CGM TRUST, N-30D, 1997-02-21

CGM TRUST
N-30D, 1997-02-21

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<PAGE>
TO OUR SHAREHOLDERS:
- -------------------------------------------------------------------------------
CGM Fixed Income Fund increased 4.4% during the fourth quarter of 1996 compared
to the Merrill Lynch Master Bond Index which increased 3.1% over the same
period. For the year just ended, the Fund posted a total return of 15.4% while
the Merrill Lynch Master Bond Index returned 3.6%.

THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
In 1996, the U.S. economy was extraordinary as it completed another year of
growth with only moderate inflation. Rarely does benign inflation follow six
years of business expansion. We experienced strong growth in jobs, increased
productivity and higher corporate profits, and an increase of 2.9% in the
inflation rate as measured by the Consumer Price Index. The prolonged expansion
has placed us at high levels of capacity utilization and low levels of
unemployment which, with added economic fuel, could easily lead to higher rates
of inflation.

The equity markets have taken their cue from the continuing business expansion
and have priced future prospects generously. The chairman of the Federal Reserve
Board recently cautioned against "irrational exuberance" and while the phrase
may aptly describe the recent wave of initial public offerings and some sectors
of the market such as technology and telecommunications, it may not be
symptomatic of the stock market as a whole.

The bond market is particularly sensitive to signs of continuing strength in the
economy. Recent data on the sale of new homes and consumer confidence levels as
well as a report from the National Association of Purchasing Managers all
indicated greater-than-expected strength which sent interest rates up and
triggered a short-lived decline in equity prices.

Looking ahead, further gains in the market will be more difficult to achieve on
account of high valuations and will be heavily dependent on how inflation trends
affect interest rates in 1997. We hope to see pricing excesses wrung from the
market without compromising investor confidence. Our focus continues to be on
growth at a reasonable price.

PORTFOLIO STRATEGY
Performance of CGM Fixed Income Fund during 1996 is attributable to excellent
returns on several convertible positions in money center banks, airlines, and
machinery and technology companies. High yield securities in general enjoyed a
good year and CGM Fixed Income Fund benefited from their strong showing by
maintaining a significant position throughout the year. Shrinking quality
spreads of lower investment grade corporate issues as well as credit upgrades
from the major rating services on several holdings were good news for Fund
performance in 1996 as well.

We expect to maintain our more defensive CGM Fixed Income Fund portfolio
structure in terms of maturity, duration and quality exposure in deference to
continued economic growth and the increasing likelihood of rising wage inflation
as we approach full employment. During the year, the Fund's exposure to the
stock market was pared significantly to consist primarily of real estate
investment trusts (REITs). REITs constitute the largest CGM Fixed Income
portfolio industry position with holdings in transportation and financial
services making up the second and third largest industry positions,
respectively. In addition, the Fund is 17.8% invested in Treasury bills. The
Fund's three largest company holdings are Felcor Suite Hotel, Inc., Pacific Gulf
Properties, Inc., and Overseas Shipholding Group.

Robert L. Kemp

/s/ Robert L. Kemp

President

Janice H. Saul

/s/ Janice H. Saul

Portfolio Manager

G. Kenneth Heebner

/s/ G. Kenneth Heebner

Portfolio Manager

January 10, 1997

<PAGE>
- ------------------------------------------------------------------------------
COMPARISONS OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM FIXED INCOME FUND AND THE MERRILL LYNCH MASTER BOND INDEX
assuming reinvestment of dividends and capital shares

- --------------------------------------
Average Annual Total Return
- --------------------------------------
1 year Life of Fund*
15.4% 12.4%
*(March 17, 1992 -- December 31, 1996)
- --------------------------------------
Past performance is no indication
of future results
- --------------------------------------

CGM MERRILL
3/92 10,000 10,000
1992 10,920 10,970
1993 12,985 12,067
1994 11,943 11,727
1995 15,167 13,897
1996 17,503 14,397
- ------------------------------------------------------------------------------

CGM FIXED INCOME FUND
PORTFOLIO MANAGERS
- ------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Fixed Income Fund with Janice Saul since June
1993. In 1989, Mr. Heebner founded Capital Growth Management Limited Partnership
with Robert L. Kemp. Prior to establishing the new company, Mr. Heebner managed
mutual fund portfolios at Loomis, Sayles and Company. He currently is
responsible for managing CGM Fixed Income Fund's investments convertible into
equity securities. In addition to co-managing CGM Fixed Income Fund, Mr. Heebner
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Realty Fund, and two
other mutual funds.

Janice H. Saul brings to her role as co-manager of CGM Fixed Income Fund more
than a decade of investment experience. She joined Capital Growth Management in
June 1993. Prior to that, she was at Loomis, Sayles and Company where she ran
private accounts for nine years and managed a long-term municipal bond fund from
May 1991 until May 1993. Ms. Saul was associate portfolio manager of CGM Fixed
Income Fund from June through November 1993 and was named co-manager of the
portfolio in December 1993. Ms. Saul is responsible for managing CGM Fixed
Income Fund's debt securities and also manages CGM American Tax Free Fund.

<PAGE>

INVESTMENT PERFORMANCE
(unaudited)
- --------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1996

CGM FIXED LIPPER GENERAL
INCOME FUND BOND FUND AVERAGE
--------------------------------
3 Years ...................................... +35.1% +28.1%
1 Year ....................................... +15.4 + 6.1
3 Months ..................................... + 4.4 + 3.6

The Fund's average annual total returns for the three-year period ended December
31, 1996 and from inception (March 17, 1992) through December 31, 1996 are 10.5%
and 12.4%, respectively. The adviser has agreed to limit the Fund's total
operating expenses to 0.85% of its average net assets annually through December
31, 1997. Otherwise the total return for each period would be lower.

Lipper Analytical Services, Inc. is an independent mutual fund ranking
service.

The performance data contained in the report represent past performance. The
investment return and the principal value of an investment in the Fund will
fluctuate so that investors' shares, when redeemed, may be worth more or less
than their original cost.

BOARD OF TRUSTEES

PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY

OFFICERS

ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
JANICE H. SAUL, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110

TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS

STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102

SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY

BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266-8511
<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996
BONDS, NOTES AND BILLS -- 72.7% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE(a)
---------- ------------
AUTO AND RELATED -- 2.4%
Poindexter JB, Inc., 12.50%, 5/15/04 ............ $1,000,000 $ 970,000
-----------
BEVERAGES AND TOBACCO - 2.5%
Panamerican Beverages, Inc., 8.125%, 4/01/03 ..... 1,000,000 1,027,000
-----------
BROKERS/INVESTMENT SERVICES -- 2.6%
Lehman Brothers Holdings, Inc., 8.50%, 5/01/07 ... 1,000,000 1,072,860
-----------
CHEMICALS -- SPECIALTY -- 1.8%
Polymer Group, Inc., 12.25%, 7/15/02 ............. 667,000 728,698
-----------
ENERGY -- 3.4%
Mitchell Energy & Development Corp., 8.00%, 7/15/99 300,000 306,342
Mitchell Energy & Development Corp., 9.25%, 1/15/02 1,000,000 1,069,070
-----------
1,375,412
-----------
HOTELS & RESTAURANTS -- 2.2%
Flagstar Corp., 10.75%, 9/15/01 .................. 1,000,000 905,000
-----------
INSURANCE -- 3.9%
Conseco, Inc., 8.125%, 2/15/03 ................... 1,500,000 1,581,015
-----------
MEDIA -- 4.5%
Adelphia Communications, Co., 12.50%, 5/15/02 .... 750,000 768,750
K III Communications Corp., 10.625%, 5/01/02 ..... 1,000,000 1,050,000
-----------
1,818,750
-----------
METALS & MINING -- 1.2%
Freeport McMoran Cooper, 7.50%, 11/15/06 ......... 500,000 490,000
-----------
PAPER -- 2.8%
Stone Container Corp., 8.875%, 7/15/00
(Convertible) .................................... 800,000 1,151,000
-----------
PLASTICS -- 5.0%
Berry Plastics Corp., 12.25%, 4/15/04 ............ 1,000,000 1,090,000
Geon Co., 6.875%, 12/15/05 ....................... 1,000,000 949,030
-----------
2,039,030
-----------
REAL ESTATE INVESTMENT TRUSTS -- 8.6%
Camden Property Trust, 7.33%, 4/01/01 (Convertible) 1,250,000 1,431,250
Pacific Gulf Properties, Inc., 8.375%, 2/15/01
(Convertible) .................................... 1,850,000 2,062,750
-----------
3,494,000
-----------
TELEPHONE -- 4.3%
360 Communications, 7.50%, 3/01/06 ............... 1,750,000 1,735,843
-----------

See accompanying notes to financial statements

<PAGE>

CGM FIXED INCOME FUND
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INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
BONDS, NOTES AND BILLS (CONTINUED)
FACE
AMOUNT VALUE(a)
---------- ------------
TRANSPORTATION -- 7.0%
Moran Transportation Co., 11.75%, 7/15/04 ........ $1,000,000 $ 1,042,500
Overseas Shipholding Group, 8.00%, 12/01/03 ...... 750,000 762,307
Overseas Shipholding Group, 8.75%, 12/01/13 ...... 1,000,000 1,039,110
-----------
2,843,917
-----------
U.S. GOVERNMENT -- 17.8%
United States Treasury Bills, 4.797%, 2/20/97 .... 7,300,000 7,250,725
-----------
UTILITIES -- 2.7%
Great Lakes Power, Inc., 9.00%, 8/01/04 .......... 1,000,000 1,074,040
-----------
TOTAL BONDS, NOTES AND BILLS (Identified Cost
$28,820,674) ....................................... 29,557,290
-----------

PREFERRED STOCKS -- 25.0%
SHARES
-------
Avalon Properties, Inc., $2.25 ................... 61,000 1,540,250
Conseco Financing Trust, $2.29 ................... 16,000 408,000
DLJ Capital Trust, $2.105 ........................ 40,000 1,015,000
Felcor Suite Hotels, Inc., $1.95 (Convertible) ... 118,000 3,304,000
Hartford Capital, $2.088 ......................... 40,000 1,015,000
PWG Capital, $2.075 .............................. 20,000 507,500
Placer Dome, Inc., $2.156 ........................ 20,000 489,000
Rouse Capital, $2.313 ............................ 59,225 1,502,834
U.S. West Financing, $2.0625 ..................... 15,000 376,875
-----------
TOTAL PREFERRED STOCKS (Identified Cost $9,715,556) .. 10,158,459
-----------
COMMON STOCK WARRANTS -- 0%
BPC Holdings Corp. Exp 4/15/04 (Identified Cost
$0) .............................................. 1,000 10,000
-----------
FACE
AMOUNT
-----------
SHORT-TERM INVESTMENT -- 1.4%
American Express Credit Corp., 6.55%, 1/02/97
(Cost $565,000) .................................. $ 565,000 565,000
-----------
TOTAL INVESTMENTS -- 99.1% (Identified Cost $39,101,230)(b) ..... 40,290,749
Cash, receivables and other assets ....................... 808,721
Liabilities .............................................. (453,649)
-----------
TOTAL NET ASSETS -- 100.0% ...................................... $40,645,821
===========

(a) See Note 1A.
(b) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation of investments based on cost of $39,104,052 for Federal income
tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $ 1,285,176
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (98,479)
-----------
Net unrealized appreciation ................................... $ 1,186,697
===========

See accompanying notes to financial statements
<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------

STATEMENT OF
ASSETS AND LIABILITIES

December 31, 1996

ASSETS
Investments at value (Identified cost -- $39,101,230) $40,290,749
Cash ................................................ 3,759
Receivable for:
Shares of the Fund sold ............................ $197,012
Dividends and interest ............................. 604,803 801,815
---------
Unamortized organization expenses .................... 3,147
-----------
41,099,470
-----------
LIABILITIES
Payable for:
Shares of the Fund redeemed ........................ $ 25,577
Distributions declared ............................. 372,642 398,219
---------

Accrued expenses:
Management fees .................................... 8,974
Trustees' fees ..................................... 5,596
Accounting and Administration ...................... 826
Other expenses ..................................... 40,034 55,430
--------- -----------
453,649
-----------
NET ASSETS ........................................... $40,645,821
===========
Net Assets consist of:
Capital paid-in .................................... $39,427,284
Undistributed net investment income ................ 31,840
Accumulated net realized loss ...................... (2,822)
Unrealized appreciation on investments -- net ...... 1,189,519
-----------
NET ASSETS ........................................... $40,645,821
===========
Shares of beneficial interest outstanding, no par value 3,502,607
===========
Net asset value per share* .......................... $11.60
===========

* Shares of the Fund are sold and redeemed at net asset value
($40,645,821 / 3,502,607).

STATEMENT OF
OPERATIONS

Year Ended December 31, 1996

INVESTMENT INCOME
Income
Dividends .............................................. $ 666,755
Interest ............................................... 2,000,798
------------
2,667,553
------------
Expenses
Management fees ........................................ 200,912
Trustees' fees ......................................... 23,645
Accounting and Administration .......................... 10,000
Custodian .............................................. 54,000
Transfer agent ......................................... 57,950
Audit and tax services ................................. 26,100
Legal .................................................. 22,500
Printing ............................................... 24,250
Registration ........................................... 20,758
Amortization of organization expense ................... 15,317
Miscellaneous .......................................... 1,052
------------
456,484
Less expenses assumed by the investment adviser .......... (149,245)
------------
Net investment income .................................... 2,360,314
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain on investments -- net ..................... 4,650,369
Unrealized depreciation -- net .......................... (1,857,988)
------------
Net gain on investments ................................. 2,792,381
------------

NET INCREASE IN ASSETS FROM OPERATIONS ................... $ 5,152,695
============

See accompanying notes to financial statements

<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
------------- ------------
FROM OPERATIONS
Net investment income ......................... $ 2,360,314 $ 1,970,864
Net realized gain from investments ............ 4,650,369 484,460
Unrealized appreciation (depreciation) ........ (1,857,988) 4,798,806
------------ -----------
Increase in net assets from operations ...... 5,152,695 7,254,130
------------ -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ......................... (2,338,686) (1,988,267)
Net realized gain on investments .............. (2,496,647) --
------------ -----------
(4,835,333) (1,988,267)
------------ -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares .................. 11,932,341 4,706,339
Net asset value of shares issued in connection
with reinvestment of:
Dividends from net investment income ........ 1,891,848 1,626,393
Distributions from net realized gain ........ 2,175,884 --
------------ -----------
16,000,073 6,332,732
Cost of shares redeemed ....................... (7,464,588) (8,477,577)
------------ -----------
Net increase (decrease) in assets from
capital share transactions ................ 8,535,485 (2,144,845)
------------ -----------
Total increase in net assets .................. 8,852,847 3,121,018
NET ASSETS
Beginning of period ........................... 31,792,974 28,671,956
------------ -----------
End of period (including undistributed net
investment income of
$31,840 and $0, respectively) ............... $ 40,645,821 $31,792,974
============ ===========
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares .................... 992,699 440,355
Issued in connection with reinvestment of:
Dividends from net investment income ........ 157,948 152,155
Distributions from net realized gain ........ 187,576 --
------------ -----------
1,338,223 592,510
Redeemed .................................... (622,495) (800,310)
------------ -----------
Net change .................................. 715,728 (207,800)
============ ===========

See accompanying notes to finanical statements
<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 31, MARCH 17, 1992(c)
------------------------------------ THROUGH
1996 1995 1994 1993 DECEMBER 31, 1992
------------------------------------ -----------------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding throughout each period:

Net asset value at the beginning of period .............. $11.41 $ 9.57 $11.17 $10.26 $10.00
------ ------ ------ ------ ------
Net investment income (a) ............................... 0.77 0.70 0.73 0.67 0.50
Dividends from net investment income .................... (0.77) (0.70) (0.73) (0.67) (0.49)
Net realized and unrealized gain (loss) on investments .. 0.95 1.84 (1.60) 1.23 0.40
Distribution from net realized gain ..................... (0.76) -- -- (0.32) (0.13)
Distribution from paid-in capital ....................... -- -- -- -- (0.02)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value .............. 0.19 1.84 (1.60) 0.91 0.26
------ ------ ------ ------ ------
Net asset value at the end of period .................... $11.60 $11.41 $ 9.57 $11.17 $10.26
====== ====== ====== ====== ======
Total Return (%) (b) .................................... 15.4 27.3 -8.0 18.9 9.2(d)

Ratios:
Operating expenses to average net assets (%) ............ 0.85 0.85 0.85 0.85 0.85(e)
Operating expenses to average net assets before expense
limitation (%) ........................................ 1.26 1.53 1.46 2.02 3.21(e)
Net investment income to average net assets (%) ......... 6.53 6.46 7.00 6.30 7.29(e)
Portfolio turnover (%) .................................. 149 148 129 149 212(e)
Average commission rate(f) .............................. $0.0700 -- -- -- --

Net assets at end of period (in thousands) .............. $40,646 $31,793 $28,672 $32,883 $9,467

(a) Net of reimbursement which amounted to .............. $ 0.05 $ 0.07 $ 0.06 $ 0.12 $ 0.16
(b) The total return would have been lower had certain expenses not been reimbursed during the period.
(c) Commencement of operations.
(d) Not computed on an annualized basis.
(e) Computed on an annualized basis.
(f) SEC regulations require portfolios to disclose the average commission rate paid on trades for which
commissions were charged for fiscal years beginning on or after September 1, 1995.
</TABLE>

See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996

1. The Fund is a series of CGM Trust which is organized as a Massachusetts
business trust under the laws of Massachusetts pursuant to an Agreement and
Declaration of Trust. The Trust is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company. The Trust has
three other funds whose financial statements are not presented herein. The Fund
commenced operations on March 17, 1992. The investment objective of the Fund is
to maximize total return by investing in debt securities and preferred stock
that provide current income, capital appreciation or a combination of both
income and appreciation.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.

A. SECURITY VALUATION -- Corporate debt securities are generally valued on the
basis of valuations furnished by a pricing service authorized by the Board
of Trustees, which determines valuations for normal, institutional- size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. United States government debt
securities are valued at the current closing bid, as last reported by a
pricing service approved by the Board of Trustees. Equity securities are
valued on the basis of valuations furnished by a pricing service, authorized
by the Board of Trustees, which provides the last reported sale price for
securities listed on a national securities exchange or on the NASDAQ
national market system or, if no sale was reported and in the case of
over-the-counter securities not so listed, the last reported bid price.
Short-term investments having a maturity of sixty days or less are stated at
amortized cost, which approximates value. Other assets and securities which
are not readily marketable will be valued in good faith at fair value using
methods determined by the Board of Trustees.

B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Interest income is increased by the
accretion of discount. Premium is amortized against interest income with a
corresponding decrease in the cost basis. Net gain or loss on securities
sold is determined on the identified cost basis.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Permanent book and tax differences relating to
shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.

<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

E. ORGANIZATION EXPENSE -- Costs incurred in 1992 in connection with the Fund's
organization and registration amounting to $76,426 have been paid by the
Fund. These costs are being amortized over 60 months beginning March 17,
1992.

2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1996,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $45,312,901 and $44,968,667,
respectively. Purchases and sales of United States government obligations
aggregated $1,266,406 and $3,188,126, respectively.

3. A. MANAGEMENT FEES -- During the year ended December 31, 1996, the Fund
incurred management fees of $200,912 payable to the Fund's investment
adviser, Capital Growth Management Limited Partnership (CGM), certain
officers and directors of which are also officers and trustees of the
Fund. On December 12, 1996, the Fund had a Special Meeting of its
Shareholders. At that meeting, Shareholders approved an Advisory
Agreement between the Fund and CGM, effective December 13, 1996,
providing for a fee at the annual rate of 0.65% on the first $200
million of the Fund's average daily net assets, 0.55% of the next $300
million and 0.40% of such assets in excess of $500 million. Prior to
December 13, 1996, the advisory fee had been at the annual rate of
0.55% on the first $200 million of the Fund's average daily net
assets, 0.45% of the next $300 million and 0.35% of such assets in
excess of $500 million. For 1996, CGM waived $149,245 of its fee. See
Note 4.

B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the
Fund; (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder
reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance; and (iii) registration, filing and
other fees in connection with requirements of regulatory authorities.
For the year ended December 31, 1996 these expenses amounted to $10,000
and are shown separately in the financial statements as Accounting and
Administration.

C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors, officers
or employees of CGM, or any affiliate of CGM, other than registered
investment companies. Each other trustee is compensated by the Fund with
an annual base fee of $3,000 plus travel expenses for each meeting
attended and an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets of
the CGM Funds, which for 1996 was $397. In addition, the chairman of the
Independent Trustees Committee receives an annual retainer of $1,000.

4. EXPENSE LIMITATION -- Until December 31, 1997, and, thereafter, until further
notice to the Fund, CGM has voluntarily agreed to reduce its management fee and,
if necessary, to assume expenses of the Fund in order to limit the Fund's
expenses to an annual rate of 0.85% of average daily net assets. As a result of
the Fund's expenses exceeding the voluntary expense limitation, CGM waived
$149,245 of its management fee. The Fund incurred operating expenses of
$307,239, representing 0.85% of the average daily net assets.

<PAGE>

CGM FIXED INCOME FUND
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of CGM Fixed Income Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of CGM Fixed Income Fund at December
31, 1996, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and the financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997

- ------------------------------------------------------------------------------
SHAREHOLDER MEETING -- DECEMBER 12, 1996

On December 12, 1996 the Fund had a Special Meeting of its Shareholders. At that
meeting, Shareholders approved an Advisory Agreement between the Fund and
Capital Growth Management Limited Partnership that changed the advisory fee (see
Note 3a) paid by the Fund to CGM (by a share vote of 1,400,770.463 in favor,
395,583.281 against and 78,306.562 abstentions) and ratified the selection of
Price Waterhouse LLP as the Fund's independent accountants for the year ending
December 31, 1996 (by a share vote of 1,802,136.641 in favor, 48,989.043 against
and 23,534.622 abstentions).

<PAGE>

CGM
FIXED INCOME
FUND

5th Annual Report
December 31, 1996

A No-Load Fund

[Fencer logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership

INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110

- ------------------------------------------------------------------------------
TELEPHONE NUMBERS

For information about:
[] Account Procedures and Status

[] Redemptions

[] Exchanges

Call 800-343-5678

[] New Account Procedures

[] Prospectuses

[] Performance

Call 800-345-4048

- ------------------------------------------------------------------------------
MAILING ADDRESSES

FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511

FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------

This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.

FAR96 Printed in U.S.A.
- -------

<PAGE>

TO OUR SHAREHOLDERS
- ------------------------------------------------------------------------------

CGM Mutual Fund rose 12.8% during the fourth quarter of 1996 compared to the
unmanaged Standard and Poor's 500 Index which increased 8.3% over the same
period and the Merrill Lynch Master Bond Index which returned 3.1%. For the year
just ended, CGM Mutual Fund posted a total return of 23.7% while the S&P 500 and
Merrill Lynch Master Bond Index returned 23.0% and 3.6% respectively.

PORTFOLIO STRATEGY
CGM Mutual Fund maintained a position of 25% of the portfolio in fixed income
securities during 1996. A major holding of long-term government bonds was sold
at the start of the year and proceeds were invested in short-term Treasury
bills. The Fund gradually accumulated a position in real estate investment
trusts during the year, which accounted for 13.8% of the portfolio at year-end.
Fund performance was bolstered by significant appreciation in bank and
technology stocks.

At the end of the fourth quarter, CGM Mutual Fund held approximately 27% in
Treasury bills and corporate bonds and the balance in stocks of companies in
which we are confident of a favorable earnings outlook. In addition to the fixed
income holdings, the three largest industry positions are real estate investment
trusts, money center banks and oil service companies. The three largest company
holdings are Citicorp, Philip Morris Companies, Inc. and Intel Corporation.

/s/ Robert L. Kemp

Robert L. Kemp
President

/s/ G. Kenneth Heebner

G. Kenneth Heebner
Portfolio Manager

January 10, 1997

<PAGE>
COMPARISONS OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CGM MUTUAL FUND,
THE UNMANAGED S&P 500, AND THE MERRILL LYNCH MASTER BOND INDEX
assuming reinvestment of dividends and capital gains

- ---------------------------------------
Average Annual Total Return
- ---------------------------------------
1 year 5 year 10 year
23.7% 12.4% 13.8%
- ---------------------------------------
Past performance is no indication
of future results
- ---------------------------------------

CGM S&P MERRILL
1987 11,370 10,525 10,240
1988 11,731 12,268 11,059
1989 14,271 16,149 12,629
1990 14,429 15,647 13,778
1991 20,327 20,403 15,969
1992 21,561 21,956 17,183
1993 26,269 24,164 18,901
1994 23,712 24,481 18,372
1995 29,476 33,670 21,771
1996 36,453 41,414 22,555

CGM MUTUAL FUND
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------

G. Kenneth Heebner has managed CGM Mutual Fund since 1981. In 1989, Mr.
Heebner founded Capital Growth Management Limited Partnership with Robert L.
Kemp. Prior to establishing the new company, Mr. Heebner was at Loomis,
Sayles and Company where he managed the Fund, then known as Loomis-Sayles
Mutual Fund. In addition to CGM Mutual Fund, Mr. Heebner currently manages CGM
Capital Development Fund and CGM Realty Fund as well as two other mutual
funds. He also co-manages CGM Fixed Income Fund with Janice Saul.

INVESTMENT PERFORMANCE
(unaudited)
- --------------------------------------------------------------------------------

Total Return for Periods Ended December 31, 1996

CGM
MUTUAL FUND
------------
10 Years ......................................................... +264.5%
5 Years ......................................................... + 79.3
1 Year .......................................................... + 23.7
3 Months ........................................................ + 12.8

<PAGE>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
25 YEAR INVESTMENT RECORD
DECEMBER 31, 1971 -- DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
IF YOU HAD PURCHASED ONE SHARE OF THE FUND ON DECEMBER 31, 1971
- --------------------------------------------------------------------------------------------------------------------
-- AND HAD TAKEN ALL DIVIDENDS OR -- HAD REINVESTED ALL DIVIDENDS AND CAPITAL
AND DISTRIBUTIONS IN CASH GAINS DISTRIBUTIONS IN ADDITIONAL SHARES
---------------------------------------------------------------------------------
During the Year
You Would Have Received Which Would Represent
----------------------------------- ---------------------------------
The Value of A Cumulative
The Net Your Original Change
Asset Value Per Share Per Share Investment An Expressed
On of Your Capital Gains Income At Each Annual As An Index With
December Share Would Distributions Distributions Year End Total Return December 31,
31 Have Been of of Would Have Been of 1971 = 100.0
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1971 $15.37 100.0
1972 16.20 0.35 0.42 17.05 + 10.9 110.9
1973 14.20 0.42 0.42 15.77 - 7.5 102.6
1974 10.27 -- 0.46 11.86 - 24.8 77.2
1975 12.44 -- 0.43 14.88 + 25.5 96.9
1976 13.96 -- 0.43 17.25 + 15.9 112.3
1977 12.88 -- 0.52 16.54 - 4.1 107.7
1978 12.83 -- 0.65 17.35 + 4.9 113.0
1979 13.81 -- 0.72 19.73 + 13.7 128.5
1980 14.85 -- 0.88 22.65 + 14.8 147.5
1981 13.90 -- 0.97 22.67 + 0.1 147.6
1982 18.16 -- 1.09 31.96 + 41.0 208.1
1983 18.81 -- 1.09 35.12 + 9.9 228.7
1984 17.01 1.86 0.95 37.33 + 6.3 243.1
1985 21.53 -- 1.08 50.21 + 34.5 327.0
1986 22.86 2.75 0.94 62.81 + 25.1 409.1
1987 20.40 4.52 1.06 71.41 + 13.7 465.1
1988 19.94 -- 1.10 73.70 + 3.2 480.0
1989 22.34 0.95 0.93 89.69 + 21.7 584.2
1990 21.64 -- 0.93* 90.68 + 1.1 590.6
1991 26.80 2.64 0.97 127.77 + 40.9 832.2
1992 26.02 1.42 0.93 135.56 + 6.1 883.0
1993 28.88 1.93 0.86 165.11 + 21.8 1075.5
1994 25.05 -- 1.04 149.09 - 9.7 971.2
1995 29.43 0.89 0.77 185.32 + 24.3 1207.2
1996 31.42 4.15 0.74 229.24 + 23.7 1493.3
------ ------ -------
Totals $21.88 $20.38 +1393.3
- --------------------------------------------------------------------------------------------------------------------

* Includes $0.05 per share distributed from paid-in capital.
Shares were first offered on November 5, 1929; the net asset value per share, adjusted for stock splits and dividends, was $8.33.
</TABLE>

----------------------------------------------------------------------------
The performance data contained in this report represent past performance,
which is no guarantee of future results. The investment return on, and the
principal value of, an investment in the Fund will fluctuate so that
investors' shares, when redeemed, may be worth more or less than their
original cost.
<PAGE>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------

INVESTMENTS AS OF DECEMBER 31, 1996
COMMON STOCKS -- 74.5% OF TOTAL NET ASSETS
SHARES VALUE(a)
------- --------------
AEROSPACE -- 4.7%
Boeing Company .............................. 540,000 $ 57,442,500
--------------
BANKS -- MONEY CENTER -- 12.7%
Chase Manhattan Corporation ................. 702,000 62,653,500
Citicorp .................................... 887,500 91,412,500
--------------
154,066,000
--------------
BASIC MATERIALS -- 1.7%
British Steel PLC ADR(b) .................... 750,000 20,625,000
--------------
COMPUTER SOFTWARE AND SERVICES -- 0.8%
lanonal Dell Computer Corporation(c) ....... 172,600 9,169,375
--------------
ELECTRONIC COMPONENTS -- 5.6%
Intel Corporation ........................... 522,000 68,349,375
--------------
FOOD -- RETAILERS/WHOLESALERS -- 9.8%
Hershey Foods Corporation ................... 790,000 34,562,500
Philip Morris Companies, Inc. ............... 755,000 85,031,875
--------------
119,594,375
--------------
INSURANCE -- 6.1%
Aetna, Inc. ................................. 300,000 24,000,000
American International Group, Inc. .......... 467,000 50,552,750
--------------
74,552,750
--------------
METALS AND MINING -- 5.0%
Phelps Dodge Corporation .................... 900,000 60,750,000
--------------
OIL -- SERVICE -- 10.5%
Halliburton Company ......................... 1,030,000 62,057,500
Schlumberger Limited ........................ 660,000 65,917,500
--------------
127,975,000
--------------
PERIPHERALS -- 3.8%
Seagate Technology(c) ....................... 1,150,000 45,425,000
--------------
REAL ESTATE INVESTMENT TRUSTS -- 13.8%
Beacon Properties Corporation ............... 600,000 21,975,000
Crescent Real Estate Equities ............... 500,000 26,375,000
Essex Property Trust ........................ 70,000 2,056,250
Felcor Suite Hotels, Inc. ................... 1,613,500 57,077,563
RFS Hotel Investments, Inc. ................. 235,000 4,641,250
Starwood Lodging Trust ...................... 1,020,000 56,227,500
--------------
168,352,563
--------------
TOTAL COMMON STOCKS (Identified Cost $689,153,647) 906,301,938
--------------

See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
BONDS AND BILLS -- 26.6%
FACE
AMOUNT VALUE(a)
------- --------------
INDUSTRIAL BONDS -- 4.1%
Kaiser Aluminum & Chemical Corporation,
12.75%, 2/01/03 ............................ $ 20,000,000 $ 21,500,000
Rohr, Inc., 11.625%, 5/15/03 ................ 5,000,000 5,512,500
Stone Container Corporation, 9.875%, 2/01/01 23,000,000 23,230,000
--------------
50,242,500
--------------
UNITED STATES TREASURY -- 22.5%
United States Treasury Bills, 4.94%, 2/13/97 200,000,000 198,799,586
United States Treasury Bills, 4.747%, 3/20/97 36,000,000 35,628,840
United States Treasury Bills, 4.90%, 3/27/97 40,000,000 39,537,200
--------------
273,965,626
--------------
TOTAL BONDS AND BILLS (Identified Cost
$324,471,372) ................................. 324,208,126
--------------
SHORT-TERM INVESTMENT -- 1.0%
American Express Credit Corp., 6.55% 1/02/97
(Cost $12,150,000) .................... 12,150,000 12,150,000
--------------

TOTAL INVESTMENTS -- 102.1% (Identified Cost
$1,025,775,019)(d) ......................................... 1,242,660,064
Cash and Receivables .................................. 24,388,318
Liabilities ........................................... (50,525,492)
--------------
TOTAL NET ASSETS -- 100% ..................................... $1,216,522,890
==============

(a) See Note 1A.
(b) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
(c) Non-income producing security.
(d) Federal Tax Information: At December 31, 1996, the net unrealized
appreciation on investments based on cost of $1,025,984,128 for Federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ...... $ 223,839,066
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ...... (7,163,130)
--------------
Net unrealized appreciation .................................. $ 216,675,936
==============

See accompanying notes to financial statements
<PAGE>

STATEMENT OF
ASSETS AND LIABILITIES

December 31, 1996

ASSETS
Investments at value (Identified
cost -- $1,025,775,019) ................. $1,242,660,064
Cash ...................................... 3,474
Receivable for:
Securities sold ......................... $19,419,195
Shares of the Fund sold ................. 287,813
Dividends and interest .................. 4,677,836 24,384,844
----------- --------------
1,267,048,382
--------------
LIABILITIES
Payable for:
Securities purchased $24,343,400
Shares of the Fund redeemed ............. 13,437,815
Distributions declared 11,584,642 49,365,857
-------------

Accrued expenses:
Management fees ......................... 813,255
Trustees' fees .......................... 27,502
Accounting and Administration ........... 6,917
Other expenses .......................... 311,961 1,159,635
------------ --------------
50,525,492
--------------
NET ASSETS .................................................. $1,216,522,890
==============
Net Assets consist of:
Capital paid-in ......................................... $ 998,939,460
Undistributed net investment income ..................... 540,285
Accumulated net realized gain ........................... 158,100
Unrealized appreciation on investments -- net ........... 216,885,045
--------------
NET ASSETS .................................................. $1,216,522,890
==============

Shares of beneficial interest outstanding, no par value .. 38,722,072
==============
Net asset value per share* ................................ $31.42
==============

* Shares of the Fund are sold and redeemed at net asset value
($1,216,522,890 / 38,722,072).

STATEMENT OF
OPERATIONS

Year Ended December 31, 1996

INVESTMENT INCOME
Income
Dividends (net of withholding tax of $28,162) ........... $ 19,121,649
Interest ................................................ 18,198,144
-------------
37,319,793
-------------
Expenses
Management fees ......................................... 8,033,863
Trustees' fees .......................................... 110,770
Accounting and Administration ........................... 83,000
Custodian ............................................... 172,000
Transfer agent .......................................... 1,488,500
Audit and tax services .................................. 33,000
Legal ................................................... 22,000
Printing ................................................ 107,500
Registration ............................................ 29,220
Miscellaneous ........................................... 20,879
-------------
10,100,732
-------------
Net investment income ..................................... 27,219,061
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on investments -- net ..................... 145,714,784
Unrealized appreciation -- net .......................... 77,414,751
-------------
Net gain on investments ................................. 223,129,535
-------------

NET INCREASE IN ASSETS FROM OPERATIONS ...................... $ 250,348,596
=============

See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
-------------- --------------
OPERATIONS
Net investment income .................... $ 27,219,061 $ 28,544,933
Net realized gain from investments ....... 145,714,784 64,726,578
Unrealized appreciation .................. 77,414,751 149,522,113
-------------- --------------
Increase in net assets from operations . 250,348,596 242,793,624
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............... (26,678,776) (30,206,254)
From net realized gain on investments .... (142,888,891) (33,830,922)
-------------- --------------
(169,567,667) (64,037,176)
-------------- --------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ............. 85,970,440 99,581,131
Net asset value of shares issued in
connection with reinvestment of:
Dividends from net investment income ... 24,156,561 27,004,558
Distributions from net realized gain ... 131,950,732 31,302,777
-------------- --------------
242,077,733 157,888,466
Cost of shares redeemed .................. (260,774,531) (245,581,485)
-------------- --------------
Net decrease in assets from capital
share transactions ................... (18,696,798) (87,693,019)
-------------- --------------
Total increase in net assets ............. 62,084,131 91,063,429

NET ASSETS
Beginning of period ...................... 1,154,438,759 1,063,375,330
-------------- --------------
End of the period (including undistributed
net investment income of $540,285 and
$0, respectively) ...................... $1,216,522,890 $1,154,438,759
============== ==============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ............... 2,757,585 3,595,533
Issued in connection with reinvestment of:
Dividends from net investment income ... 776,634 945,112
Distributions from net realized gain ... 4,199,578 1,063,635
-------------- --------------
7,733,797 5,604,280
Redeemed ............................... (8,241,929) (8,827,153)
-------------- --------------
Net change ............................. (508,132) (3,222,873)
============== ==============

See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding throughout each period:

Net asset value at the beginning of period ................... $29.43 $25.05 $28.88 $26.02 $26.80
------ ------ ------ ------ ------

Net investment income ........................................ 0.75 0.73 1.09 0.92 0.93
Dividends from net investment income ......................... (0.74) (0.77) (1.04) (0.86) (0.93)
Net realized and unrealized gain (loss) on investments ....... 6.13 5.31 (3.88) 4.73 0.64
Distribution from net realized gain .......................... (4.15) (0.89) -- (1.81) (1.42)
Distribution in excess of net realized gain .................. -- -- -- (0.12) --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value ................... 1.99 4.38 (3.83) 2.86 (0.78)
------ ------ ------ ------ ------
Net asset value at end of period ............................. $31.42 $29.43 $25.05 $28.88 $26.02
====== ====== ====== ====== ======
Total Return (%) ............................................. 23.7 24.3 -9.7 21.8 6.1

Ratios:
Operating expenses to average net assets (%) ................. 0.87 0.91 0.92 0.93 0.93
Net investment income to average net assets (%) .............. 2.33 2.55 4.39 3.45 3.74
Portfolio turnover (%) ....................................... 192 291 173 97 121
Average commission rate* ..................................... $0.0695 -- -- -- --
Net assets at end of period (in thousands) ($) ............... 1,216,523 1,154,439 1,063,375 947,115 548,630

* SEC regulations require portfolios to disclose the average commission rate paid on trades for which commissions were charged for
fiscal years beginning on or after September 1, 1995.
</TABLE>

See accompanying notes to financial statements

- -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996

1. The Fund is a series of CGM Trust which is organized as a Massachusetts
business trust under the laws of Massachusetts pursuant to an Agreement and
Declaration of Trust. The Trust is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company. The Trust has
three other Funds whose financial statements are not presented herein. The
Fund's objective is reasonable long-term capital appreciation with a prudent
approach to protection of capital from undue risks. Current income is a
consideration in the selection of the Fund's portfolio securities, but it is not
a controlling factor.

A. SECURITY VALUATION -- Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which provides the last reported sale price for securities listed
on a national securities exchange or on the NASDAQ national market system
or, if no sale was reported and in the case of over-the-counter securities
not so listed, the last reported bid price. Corporate debt securities are
valued on the basis of valuations furnished by a pricing service, authorized
by the Board of Trustees, which determines valuations for normal,
institutional-size trading units of such securities using market
information, transactions for comparable securities and various
relationships between securities which are generally recognized by

<PAGE>
CGM MUTUAL FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

institutional traders. United States government debt securities are valued
at the current closing bid, as last reported by a pricing service approved
by the Board of Trustees. Short-term investments having a maturity of sixty
days or less are stated at amortized cost, which approximates value.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Net gain or loss on securities sold
is determined on the identified cost basis.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Dividend income received by the Fund from its
investment in REITs may be comprised, for tax purposes, of ordinary income,
capital gains, and return of capital. These dividends, when distributed by
the Fund, are passed through to the Fund's shareholders with these same tax
characteristics. For 1996, return of capital and capital gain distributions
from REITs totaled $736,681 and $13,963, respectively, resulting in a
reduction of the Fund's dividend income and an increase in its realized and
unrealized gain on investments. Permanent book and tax differences relating
to shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.

2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1996,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $1,848,657,946 and
$2,027,571,053, respectively. Purchases and sales of United States government
obligations aggregated $0 and $227,765,513, respectively.

3. A. MANAGEMENT FEES -- During the year ended December 31, 1996, the Fund
incurred management fees of $8,033,863, paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. On December 12, 1996, the Fund had a Special
Meeting of its Shareholders. At that meeting, Shareholders approved an
Advisory Agreement between the Fund and CGM, effective December 13,
1996, providing for a fee at the annual rate of 0.90% on the first
$500 million of the Fund's average daily net assets, 0.80% of the next
$500 million and 0.75% of such assets in excess of $1 billion. Prior
to December 13, 1996, the advisory fee had been at the annual rate of
0.75% on the first $200 million of the Fund's average daily net
assets, 0.70% of the next $300 million and 0.65% of such assets in
excess of $500 million.

B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which were
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the
Fund; (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder
reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance; and (iii) registration, filing and
other fees in connection with requirements of regulatory authorities.
The Accounting and Administration expense of $83,000 is shown separately
in the financial statements.

<PAGE>
CGM MUTUAL FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors, officers
or employees of CGM, or any affiliate of CGM, (other than registered
investment companies). Each other trustee is compensated by the Fund
with an annual base fee of $3,000 plus travel expenses for each meeting
attended and an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets of
the CGM Funds, which for 1996 was $14,834. In addition, the Chairman of
the Independent Trustees Committee receives an annual retainer of
$1,500.

- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of CGM Mutual Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of CGM Mutual Fund at December 31,
1996, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997

<PAGE>

CGM MUTUAL FUND
- ------------------------------------------------------------------------------
SHAREHOLDER MEETING -- DECEMBER 12, 1996
(unaudited)

On December 12, 1996 the Fund had a Special Meeting of its Shareholders. At that
meeting, Shareholders approved an Advisory Agreement between the Fund and
Capital Growth Management Limited Partnership that changed the advisory fee (see
Note 3a) paid by the Fund to CGM (by a share vote of 14,654,990.905 in favor,
5,878,109.318 against and 974,814.321 abstentions) and ratified the selection of
Price Waterhouse LLP as the Fund's independent accountants for the year ending
December 31, 1996 (by a share vote of 20,344,814.286 in favor, 630,714.182
against and 532,396.076 abstentions).

<TABLE>
- -------------------------------------------------------------------------------------------
<S> <C>
BOARD OF TRUSTEES INVESTMENT ADVISER

PETER O. BROWN CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
NICHOLAS J. GRANT Boston, Massachusetts 02110
G. KENNETH HEEBNER
ROBERT L. KEMP TRANSFER AND DIVIDEND PAYING
ROBERT B. KITTREDGE AGENT AND CUSTODIAN OF ASSETS
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR. STATE STREET BANK AND TRUST COMPANY
J. BAUR WHITTLESEY Boston, Massachusetts 02102

OFFICERS SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
ROBERT L. KEMP, President TRUST COMPANY
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary BOSTON FINANCIAL DATA SERVICES, INC.
KATHLEEN S. HAUGHTON, Vice President P.O. Box 8511
MARTHA I. MAGUIRE, Vice President Boston, Massachusetts 02266-8511
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer
</TABLE>
<PAGE>

CGM
MUTUAL FUND

67th Annual Report
December 31, 1996

A No-Load Fund

[Fencer logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110

- ------------------------------------------------------------------------------
TELEPHONE NUMBERS

For information about:
[] Account Procedures and Status

[] Redemptions

[] Exchanges

Call 800-343-5678

[] New Account Procedures

[] Prospectuses

[] Performance

Call 800-345-4048

- ------------------------------------------------------------------------------
MAILING ADDRESSES

FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511

FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------

MAR96 Printed in U.S.A.

<PAGE>

TO OUR SHAREHOLDERS:
- ------------------------------------------------------------------------------
CGM American Tax Free Fund increased 2.7% during the fourth quarter of 1996
compared to the Lehman Municipal Bond Index which rose 2.6% for the same period.
For the year just ended, the CGM American Tax Free Fund returned 2.9% compared
to the Lehman Municipal Bond Index which increased 4.4%.

PORTFOLIO STRATEGY
The municipal bond market outperformed the long Treasury market in 1996 although
historically low rates and a hot stock market drew attention away from tax
exempt securities. Other distractions included Orange County, California's
emergence from bankruptcy and the latest fiscal mismanagement problems in Miami.

Over the course of the year, CGM American Tax Free Fund benefited from several
meaningful credit upgrades of portfolio holdings. However, the Fund was
unwilling to take on excessive interest rate risk and elected to maintain a
shorter maturity than many of its peer funds. As a result CGM American Tax Free
Fund lagged during market rallies and underperformed its Lipper average for the
year.

1997 offers little encouragement in the municipal bond market as the shift of
fiscal responsibility from federal and state levels to municipalities threatens
to overburden some local budgets. Additionally, current interest rate levels
continue to drive off retail interest in the market.

We will maintain our defensive CGM American Tax Free Fund portfolio structure of
shorter average maturity and duration and focus on issue structure and credit
opportunities as they arise in the months ahead. The Fund continues to offer
high tax exempt income without taking on extreme interest rate risk. The Fund's
three largest sectors are industrial/pollution control, water/sewer and housing.
The three largest holdings are Hodge Louisiana (Stone Container), Howard County,
Maryland Multi-family Housing (Avalon Properties) and Dade County, Florida
Water/Sewer Revenue.

/s/ Robert L. Kemp

Robert L. Kemp
President

/s/ Janice H. Saul

Janice H. Saul
Portfolio Manager
January 10, 1997
<PAGE>

- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM AMERICAN TAX FREE FUND AND THE LEHMAN MUNICIPAL
BOND FUND INDEX
assuming reinvestment of dividends and capital gains

- -------------------------------------------
Average Annual Total Return
- -------------------------------------------
1 Year Life of Fund*
2.9% 4.4%
*(November 10, 1993 -- December 31, 1996)
- -------------------------------------------
Past performance is no indication
of future results
- -------------------------------------------

CGM LEHMAN
11/93 10,000 10,000
1993 10,290 10,210
1994 9,446 9,679
1995 11,146 11,373
1996 11,469 11,873

CGM AMERICAN TAX FREE FUND
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------

Janice H. Saul joined Capital Growth Management in June 1993, and assumed
management of CGM American Tax Free Fund at its inception, November 10, 1993.
Ms. Saul's experience with municipal securities began in 1979 at Scudder,
Stevens, and Clark. In 1983, she joined Loomis, Sayles and Company where she ran
private accounts for nine years. From 1991 until May 1993, Ms. Saul managed a
new long-term municipal bond fund at Loomis, Sayles and Company. Ms. Saul
currently is also co-manager of CGM Fixed Income Fund.

INVESTMENT PERFORMANCE
(unaudited)
- --------------------------------------------------------------------------------

Total Return for Periods Ended December 31, 1996

CGM AMERICAN LIPPER GENERAL MUNICIPAL
TAX FREE FUND DEBT FUND AVERAGE

-------------------------------------
1 Year .................................. +2.9% +3.3%
3 Months ................................ +2.7 +2.4

The Fund's average annual total return since inception (November 10, 1993)
through December 31, 1996 is +4.4%. The adviser has agreed to absorb the Fund's
total operating expenses through December 31, 1997. Otherwise, the Fund's total
return since inception, and for the one year and three-month periods ended
December 31, 1996 would have been lower.

Lipper Analytical Services, Inc. is an independent mutual fund ranking
service.

<PAGE>

- ------------------------------------------------------------------------------
BOARD OF TRUSTEES

PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY

OFFICERS

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
Boston, Massachusetts 02110

TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS

STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102

SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY

BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266-8511

<PAGE>

CGM AMERICAN TAX FREE FUND
- ------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996
MUNICIPAL BONDS -- 99.4% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE(a)
--------- -----------
CALIFORNIA -- 14.4%
California Housing Finance Agency, 6.00%, 8/01/15 $ 250,000 $ 253,107
Los Angeles Regional Airport, 6.875%, 11/15/12 ... 500,000 530,900
San Jose Redevelopment Tax Allocation, 5.00%,
8/01/20 ........................................ 500,000 460,365
Yuba County Water Agency Revenue, 4.00%, 3/01/16 . 610,000 541,979
-----------
1,786,351
-----------
FLORIDA -- 19.1%
Dade County Water & Sewer Systems, 6.25%, 10/01/11 500,000 552,980
Gainesville Utility Systems, 5.75%, 10/01/09 ..... 500,000 531,085
Orlando & Orange County Expressway, 5.95%, 7/01/23 500,000 504,265
Polk County Industrial Development Authority
Revenue Bonds (IMC Fertilizer), 7.525%, 1/01/15 250,000 268,708
Volusia County Educational Facilities Authority,
6.125%, 10/15/16 ............................... 500,000 510,245
-----------
2,367,283
-----------
ILLINOIS -- 2.7%
Metropolitan Pier & Expo Authority, 6.50%, 6/15/27 300,000 339,225
-----------
KENTUCKY -- 3.4%
Kenton County Airport Revenue Bonds (Delta
Airlines), 6.75%, 2/01/02 ..................... 400,000 421,836
-----------
LOUISIANA -- 8.7%
Hodge Utility Revenue Bonds (Stone Container),
9.00%, 3/01/10 ................................ 1,000,000 1,082,270
-----------
MARYLAND -- 6.5%
Howard County Multifamily, Chase Glen Apartments,
7.00%, 7/01/24 (b) ............................. 750,000 809,678
-----------
MASSACHUSETTS -- 5.6%
Massachusetts Municipal Wholesale Electric, 8.75%,
7/01/18 ........................................ 330,000 400,508
University of Massachusetts Building Authority,
6.625%, 5/01/08 ................................ 260,000 293,514
-----------
694,022
-----------
MICHIGAN -- 3.8%
Michigan State Housing Development, 7.05%, 10/01/12 450,000 477,162
-----------
MINNESOTA -- 4.2%
Ramsey & Washington Counties (Resource Recovery
Revenue), 6.75%, 12/01/06 ...................... 500,000 524,635
-----------
MISSOURI -- 2.0%
Missouri State Environment Improvement, 5.50%,
12/01/13 ....................................... 250,000 249,985
-----------
See accompanying notes to financial statements
<PAGE>

CGM AMERICAN TAX FREE FUND
- ------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
MUNICIPAL BONDS -- (CONTINUED)
FACE
AMOUNT VALUE(a)
--------- -----------
NEW YORK -- 11.0%
New York General Obligation Bonds, 6.125%, 8/01/06 $ 350,000 $ 376,880
New York General Obligation Bonds Series B, 8.25%,
6/01/05 ........................................ 100,000 117,781
New York State Dormitory Authority Revenue Bonds,
5.75%, 7/01/13 ................................. 250,000 249,205
New York State Dormitory Authority Revenue Bonds,
5.875%, 5/15/11 ................................ 250,000 253,983
Port Authority New York and New Jersey Special
Obligation, 9.125%, 12/01/15 ................... 325,000 366,577
-----------
1,364,426
-----------
NORTH CAROLINA -- 3.9%
North Carolina Medical Care, 5.50%, 2/15/19 ...... 500,000 487,485
-----------
OHIO -- 4.1%
Cleveland Waterworks Revenue, 5.75%, 1/01/21 ..... 500,000 506,085
-----------
PUERTO RICO -- 2.2%
Puerto Rico Electric Power Authority, 6.125%,
7/01/09 ........................................ 250,000 266,773
-----------
TEXAS -- 2.2%
Alliance Airport Authority Special Facilities
Revenue Bonds (American Airlines Inc.
Project), 7.00%, 12/01/11 ..................... 250,000 278,312
-----------
VIRGINIA -- 5.6%
Fairfax County Industrial Development Authority,
5.50%, 8/15/09 ................................. 500,000 507,685
Hopewell Industrial Development Authority (Stone
Container), 8.25%, 6/01/16 ..................... 175,000 190,452
-----------
698,137
-----------
TOTAL MUNICIPAL BONDS (Identified Cost $12,001,532) ............. 12,353,665
-----------
TOTAL INVESTMENTS -- 99.4% (Identified Cost $12,001,532)(c) ..... 12,353,665
Cash and Receivables ..................................... 266,655
Liabilities .............................................. (190,659)
-----------
TOTAL NET ASSETS -- 100.0% ...................................... $12,429,661
===========

(a) See Note 1A.
(b) Variable or floating rate security. Rate disclosed is as of December 31,
1996.
(c) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation on investments based on cost of $12,001,532 for Federal income
tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost ........... $ 369,531
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ........... (17,398)
-----------
Net unrealized appreciation ..................................... $ 352,133
===========

See accompanying notes to financial statements
<PAGE>

CGM AMERICAN TAX FREE FUND
- ------------------------------------------------------------------------------

STATEMENT OF
ASSETS AND LIABILITIES

December 31, 1996

ASSETS
Investments at value (Identified
cost -- $12,001,532) ................. $12,353,665
Cash ................................... 27,036
Receivable for:
Shares of the Fund sold ................. $ 490
Interest ................................ 239,129 239,619
-------- -----------
12,620,320
-----------
LIABILITIES
Payable for:
Shares of the Fund redeemed ............. $133,244
Distributions declared .................. 14,818
Expense advance from adviser ............ 42,597 190,659
-------- -----------
NET ASSETS .................................................. $12,429,661
===========
Net Assets consist of:
Capital paid-in ......................................... $13,189,333
Undistributed net investment income ..................... 134
Accumulated net realized loss ........................... (1,111,939)
Unrealized appreciation on investments -- net ........... 352,133
-----------
NET ASSETS .................................................. $12,429.661
===========
Shares of beneficial interest outstanding, no par value .. 1,313,412
===========
Net asset value per share* ................................ $9.46
===========

* Shares of the Fund are sold and redeemed at net asset value
($12,429,661 / 1,313,412).

STATEMENT OF
OPERATIONS

Year Ended December 31, 1996

INVESTMENT INCOME
Income
Interest ......................................................$ 712,505
---------
Expenses
Management fees ............................................... 70,051
Trustees' fees ................................................ 22,139
Accounting and Administration ................................. 4,000
Custodian ..................................................... 55,000
Transfer agent ................................................ 23,600
Audit and tax services ........................................ 17,100
Legal ......................................................... 21,300
Printing ...................................................... 16,800
Registration .................................................. 18,893
Miscellaneous ................................................. 601
---------
249,484

Less expenses assumed by the
investment adviser .......................................... (249,484)
---------
Net investment income ......................................... 712,505
---------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS
Realized loss on investments -- net ............................. (224,953)
Unrealized depreciation -- net .................................. (149,674)
---------
Net loss on investments ......................................... (374,627)
---------

NET INCREASE IN ASSETS FROM
OPERATIONS ......................................................$ 337,878
=========

See accompanying notes to financial statements
<PAGE>

CGM AMERICAN TAX FREE FUND
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
FROM OPERATIONS
Net investment income .......................... $ 712,505 $ 715,549
Net realized gain (loss) from investments ...... (224,953) 120,437
Unrealized appreciation (depreciation) ......... (149,674) 984,477
----------- -----------
Increase in net assets from operations ....... 337,878 1,820,463
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .......................... (713,442) (714,478)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ................... 2,728,617 1,944,958
Net asset value of shares issued in connection
with reinvestment of:
Dividends from net investment income ......... 544,091 556,800
----------- -----------
3,272,708 2,501,758
Cost of shares redeemed ........................ (2,322,772) (1,902,207)
----------- -----------
Net increase in assets from capital share
transactions ............................... 949,936 599,551
----------- -----------
Total increase in net assets ................... 574,372 1,705,536

NET ASSETS
Beginning of period ............................ 11,855,289 10,149,753
----------- -----------
End of period (including undistributed net
investment income of
$134 and $1,071, respectively) ............... $12,429,661 $11,855,289
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ..................... 289,359 208,109
Issued in connection with reinvestment of:
Dividends from net investment income ......... 57,875 59,184
----------- -----------
347,234 267,293
Redeemed ..................................... (247,063) (203,582)
----------- -----------
Net change ................................... 100,171 63,711
=========== ===========

See accompanying notes to finanical statements
<PAGE>

CGM AMERICAN TAX FREE FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
YEAR ENDED DECEMBER 31, NOVEMBER 10, 1993(c)
----------------------------- THROUGH
1996 1995 1994 DECEMBER 31, 1993
--------------------------------------------------

For a share of the Fund outstanding throughout each period:

Net asset value at the
beginning of period ........ $ 9.77 $ 8.83 $10.25 $10.00
------ ------ ------ ------
Net investment income (a) .. 0.58 0.61 0.58 0.04
Dividends from net
investment income .......... (0.58) (0.61) (0.58) (0.04)
Net realized and unrealized
gain (loss) on investments . (0.31) 0.94 (1.42) 0.25
------ ------ ------ ------
Net increase (decrease) in
net asset value .......... (0.31) 0.94 (1.42) 0.25
------ ------ ------ ------
Net asset value at end of
period ................... $ 9.46 $ 9.77 $ 8.83 $10.25
====== ====== ====== ======

Total Return (%) (b) ....... 2.9 18.0 -8.2 2.9(d)

Ratios:
Operating expenses to
average net assets (%) .... 0 0 0 0
Operating expenses to
average net assets before
waiver (%) ................ 2.14 2.59 2.42 3.59(e)
Net investment income to
average net assets (%) .... 6.10 6.50 6.39 4.95(e)
Portfolio turnover (%) ..... 107 125 169 0

Net assets at end of period
(in thousands) ............ $12,430 $11,855 $10,150 $4,786

(a) Net of fees waived and
reimbursed amounted to . $ 0.20 $ 0.24 $ 0.22 $ 0.03
(b) The total return would have been lower had the total fees and expenses not
been waived and reimbursed during the period.
(c) Commencement of operations.
(d) Not computed on an annualized basis.
(e) Computed on an annualized basis.

See accompanying notes to financial statements

<PAGE>

CGM AMERICAN TAX FREE FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996

1. The Fund is a series of CGM Trust which is organized as a Massachusetts
business trust under the laws of Massachusetts pursuant to an Agreement and
Declaration of Trust. The Trust is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company. The Trust has
three other funds whose financial statements are not presented herein. The Fund
commenced operations on November 10, 1993. The primary investment objective of
the Fund is to provide high current income exempt from federal income tax. The
Fund's secondary investment objective is capital appreciation.

A. SECURITY VALUATION -- Debt securities are valued on the basis of valuations
furnished by a pricing service, authorized by the Board of Trustees, which
determines valuations for normal, institutional-size trading units of such
securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized
by institutional traders. Short-term investments having a maturity of sixty
days or less are stated at amortized cost, which approximates value.

B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. The Fund
may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices. Interest
income is recorded on the accrual basis. Interest income is increased by the
accretion of discount. Premium is amortized against interest income with a
corresponding decrease in the cost basis. Net gain or loss on securities
sold is determined on the identified cost basis.

C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies, and to distribute to its shareholders all of its taxable and tax
exempt income and net realized capital gains, within the prescribed time
period. Accordingly, no provision for federal income tax has been made. At
December 31, 1996, there were capital loss carryovers available to offset
future realized gains of $886,986 expiring in the year 2002 and
approximately $225,000 expiring in 2004.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Permanent book and tax differences relating to
shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.

<PAGE>
CGM AMERICAN TAX FREE FUND
- -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

E. OTHER -- The Fund has greater than 10% of its net assets at December 31,
1996 invested in California, Florida and New York. There are certain risks
arising from geographical concentration in any state. Certain revenue or tax
related events in a state may impair the ability of certain issuers of
municipal securities to pay principal and interest on their obligations.

2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1996,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $13,322,256 and $12,132,446,
respectively. There were no purchases or sales of United States government
obligations.

3. A. MANAGEMENT FEES -- During the year ended December 31, 1996, the Fund
incurred management fees of $70,051 payable to the Fund's investment
adviser, Capital Growth Management Limited Partnership (CGM), certain
officers and directors of which are also officers and trustees of the
Fund. The management agreement provides for a fee at the annual rate
of 0.60% on the first $500 million of the Fund's average daily net
assets, 0.55% of the next $500 million and 0.45% of such assets in
excess of $1 billion. CGM waived its entire fee. See Note 4.

B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the
Fund; (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder
reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance; and (iii) registration, filing and
other fees in connection with requirements of regulatory authorities.
For the year ended December 31, 1996, these expenses amounted to $4,000
and are shown separately in the financial statements as Accounting and
Administration. The entire expense was waived by CGM.
See Note 4.

C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors, officers
or employees of CGM, or any affiliate of CGM, other than registered
investment companies. Each other trustee is compensated by the Fund with
an annual base fee of $3,000 plus travel expenses for each meeting
attended and an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets of
the CGM Funds, which for 1996 was $146. In addition, the chairman of the
Independent Trustees Committee receives an annual retainer of $1,000.

4. EXPENSE LIMITATION -- Until December 31, 1997, and, thereafter, until further
notice to the Fund, CGM has voluntarily agreed to waive its management fee and
to assume all expenses of the Fund. For the year ended December 31, 1996, CGM
waived its entire management fee of $70,051, the entire Accounting and
Administration expense of $4,000 and assumed Fund expenses of $175,433.

<PAGE>

CGM AMERICAN TAX FREE FUND
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of CGM American Tax Free Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of CGM American Tax Free Fund at
December 31, 1996, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and the financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned at
December 31, 1996 by correspondence with the custodian provide a reasonable
basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997

<PAGE>

CGM
AMERICAN
TAX FREE FUND

4th Annual Report
December 31, 1996

A No-Load Fund

[Fencer logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110

- ------------------------------------------------------------------------------
TELEPHONE NUMBERS

For information about:
[] Account Procedures and Status

[] Redemptions

[] Exchanges

Call 800-343-5678

[] New Account Procedures

[] Prospectuses

[] Performance

Call 800-345-4048

- ------------------------------------------------------------------------------
MAILING ADDRESSES

FOR EXISTING ACCOUNTS

Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511

FOR NEW ACCOUNT APPLICATIONS ONLY

The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------

AAR96 Printed in U.S.A.

<PAGE>
TO OUR SHAREHOLDERS:
- -------------------------------------------------------------------------------
CGM Realty Fund increased 22.0% during the fourth quarter of 1996 compared to
the National Association of Real Estate Investment Trust's (NAREIT) Equity REIT
Index which increased 18.9% over the same period. For the year just ended, the
Fund returned 44.1% while the NAREIT Equity REIT index increased 35.3%.

PORTFOLIO STRATEGY
CGM Realty Fund remained fully invested during 1996 in anticipation of a robust
environment for most property types in most regions of the country. The Fund
benefited from a major concentration in hotel REITs which enjoyed strong growth
in occupancy and room rates. Other important investments included West Coast
apartment REITs and East Coast office REITs.

CGM Realty Fund is 49.4% invested in hotel REITs; 23.8% in apartment REITs; 22%
in office and industrial REITs; and 4.4% in retail REITs. The Fund's three
largest holdings are Felcor Suite Hotels, Inc., Boykin Lodging Company and RFS
Hotel Investments, Inc.

/S/ Robert L. Kemp

Robert L. Kemp
President

/S/ G. Kenneth Heebner

G. Kenneth Heebner
Portfolio Manager

January 10, 1997

<PAGE>
- ------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM REALTY FUND AND THE UNMANAGED S&P 500
assuming reinvestment of dividends and capital gains

- -----------------------------------------
Average Annual Total Return

1 Year Life of Fund*
44.1% 23.1%
*(5/13/94 -- 12/31/96)
- -----------------------------------------
Past performance is not indication
of future results
- -----------------------------------------

CGM S&P
5/13/94 10,000 10,000
12/31/94 10,020 10,079
12/31/95 12,004 13,859
12/31/96 17,298 17,059

CGM REALTY FUND
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Realty Fund since its inception on May 13,
1994. In 1989, Mr. Heebner founded Capital Growth
Management Limited Partnership with Robert L. Kemp. Prior to establishing the
new company, Mr. Heebner managed mutual funds at Loomis,
Sayles and Company. In addition to CGM Realty Fund, he currently manages CGM
Capital Development Fund, CGM Mutual Fund, and two other mutual funds. He also
co-manages CGM Fixed Income Fund with Janice Saul.

INVESTMENT PERFORMANCE
(unaudited)
- ------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1996
NATIONAL
ASSOCIATION OF
REAL ESTATE
INVESTMENT TRUSTS
CGM (NAREIT)
REALTY FUND EQUITY REIT INDEX
-------- -------------------
1 Year .................. +44.1% +35.3%
3 Months ................ +22.0 +18.9

The Fund's average annual total return since inception (May 13, 1994) through
December 31, 1996 is 23.1%. The adviser has agreed to limit the Fund's total
operating expenses to 1.00% of its average net assets through December 31, 1997.
Otherwise, the Fund's total return since inception and for the one year and
three-month periods ended December 31, 1996 would have been lower.

<PAGE>

- ------------------------------------------------------------------------------
BOARD OF TRUSTEES

PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY

OFFICERS

ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
Boston, Massachusetts 02110

TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS

STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102

SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY

BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266-8511

<PAGE>
CGM REALTY FUND
- ------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996

REAL ESTATE INVESTMENT TRUSTS -- 99.6% OF TOTAL NET ASSETS
SHARES VALUE(a)
------- -----------
APARTMENTS -- 23.8%
Bay Apartment Community, Inc. ................... 212,000 $ 7,632,000
Essex Property Trust ............................ 272,200 7,995,875
Home Properties New York, Inc. .................. 317,000 7,132,500
Pacific Gulf Properties, Inc. ................... 401,800 7,835,100
Walden Residential Properties, Inc. ............. 315,000 7,835,625
-----------
38,431,100
-----------
HOTELS -- 49.4%
American General Hospitality .................... 294,000 6,982,500
Boykin Lodging Company .......................... 344,000 8,256,000
Felcor Suite Hotels, Inc. ....................... 571,500 20,216,813
Innkeepers USA Trust ............................ 504,000 6,993,000
Jameson Inns, Inc. .............................. 270,000 3,577,500
Patriot American Hospitality .................... 173,600 7,486,500
RFS Hotel Investments, Inc. ..................... 417,000 8,235,750
Starwood Lodging Trust .......................... 146,000 8,048,250
Sunstone Hotel Investments, Inc. ................ 615,000 8,071,875
Winston Hotels .................................. 153,000 2,084,625
-----------
79,952,813
-----------
OFFICE & INDUSTRIAL -- 22.0%
Arden Realty, Inc. .............................. 295,000 8,186,250
Beacon Properties Corporation ................... 159,000 5,823,375
Cali Realty Corporation ......................... 242,400 7,484,100
Crescent Real Estate Equities ................... 116,000 6,119,000
Reckson Associates Realty Corporation ........... 187,900 7,938,775
-----------
35,551,500
-----------
RETAIL -- 4.4%
Chelsea GCA Realty, Inc. ........................ 204,500 7,080,812
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Identified Cost
$126,084,507) ............................................... 161,016,225
-----------

See accompanying notes to financial statements
<PAGE>

CGM REALTY FUND
- ------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
FACE
SHORT-TERM INVESTMENT -- 0.3% AMOUNT VALUE(a)
------- -----------
American Express Credit Corp., 6.55%, 1/02/97
(Cost $565,000) ..................................... $565,000 $ 565,000
------------
TOTAL INVESTMENTS -- 99.9% (Identified Cost $126,649,507)(b) ... 161,581,225
Cash, receivables and other assets ...................... 6,196,692
Liabilities ............................................. (6,050,883)
------------
TOTAL NET ASSETS -- 100% ....................................... $161,727,034
============
(a) See Note 1A.
(b) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation on investments based on cost of $126,705,323 for Federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $ 34,875,902
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... 0
------------
Net unrealized appreciation ................................... $ 34,875,902
============
See accompanying notes to financial statements
<PAGE>

CGM REALTY FUND
- ------------------------------------------------------------------------------
STATEMENT OF
ASSETS AND LIABILITIES

December 31, 1996

ASSETS
Investments at value (Identified
cost -- $126,649,507) ....................................... $161,581,225
Cash ......................................................... 3,979
Receivable for:
Securities sold ..................................$ 348,750
Shares of the Fund sold .......................... 4,428,384
Dividends and interest ........................... 1,382,468 6,159,602
-----------
Unamortized organizational expenses .......................... 33,111
------------
167,777,917
------------
LIABILITIES
Payable for:
Securities purchased ............................. $4,769,935
Shares of the Fund
redeemed ........................................ 48,089
Distributions declared ........................... 1,083,935 5,901,959
-----------

Accrued expenses:
Management fees .................................. 86,172
Trustees' fees ................................... 5,795
Accounting and
Administration .................................. 1,500
Other expenses ................................... 55,457 148,924
------------ -----------
6,050,883
------------
NET ASSETS .................................................... $161,727,034
============
Net Assets consist of:
Capital paid-in ............................................. $126,851,132
Accumulated net realized loss ............................... (55,816)
Unrealized appreciation on
investments -- net ......................................... 34,931,718
------------
NET ASSETS .................................................... $161,727,034
============

Shares of beneficial interest
outstanding, no par value .................................. 11,155,747
============
Net asset value per share* ................................... $14.50
============

*Shares of the Fund are sold and redeemed at net asset value
($161,727,034 / 11,155,747).

STATEMENT OF
OPERATIONS

Year Ended December 31, 1996

INVESTMENT INCOME
Income
Dividends .................................................... $ 4,984,202
Interest ..................................................... 59,475
-----------
5,043,677
-----------
Expenses
Management fees .............................................. 717,641
Trustees' fees ............................................... 24,443
Accounting and Administration ................................ 18,000
Custodian .................................................... 64,300
Transfer agent ............................................... 114,500
Audit and tax services ....................................... 19,600
Legal ........................................................ 17,250
Printing ..................................................... 33,300
Registration ................................................. 28,930
Amortization of organizational
expense ..................................................... 14,076
Miscellaneous ................................................ 1,365
-----------
1,053,405
Less expenses assumed by the invest-
ment adviser ................................................ (209,122)
-----------
Net investment income ......................................... 4,199,394
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on investments -- net .......................... 5,829,586
Unrealized appreciation -- net ............................... 28,466,645
-----------
Net gain on investments ...................................... 34,296,231
-----------

NET INCREASE IN ASSETS FROM
OPERATIONS .................................................... $38,495,625
===========

See accompanying notes to financial statements

<PAGE>

CGM REALTY FUND
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
FROM OPERATIONS
Net investment income ......................... $ 4,199,394 $ 2,159,982
Net realized gain (loss) from investments ..... 5,829,586 (1,370,138)
Unrealized appreciation ....................... 28,466,645 6,607,117
------------ -----------
Increase in net assets from operations ...... 38,495,625 7,396,961
------------ -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ......................... (4,209,203) (2,169,764)
Net realized gain on investments .............. (4,289,171) --
Tax return of capital ......................... -- (561,236)
In excess of net investment income ............ (978,678) --
------------ -----------
(9,477,052) (2,731,000)
------------ -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares .................. 109,581,079 18,117,842
Net asset value of shares issued in connection
with reinvestment of:
Dividends from net investment income ........ 3,469,327 1,918,906
Distributions from net realized gain ........ 3,608,689 --
Distributions from tax return of capital .... -- 496,331
Distributions in excess of net investment
income ..................................... 802,054 --
------------ -----------
117,461,149 20,533,079
Cost of shares redeemed ....................... (32,447,080) (11,781,424)
------------ -----------
Net increase in assets from capital share
transactions .............................. 85,014,069 8,751,655
------------ -----------
Total increase in net assets .................. 114,032,642 13,417,616

NET ASSETS
Beginning of period ........................... 47,694,392 34,276,776
------------ -----------

End of period ................................. $161,727,034 $47,694,392
============ ===========
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares .................... 8,792,108 1,790,175
Issued in connection with reinvestment of:
Dividends from net investment income ........ 272,920 186,107
Distributions from net realized gain ........ 248,876 --
Distributions from tax return of capital .... -- 48,137
Distributions in excess of net investment
income .......................................... 65,285 --
------------ -----------
9,379,189 2,024,419
Redeemed .................................... (2,602,008) (1,175,874)
------------ -----------
Net change .................................. 6,777,181 848,545
============ ===========

See accompanying notes to financial statements

<PAGE>

CGM REALTY FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FOR THE MAY 13, 1994(c)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------------------------
<S> <C> <C> <C>
For a share of the Fund outstanding throughout each period:
Net asset value at the beginning of period ................................ $10.89 $ 9.71 $10.00
------ ------ ------
Net investment income (a) ................................................. 0.52 0.54 0.31
Dividends from net investment income ...................................... (0.52) (0.54) (0.23)
Distributions from net realized gain ...................................... (0.41) -- --
Distribution from tax return of capital .................................. -- (0.14) (0.08)
Distributions in excess of net investment income ........................ (0.12) -- --
Net realized and unrealized gain (loss) on investments .................... 4.14 1.32 (0.29)
------ ------ ------
Net increase (decrease) in net asset value ................................ 3.61 1.18 (0.29)
------ ------ ------
Net asset value at end of period .......................................... $14.50 $10.89 $ 9.71
====== ====== ======
Total Return (%) (b) ...................................................... 44.1 19.8 0.2(d)
Ratios:
Operating expenses to average net assets (%) .............................. 1.00 1.00 1.00(e)
Operating expenses to average net assets before expense limitation (%) .... 1.25 1.68 2.00(e)
Net income to average net assets (%) ...................................... 4.97 5.51 7.40(e)
Portfolio turnover (%) .................................................... 57 85 47(e)
Average commission rate (f) ............................................... $0.0660 -- --

Net assets at end of period (in thousands) ................................ $161,727 $47,694 $34,277

(a) Net of reimbursement which amounted to ................................ $ 0.02 $ 0.07 $ 0.04
(b) The total return would have been lower had certain expenses not been reduced during the period.
(c) Commencement of operations.
(d) Not computed on an annualized basis.
(e) Computed on an annualized basis.
(f) SEC regulations require portfolios to disclose the average commission rate paid on trades for which commissions were
charged for fiscal years beginning on or after September 1, 1995.
</TABLE>

See accompanying notes to financial statements

<PAGE>
CGM REALTY FUND
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996

1.The Fund is a series of CGM Trust which is organized as a Massachusetts
business trust under the laws of Massachusetts pursuant to an Agreement and
Declaration of Trust. The Trust is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company. The Trust
has three other funds whose financial statements are not presented herein. The
Fund commenced operations on May 13, 1994. The Fund's investment objective is
to earn above-average income and long-term growth of capital. The Fund intends
to pursue its objective by investing primarily in equity securities of
companies in the real estate industry.

B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Net gain or loss on securities sold
is determined on the identified cost basis.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Dividend income received by the Fund from its
investment in REITs may, for tax purposes, consist of ordinary income,
capital gains and return of capital. The portion derived from capital gains
and return of capital will result in a reduction of the Fund's dividend
income and an increase in realized and unrealized gain on investments. These
dividends, when distributed by the Fund, are passed through to the Fund's
shareholders with these same tax characteristics. Permanent book and tax
differences relating to shareholder distributions may result in
reclassifications to paid-in capital. Undistributed net investment income,
accumulated net investment loss, or distributions in excess of net
investment income may include temporary book and tax differences, which will
reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end is distributed in the following year.

<PAGE>
CGM REALTY FUND
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

E. ORGANIZATION EXPENSE -- Costs incurred in 1994 in connection with the Fund's
organization and registration amounting to $70,186 have been paid by the
Fund. These costs are being amortized over 60 months beginning May 13, 1994.

2. PURCHASES AND SALE OF SECURITIES -- For the year ended December 31, 1996,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $129,662,277 and $48,719,998,
respectively. There were no purchases or sales of United States government
obligations.

3. A. MANAGEMENT FEES -- During the year ended December 31, 1996, the Fund
incurred management fees of $717,641, paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. The management agreement provides for a fee at
the annual rate of 0.85% on the first $500 million of the Fund's
average daily net assets and 0.75% on amounts in excess of $500
million. CGM waived a portion of its fee. See Note 4.

B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting, internal auditing and
financial reporting functions and clerical functions relating to the
Fund; (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder
reports and notices, proxy solicitation material furnished to
shareholders of the Fund or regulatory authorities and reports and
questionnaires for SEC compliance; and (iii) registration, filing and
other fees in connection with requirements of regulatory authorities.
For the year ended December 31, 1996 these expenses amounted to $18,000
and are shown separately in the financial statements as Accounting and
Administration.

C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors, officers
or employees of CGM, or any affiliate of CGM, (other than registered
investment companies). Each other trustee is compensated by the Fund
with an annual base fee of $3,000 plus travel expenses for each meeting
attended and an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets of
the CGM Funds, which for 1996 was $530. In addition, the chairman of the
Independent Trustees Committee receives an annual retainer of $1,000.

4. EXPENSE LIMITATION -- Until December 31, 1997 and, thereafter, until further
notice to the Fund, CGM has voluntarily agreed to reduce its management fee and,
if necessary, to assume expenses of the Fund in order to limit the Fund's
expenses to an annual rate of 1.00% of average daily net assets. As a result of
the Fund's expenses exceeding the voluntary expense limitation, CGM waived
$209,122 of its management fee. The Fund incurred operating expenses of
$844,283, representing 1.00% of the average daily net assets.

<PAGE>

CGM REALTY FUND
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Trustees and Shareholders of CGM Realty Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of CGM Realty Fund at December 31,
1996, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Boston, Massachusetts
February 7, 1997
<PAGE>

CGM
REALTY FUND

3rd Annual Report
December 31, 1996

A No-Load Fund

[Fencer logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership

INVESTMENT ADVISER

CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110

- ------------------------------------------------------------------------------
TELEPHONE NUMBERS

For information about:
[] Account Procedures and Status

[] Redemptions

[] Exchanges

Call 800-343-5678

[] New Account Procedures

[] Prospectuses

[] Performance

Call 800-345-4048

- ------------------------------------------------------------------------------
MAILING ADDRESSES

FOR EXISTING ACCOUNTS

Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511

FOR NEW ACCOUNT APPLICATIONS ONLY

The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------

RAR96 Printed in U.S.A.