
1998 annual report
IDS
Mutual
(prospectus enclosed)
(icon of) scale of justice
The goal of IDS Mutual, a part of IDSInvestment Series, Inc., is to provide a
balance of growth of capital and current income. The Fund divides its
investments between common stocks and senior securities (bonds and preferred
stocks).
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
American Express Financial Advisors
Distributed by American Express Financial Advisors Inc.
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(icon of) scale of justice
A beneficial balance
A balanced portfolio is one of the building blocks of investment planning. And
balance is what IDSMutual is all about. The Fund starts with a focus on stocks,
many of which are part of the who's who of corporate America. To help balance
the fluctuations inherent in stocks, as well as provide greater income to
investors, bonds are added to the portfolio. The result: a Fund that offers
income above that of a pure stock fund, while still providing potential for
capital appreciation.
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Contents
1998 annual report
From the chairman 4
From the portfolio managers 4
The Portfolio's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report (Fund) 9
Financial statements (Fund) 10
Notes to financial statements (Fund) 13
Independent auditors' report (Portfolio) 18
Financial statements (Portfolio) 19
Notes to financial statements (Portfolio) 22
Investments in securities 33
IDS mutual funds 45
Federal income tax information 49
1998 prospectus
The Fund in brief 3p
Goal 3p
Investment policies and risks 3p
Structure of the Fund 4p
Manager and distributor 4p
Portfolio managers 5p
Alternative purchase arrangements 5p
Sales charge and Fund expenses 6p
Performance 8p
Financial highlights 8p
Total returns 10p
Investment policies and risks 12p
Facts about investments and their risks 13p
Valuing Fund shares 17p
How to purchase, exchange or redeem shares 18p
Alternative purchase arrangements 18p
How to purchase shares 20p
How to exchange shares 23p
How to redeem shares 24p
Reductions and waivers of the sales charge 29p
Special shareholder services 34p
Services 34p
Quick telephone reference 34p
Distributions and taxes 35p
Dividend and capital gain distributions 35p
Reinvestments 36p
Taxes 36p
How to determine the correct TIN 38p
How the Fund and Portfolio are organized 39p
Shares 39p
Voting rights 39p
Shareholder meetings 39p
Special considerations regarding
master/feeder structure 40p
Board members and officers 41p
Investment manager 43p
Administrator and transfer agent 43p
Distributor 44p
About American Express Financial Corporation 46p
General information 46p
Year 2000 47p
Appendix 48p
Descriptions of derivative instruments 48p
The purpose of this annual report is to tell investors how the Fund
performed.
(icon of) one open book inside of another
The prospectus, which is bound into the middle of this annual report,
describes the Fund in detail.
(This annual report is not part of the prospectus.)
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To our shareholders
From the chairman
If you're an experienced investor, you know that the past 12 months was a
highly volatile period in many financial markets. But history tells us that
substantial market moves are nothing new. Though they're often
unpredictable, declines -- whether they're brief or long-lasting, moderate
or substantial -- are always a possibility.
That potential for such volatility reinforces the need for investors to
periodically review their long-term goals and examine whether their
investment program remains on track to achieving them. Your quarterly
investment statements are one part of that monitoring process. The other is
a meeting with your American Express financial advisor. That becomes even
more important if there's a major change in your financial situation or in
the financial markets.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
From the portfolio managers
A substantial sell-off in the U.S. stock market late in the fiscal year
eroded nearly all of IDS Mutual's gain to that point, leaving the Fund with
a slightly positive performance for the period as a whole. For the 12
months, the total return (including net asset value change, dividends,
interest and capital gains) was 0.7% for the Fund's Class A shares.
Stocks were on a roller-coaster for much of the period, as investors tried
to weigh the positive factors of low inflation, falling long-term interest
rates and continued economic growth in the U.S. against the possibility of
an increasing slowdown in corporate profits brought on by the economic woes
of a growing number of foreign markets in Asia, Latin America and Eastern
Europe.
Still, thanks to a powerful rally during February and March, U.S. stocks
were up nicely by the time summer came around. But by August, financial
crises in Russia and Latin America were again driving our market into a
rapid retreat, although it did manage a moderate bounce-back in September.
(This annual report is not part of the prospectus.)
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A case for quality
The bond market enjoyed a much calmer 12 months. Thanks to ongoing low
inflation and a "flight to quality" spawned by the worsening situation
overseas, U.S. Treasury bonds rallied strongly for much of the period,
taking down long-term interest rates in the process. (Bond prices move in
the opposite direction of interest rates.) Clearly, the bond component of
the portfolio had a very positive effect on the Fund's performance over the
12 months.
The Fund's portfolio of investments underwent some changes during the 12
months. Concurrent with a change in equity managers last December, the
portfolio took on a less defensive structure, which centered on lowering
cash reserves and putting the money to work in stocks. In addition, we
reduced the exposure to foreign stocks to help shield the Fund from the
problems in overseas markets and increased bond holdings to take advantage
of the positive trend in that market. In that regard, Fund performance
benefited from a somewhat long duration (a strategy that increases the
portfolio's sensitivity to interest rate changes), as well as an emphasis
on high-quality issues. At the end of the period, about 61% of the
portfolio was invested in stocks, about 33% in bonds, and the rest in cash
reserves.
Kurt Winters
(picture of) Kurt Winters
Kurt Winters
Portfolio Manager
Brad Stone
(picture of) Brad Stone
Brad Stone
Portfolio manager
(This annual report is not part of the prospectus.)
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Class A
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1998 $13.29
Sept. 30, 1997 $15.32
Decrease $ 2.03
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.86
From capital gains $ 1.29
Total distributions $ 2.15
Total return* +0.7%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30, 1998 $13.21
Sept. 30, 1997 $15.25
Decrease $ 2.04
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.76
From capital gains $ 1.29
Total distributions $ 2.05
Total return* -0.1%**
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
Sept. 30,1998 $13.29
Sept. 30, 1997 $15.32
Decrease $ 2.03
Distributions
Oct. 1, 1997 - Sept. 30, 1998
From income $ 0.87
From capital gains $ 1.29
Total distributions $ 2.16
Total return* +0.8%**
* The prospectus discusses the effect of sales charges, if any, on the
various classes.
** The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not part of the prospectus.)
<PAGE>
The Portfolio's ten largest holdings
Percent Value
(of Portfolio's net assets) (as of Sept. 30, 1998)
Washington Mutual 1.84% $87,328,125
Intl Business Machines 1.75 83,199,999
First Union 1.70 80,940,233
Royal Dutch Petroleum 1.69 80,486,249
First Chicago NBD 1.66 78,775,000
Lincoln Natl 1.49 70,940,625
American Stores 1.49 70,812,500
Household Intl 1.41 66,843,750
Marsh & McLennan 1.40 66,378,938
American Intl Group 1.26 59,771,250
Excludes U.S. Treasury and government agency holdings.
For further detail about these holdings, please refer to the section
entitled "Investments in securities" herein.
(icon of) pie chart
The ten holdings listed here make up 15.69% of the Portfolio's net assets
(This annual report is not part of the prospectus.)
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Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each
month...
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low...
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10 months,
while the average market price actually was $18.10.
Three ways to benefit from a mutual fund:
oyour shares increase in value when the Fund's investments do well
oyou receive capital gains when the gains on investments sold by the Fund
exceed losses
oyou receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and capital
gain distributions to buy additional shares of the Fund or another fund.
(This annual report is not part of the prospectus.)
<PAGE>
The Fund's long-term performance
Assumes: oHolding period from 10/01/88 to 9/30/98. oReturns do not reflect
taxes payable on distributions. oReinvestment of all income and capital
gain distributions for the Fund, with a value of $17,197. Also see
"Performance"in the Fund's current prospectus.
Standard &Poor's 500 Stock Index (S&P 500), an unmanaged list of common
stocks, is frequently used as a general measure of market performance.
Lipper Balanced Fund Index, an unmanaged index published by Lipper
Analytical Services, Inc., includes 30 funds that are generally similar to
the Fund, although some funds in the index may have somewhat different
investment policies or objectives.
How your $10,000 has grown in IDS Mutual
$50,000
$40,000
S&P 500
Stock Index
$30,000
$28,113
Mutual
$20,000 Class A
Lipper Balanced
Fund Index
$10,000
$9,500
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
Average annual total return
(as of Sept. 30, 1998):
Since
1 year inception 5 years 10 years
Class A -4.34% --% +9.28% +10.89%
Class B* -3.53% +12.32%* --% --%
Class Y* +0.77% +13.95%* --% --%
*Inception date was March 20, 1995.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the S&P 500 and the Lipper Balanced Fund
Index. In comparing IDSMutual (Class A) to the two indexes, you should take
into account the fact that the Fund's performance reflects the maximum
sales charge of 5%, while such charges are not reflected in the performance
of the indexes.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge, up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
<PAGE>
The financial statements contained in Post-Effective Amendment #99 to
Registration Statement No. 2-11328 filed on or about November 25, 1998, are
incorporated herein by reference.
<PAGE>
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
(icon of) world with countries
IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
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IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
(icon of) three flags
IDS Global Balanced Fund
Invests in stocks and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
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IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
(icon of) globe
Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
(icon of) cart of precious gems
IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
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IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
(icon of) building
IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the S&P 500 Stock Index.
(icon of) chess piece
IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Stock Index that are believed to have strong growth
potential. The Portfolio is managed using a research methodology by the Research
Department of AEFC. Goal is long-term appreciation.
(icon of) magnifying glass
(This annual report is not part of the prospectus.)
<PAGE>
IDS mutual funds
IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
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IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with
significant growth potential due to superiority in
technology, marketing or management. The Fund frequently
changes its industry mix.
(icon of) dimension
IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
(icon of) shooting star
Growth & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks that generaly pay
dividends and bonds. Seeks growth of capital and income.
(icon of) three pine trees
IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
(icon of) ribbon
IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
(icon of) gyroscope
IDS Stock Fund
Invests in a Portfolio comprised primarily of common stock of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
(icon of) building with columns
IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
(icon of) three growing flowers
IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
(icon of) light bulb
IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
(icon of) two puzzle pieces
IDS Mutual
Invests in a Portfolio that seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
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(This annual report is not part of the prospectus.)
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Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
(icon of) two coins
IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
(icon of) skyline
IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
(icon of) shield with eagle head
Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
(icon of) shield with Greek column
IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
(icon of) shield with star
IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
(icon of) shield with U.S. enclosed
IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
(icon of) shield with basket of apples enclosed
IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
(icon of) shield with tree enclosed
(This annual report is not part of the prospectus.)
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Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
(icon of) piggy bank
IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
(icon of) shield with piggy bank enclosed
For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
IDS Mutual
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its
fiscal year. Some of the dividends listed below were reported to you on a
Form 1099-DIV, Dividends and Distributions, last January. Dividends paid to
you since the end of last year will be reported to you on a tax statement
sent next January. Shareholders should consult a tax advisor on how to
report distributions for state and local purposes.
Class A
Income distributions
taxable as dividend income, 31.87% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $0.51651
March 27, 1998 0.12605
June 26, 1998 0.11312
Sept. 25, 1998 0.10723
Total $0.86291
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $1.29159
Total distributions $2.15450
The distribution of $1.80810 per share, payable Dec. 29, 1997, consisted of
$0.13543 derived from net investment income, $0.38108 from net short-term
capital gains (a total of $0.51651 taxable as dividend income) and $1.29159
from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.54492 and 20% - $0.74667.
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
IDS Mutual
Class B
Income distributions
taxable as dividend income, 31.87% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $0.48809
March 27, 1998 0.10181
June 26, 1998 0.08702
Sept. 25, 1998 0.08194
Total $0.75886
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $1.29159
Total distributions $2.05045
The distributions of $1.77968 per share, payable Dec. 29, 1997, consisted
of $0.10701 derived from net investment income, $0.38108 from net
short-term capital gains (a total of $0.48809 taxable as dividend income)
and $1.29159 from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.54492 and 20% - $0.74667.
(This annual report is not part of the prospectus.)
<PAGE>
Class Y
Income distributions
taxable as dividend income, 31.87% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $0.51943
March 27, 1998 0.12846
June 26, 1998 0.11562
Sept. 25, 1998 0.10967
Total $0.87318
Capital gain distribution
taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $1.29159
Total distributions $2.16477
The distribution of $1.81102 per share, payable Dec. 29, 1997, consisted of
$0.13835 derived from net investment income, $0.38108 from net short-term
capital gains (a total of $0.51943 taxable as dividend income) and $1.29159
from net long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.54492 and 20% - $0.74667.
(This annual report is not part of the prospectus.)
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Quick telephone reference*
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
612-671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
*You may experience delays when call volumes are high.
AMERICAN EXPRESS Financial Advisors
IDS Mutual
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
