CGM TRUST, 497, 1997-05-02

CGM TRUST
497, 1997-05-02

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<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM MUTUAL FUND

CGM Mutual Fund (the "Fund") is a diversified and flexibly managed mutual
fund and a series of CGM Trust (the "Trust"), a registered, open-end, no-load
management investment company. 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. The Fund's investment
manager is Capital Growth Management Limited Partnership ("CGM" or the
"Investment Manager").

PROSPECTUS
May 1, 1997
This prospectus sets forth information you should know before investing in
the Fund. It should be retained for future reference. A Statement of
Additional Information about the Fund dated May 1, 1997, (the "Statement") has
been filed with the Securities and Exchange Commission (the "SEC") and is
available free of charge. Write to the Trust, c/o CGM Investor Services, 222
Berkeley Street, Boston, MA 02116 or call the telephone number listed below to
obtain a Statement. The SEC maintains a web site (http://www.sec.gov) that
contains the Statement, material incorporated by reference and other information
regarding the Fund. The Statement contains more detailed information about the
Fund and, as amended or supplemented from time to time, is incorporated into
this prospectus by reference.

- -------------------------------------------------------------------------------
For additional information about:
[] Account procedures and status [] New account procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance

Call 800-343-5678 Call 800-345-4048
- -------------------------------------------------------------------------------

TABLE OF CONTENTS

Page

Schedule of Fees ................................................ 2
Financial Highlights ............................................ 3
Investment Objective and Policies ............................... 4
The Fund's Investment Manager ................................... 5
The Portfolio Manager ........................................... 5
How to Purchase Shares .......................................... 5
Shareholder Services ............................................ 6
How to Redeem Shares ............................................ 7
Telephone Transactions .......................................... 9
Dividends, Capital Gains and Taxes .............................. 10
Pricing of Shares ............................................... 11
Performance Information ......................................... 12
Additional Facts About the Fund ................................. 12

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
CGM MUTUAL FUND

SCHEDULE OF FEES

SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............................... None

Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) ............................... None

Redemption Fees* .................................................. None

Exchange Fees ..................................................... None

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

Management Fees ................................................... 0.84%

12b-1 Fees ........................................................ None

Other Expenses .................................................... 0.18%
----
Total Fund Operating Expenses ..................................... 1.02%

- ----------
*A wire fee (currently $5.00) will be deducted from proceeds if a shareholder
elects to transfer redemption proceeds by wire.

The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly if you
invest in the Fund. This fee schedule has been adjusted to give effect to the
revised management fee that became effective on December 13, 1996. For
additional information about the Fund's fees and expenses, please see "The
Fund's Investment Manager" and the Statement.

The following example illustrates the approximate expenses that you would
incur on a $1,000 investment over a ten-year period, assuming a 5% annual rate
of return and redemption at the end of each period.

CUMULATIVE
------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$10 $32 $56 $125

Please keep in mind that the example shown above is hypothetical. The
information above should not be considered a representation of past or future
return and expenses; the actual return and expenses may be more or less.
<PAGE>
CGM MUTUAL FUND
FINANCIAL HIGHLIGHTS

(For a share of the Fund outstanding throughout the indicated years)

These financial highlights have been examined by Price Waterhouse LLP,
independent accountants. The table below should be read in conjunction with the
financial statements and the notes thereto, which, together with the Report of
Independent Accountants thereon, are included in the Fund's Annual Report and
incorporated by reference into the Statement. In addition to the highlights set
forth below, further information about the performance of the Fund is contained
inthe Annual Report and the Statement, which may be obtained from the Trust free
of charge.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990* 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of year . $29.43 $25.05 $28.88 $26.02 $26.80 $21.64 $22.34 $19.94 $20.40 $22.86
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income ................ 0.75 0.73 1.09 0.92 0.93 0.97 0.87 0.97 1.08 0.87
Dividends from net investment income . (0.74) (0.77) (1.04) (0.86) (0.93) (0.97) (0.88) (1.02) (1.10) (1.06)
Net realized and unrealized gain
(loss) on investments ............... 6.13 5.31 (3.88) 4.73 0.64 7.80 (0.64) 3.31 (0.44) 2.25
Distributions from net realized gain
on investments ..................... (4.15) (0.89) -- (1.81) (1.42) (2.64) -- (0.86) -- (4.52)
Distributions in excess of net
realized gain ....................... -- -- -- (0.12) -- -- -- -- -- --
Distributions from paid-in capital ... -- -- -- -- -- -- (0.05) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
asset value ......................... 1.99 4.38 (3.83) 2.86 (0.78) 5.16 (0.70) 2.40 (0.46) (2.46)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of year ....... $31.42 $29.43 $25.05 $28.88 $26.02 $26.80 $21.64 $22.34 $19.94 $20.40

Total Return (%) ..................... 23.7 24.3 -9.7 21.8 6.1 40.9 1.1 21.7 3.2 13.7

Ratios:
Operating expenses to average net
assets (%) .......................... 0.87 0.91 0.92 0.93 0.93 0.93 0.97 0.97 1.01 0.94
Net income to average net assets (%) . 2.33 2.55 4.39 3.45 3.74 3.80 4.00 4.26 5.25 3.69
Portfolio turnover (%) ............... 192 291 173 97 121 201 159 218 218 197
Average commission rate** ............ $0.0695 -- -- -- -- -- -- -- -- --
Net assets at end of year
(in thousands) ($) ................. 1,216,523 1,154,439 1,063,375 947,115 548,630 401,887 295,868 312,080 292,735 303,053
</TABLE>
*On March 1, 1990, the Capital Growth Management Division of Loomis, Sayles &
Company, Incorporated was reorganized into CGM, which assumed management of
the Fund.
** SEC regulations require portfolios to disclose average commission rate paid
on trades for which commissions were charged for fiscal years beginning on or
after September 1, 1995.
<PAGE>
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INVESTMENT OBJECTIVE AND POLICIES

The Fund has as its investment objective reasonable long-term capital
appreciation with a prudent approach to protection of capital from undue risks.
While consideration is given to current income in the selection of the Fund's
portfolio securities, it is not a controlling factor. There can be no assurance
that the Fund will achieve its objective.

The Fund seeks to attain its objective by investing substantially all of the
Fund's assets in equity securities and in debt or fixed-income securities. The
Fund is "flexibly managed"; it sometimes will be more heavily invested in equity
securities and at other times will be more heavily invested in debt or
fixed-income securities, depending on management's view of the economic and
investment outlook. The Fund's investments are subject to the market risks
inherent in all securities.

Equity securities are common stocks and securities convertible into common
stock. Equity securities are volatile investments, subject to price declines as
well as advances, and involve greater risks than some other investment media.
The Fund may invest up to 25% of its total assets in securities issued by
companies in any single industry, including the real estate industry. Securities
issued by companies in the real estate industry, including those issued by real
estate investment trusts, may be subject to certain risks associated with the
direct ownership of real estate as well as credit and market risks generally
associated with fixed-income securities.

Debt or fixed-income securities include notes, bonds, preferred stock and
money market instruments including repurchase agreements. Such securities are
subject to credit risk (the risk that the obligor will default in the payment of
principal and/or interest) and to market risk (the risk that the market value of
the securities will change as a result of changes in market rates of interest).

The Fund may invest up to 35% of its total assets in debt or fixed-income
securities of a quality below investment grade at the time of investment (i.e.
securities rated lower than Baa or baa by Moody's Investors Service, Inc.
("Moody's") or lower than BBB by Standard and Poor's Corporation ("S&P"), or
their equivalent as determined by the investment manager), including up to 10%
of its total assets in fixed income securities rated at the time of investment
Caa or lower by Moody's or CCC or lower by S&P, or their equivalent as
determined by the investment manager.

Securities rated non-investment grade (lower than Baa or baa by Moody's or
lower than BBB by S&P) are sometimes referred to as "high yield" or "junk"
bonds. See Appendix A for further information about securities ratings.
Investors should consider the following risks associated with high yield
securities before investing in the Fund.

High yield securities may be regarded as predominantly speculative with
respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fund to achieve its investment objectives may, to the extent of
its investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.

High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on a
high yield security will fluctuate. If the issuer of high yield securities
defaults, the Fund may incur additional expenses to seek recovery.

The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular high yield security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the daily net asset value of the Fund's shares. Adverse
publicity and investor perceptions may decrease the value and liquidity of high
yield securities.

It is reasonable to expect any recession to severely disrupt the market for
high yield securities, have an adverse impact on the value of such securities,
and adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon. New laws and proposed new laws may adversely
impact the market for high yield securities.

Although the Fund's objective is long-term capital appreciation, it
frequently sells securities to respond to changes in market, industry, or
individual company conditions or outlook, although it may only have held those
securities for a short period. This policy may result in higher securities
transactions costs.

THE FUND'S INVESTMENT MANAGER

The Fund's investment manager is Capital Growth Management Limited
Partnership, One International Place, Boston, Massachusetts 02110. CGM, an
investment advisory firm founded in 1989, manages eight mutual fund portfolios
and advisory accounts for other clients. The general partner of CGM is a
corporation controlled equally by Robert L. Kemp and G. Kenneth Heebner, who are
trustees and officers of the Fund.

In addition to selecting and reviewing the Fund's investments, CGM provides
executive and other personnel for the management of the Fund. The Trust's Board
of Trustees supervises CGM's conduct of the affairs of the Fund. In 1996, the
Fund paid 0.69% of its average annual net assets in management fees to CGM.

The advisory agreement between CGM Mutual Fund and CGM provides for a
management fee at an annual percentage rate of 0.90% of the first $500 million
of CGM Mutual Fund's average daily net asset value, 0.80% of the next $500
million of such value, and 0.75% of such value in excess of $1 billion.

THE PORTFOLIO MANAGER

G. Kenneth Heebner manages the Fund. In 1989, Mr. Heebner founded CGM with
Robert L. Kemp. Prior to establishing the new company, Mr. Heebner managed
mutual fund portfolios at Loomis, Sayles & Company, Incorporated. He currently
manages CGM Capital Development Fund, CGM Realty Fund and, with Janice H.
Saul, co-manages CGM Fixed Income Fund.

HOW TO PURCHASE SHARES

The Trust sells shares of the Fund directly to investors without any sales
load. You may make an initial purchase of Fund shares by submitting a completed
application form and payment to:

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

The minimum initial investment is $2,500 for regular accounts and $1,000 for
retirement plans (see "Shareholder Services -- Retirement Plans") and accounts
set up under the Uniform Gifts to Minors Act ("UGMA") or the Uniform Transfers
to Minors Act ("UTMA"). Subsequent investments must be at least $50. See
"Shareholder Services" below for further information about minimum investments
in certain other circumstances.

All investments made by check should be in U.S. dollars and made payable to
CGM Mutual Fund. Third party checks (i.e. checks not payable to CGM Mutual Fund)
are generally not accepted and checks drawn on credit card accounts will not be
accepted.

After accepting an order, the Trust forwards the application and payment to
the CGM Shareholder Services Department ("CGM Shareholder Services") of Boston
Financial Data Services, Inc. ("BFDS"), which is the shareholder servicing agent
for State Street Bank and Trust Company ("State Street Bank"). CGM Shareholder
Services then opens an account, applies the payment to the purchase of full and
fractional shares, and mails a statement of the account confirming the
transaction.

After your account has been established, you may send subsequent investments
at any time directly to the shareholder servicing agent at the following
address:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511

The remittance for any subsequent investment must be accompanied by either the
Additional Investment Stub detached from a statement of account, or a note
containing sufficient information to identify the account, i.e., the Fund name,
your account number, your name and social security number.

Subsequent investments may also be made by federal funds wire. Instruct your
bank to wire federal funds to State Street Bank and Trust Company, ABA
#011000028. The text of the wire should read as follows: "DDA99046336, $ Amount,
STATE ST BOS ATTN Mutual Funds. Credit CGM Mutual Fund, Shareholder Name,
Shareholder Account Number." Your bank may charge you a fee for transmitting
funds by wire.

The Trust reserves the right to reject any purchase order, including orders
in connection with exchanges, for any reason the Trust, in its sole discretion,
deems appropriate. Although the Trust does not anticipate that it will do so,
the Trust reserves the right to suspend, change or withdraw the offering of
shares of the Fund.

The price you pay will be the per share net asset value next calculated
after a proper investment order is received by the Trust or by CGM Shareholder
Services.

If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact the
Trust or CGM Shareholder Services for details.

An investor will not receive any certificates for shares unless the investor
requests them in writing from CGM Shareholder Services. The Trust's system for
recording investments eliminates the problems of handling and safekeeping
certificates.

SHAREHOLDER SERVICES

The Fund offers the following shareholder services as more fully described
in the Statement. Explanations and forms are available from the Trust.

EXCHANGE PRIVILEGE

Shares may be exchanged for shares of money market funds currently
distributed by New England Funds, L.P. ("Money Market Funds"). You may also
exchange shares for shares of CGM Fixed Income Fund, CGM American Tax Free Fund
and CGM Realty Fund. Additionally, you may exchange shares for shares of CGM
Capital Development Fund, but only if you were a shareholder on September 24,
1993, and have remained a shareholder in CGM Capital Development Fund
continuously since that date. CGM Capital Development Fund shares are not
generally available to other persons except in special circumstances that have
been approved by, or under the authority of, the Board of Trustees of CGM
Capital Development Fund as described in the Statement.

All exchanges may be made without charge. You may make an exchange by
written instruction or, if a written authorization for telephone exchanges is on
file with CGM Shareholder Services, you may call 800-343-5678. See "Telephone
Transactions." Under certain circumstances, before an exchange can be made,
additional documents may be required to verify the authority or legal capacity
of the person seeking the exchange. Exchanges must be for amounts of at least
$1,000. If you wish to make an exchange into a new account, the exchange must
satisfy the applicable minimum initial investment requirement. Exchange requests
cannot be revoked once they have been received in good order.

Investors should not view the exchange privilege as a means for taking
advantage of short-term swings in the market, and the Fund limits the number of
exchanges each shareholder may make to four exchanges per account (or two round
trips) per calendar year. Monthly automatic exchanges from the Money Market
Funds to the Fund are exempt from this restriction. The Trust also reserves the
right to prohibit exchanges during the first 15 days following an investment in
the Fund. The Trust may terminate or change the terms of the exchange privilege.
In general, shareholders will receive notice of any material change to the
exchange privilege at least 60 days prior to the change. For federal income tax
purposes, an exchange constitutes a sale of shares, which may result in a
capital gain or loss.

SYSTEMATIC WITHDRAWAL PLAN

If the value of your account is at least $10,000, you may have periodic cash
withdrawals automatically paid to you or any person you designate. If checks are
returned to the Fund as "undeliverable" or remain uncashed for more than six
months, the plan will be cancelled. Undeliverable or uncashed checks shall be
cancelled and such amounts shall be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation of such checks.

AUTOMATIC INVESTMENT PLAN ("AIP")

Once your account has been established, voluntary monthly investments of at
least $50 may be made automatically by pre-authorized withdrawals from your
checking account. Please contact CGM Shareholder Services at 800-343-5678 to
determine the requirements associated with debits from savings banks and credit
unions. Debits from money market accounts are not acceptable. You may terminate
your participation in the AIP by sending written notice to CGM Shareholder
Services, c/o Boston Financial Data Services, Inc., P.O. Box 8511, Boston,
Massachusetts 02266-8511 or by calling 800-343-5678 more than 14 days prior to
the next scheduled debit date. The Fund may terminate your participation in the
AIP immediately in the event that any item is unpaid by your financial
institution. The Fund may terminate or modify the AIP at any time. Additional
information about this Plan is set forth in the Statement.

RETIREMENT PLANS

The Fund's shares may be purchased by tax-deferred retirement plans. CGM
makes available retirement plan forms and plan documents for IRAs, SEP-IRAs,
403(b)(7) custodial accounts, and money purchase pension and profit sharing
plans ("CGM Retirement Plans").

SHAREHOLDER REPORTS

Shareholders will receive the Fund's financial statements and a summary of
the Fund's investments at least semiannually. The Fund intends to consolidate
mailings of annual, semiannual and quarterly reports to households having
multiple accounts with the same address of record and to furnish a single copy
of each report to that address. Mailings of prospectuses and proxy statements
will not be consolidated and if a report is included in such mailings, each
shareholder will receive a separate copy. You may request additional reports by
notifying the Fund in writing, or by calling the Trust.

Shareholders will receive statements confirming all purchases, redemptions
and changes of address. You may call CGM Shareholder Services and request a
duplicate statement for the current year without charge. A fee will be charged
for any duplicate information requested for prior years.

HOW TO REDEEM SHARES

You can redeem all or part of your shares in the Fund in three different
ways: by sending a written request for a check or wire representing the
redemption proceeds, by making a telephone request for redemption by check
(provided that the amount to be redeemed is not more than $25,000 and the check
is being sent to you at your record address, which has not changed in the prior
three months) or by making a telephone request for redemption proceeds to be
wired to a bank that you have predesignated. The redemption price will always be
the net asset value per share next determined after the redemption request is
received by CGM Shareholder Services in good order (including any necessary
documentation). Necessary documentation may include, in certain circumstances,
documents verifying the authority or legal capacity of the person seeking to
redeem shares. Redemption requests cannot be revoked once they have been
received in good order.

If you elect to redeem shares in writing, send your written request to:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511

The written request must include the name of the Fund, your account number, the
exact name(s) in which your shares are registered, the number of shares or the
dollar amount to be redeemed and mailing or wire instructions. All owners of
shares must sign the request in the exact name(s) in which the shares are
registered (which appear(s) on your confirmation statement) and should indicate
any special capacity in which they are signing (such as trustee or custodian or
on behalf of a partnership, corporation or other entity). If you are signing in
a special capacity, you may wish to contact CGM Shareholder Services in advance
to determine whether additional documentation will be required before you send a
redemption request.

Redemptions from CGM Retirement Plans for which State Street Bank is the
custodian or trustee must contain additional information. Please contact CGM
Shareholder Services for instructions and forms. Complete information, including
tax withholding instructions, must be included in your redemption request.

If you are redeeming shares worth more than $25,000 or requesting that the
proceeds check be made payable to someone other than the registered owner(s) or
be sent to an address other than your record address (or sent to your record
address if such address has been changed within the previous three months), you
must have your signature guaranteed by an "eligible guarantor institution" as
defined in the rules under the Securities Exchange Act of 1934 (including a
bank, broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency or savings association, but not a notary
public).

If you hold certificates representing your investment, you must enclose the
certificates and a properly completed redemption form or stock power. You bear
the risk of loss of such certificates; consequently, you may wish to send your
certificates by registered mail.

If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions." Telephone redemptions
are not available for CGM Retirement Plans. When you make a redemption request
by telephone, you may choose to receive redemption proceeds either by having a
check mailed to the address of record on the account, provided the address has
not changed for three months and you are redeeming $25,000 or less, or by having
a wire sent to a bank account you have previously designated.

Telephone redemptions by check are available to all shareholders of the Fund
automatically unless this option is declined in the application or in writing.
You may select the telephone redemption wire service when you fill out your
initial application or you may select it later by completing the Account Update
Form (with a signature guarantee), available from the Trust or CGM Shareholder
Services.

A telephone redemption request must be received by CGM Shareholder Services
prior to the close of the New York Stock Exchange (the "Exchange"). If you
telephone your request to CGM Shareholder Services after the Exchange closes or
on a day when the Exchange is not open for business, the Trust cannot accept
your request and a new one will be necessary.

Wire redemptions by telephone may be made only if your bank is a member of
the Federal Reserve System or has a correspondent bank that is a member of such
System. If your account is with a savings bank, it must have only one
correspondent bank that is a member of the Federal Reserve System. A wire fee
(currently $5) will be deducted from the proceeds. If you decide to change the
bank account to which proceeds are to be wired, you must send in this change on
the Account Update Form with a signature guarantee.

Proceeds resulting from a written or regular telephone redemption request
will normally be mailed to you within seven days after receipt of your request
in good order. Telephone wire redemption proceeds will normally be wired to your
bank within seven days (and generally on the first business day) following
receipt of a proper redemption request. If you purchased your Fund shares by
check (or through your AIP) and elect to redeem shares within 15 days of such
purchase, you may experience delays in receiving redemption proceeds. The Trust
will generally postpone sending your redemption proceeds from such investment
until the Trust can verify that your check (or AIP investment) has been or will
be collected. There will be no such delay for redemptions following investments
paid for by federal funds wire or by bank cashier's check, certified check or
treasurer's check. If checks representing redemption proceeds are returned
"undeliverable" or remain uncashed for six months, such checks shall be
cancelled and such proceeds shall be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation of such checks.

The Fund may not suspend the right of redemption or postpone payment for
more than seven days except when the Exchange is closed for other than weekends
or holidays, when trading on the Exchange is restricted, during an emergency (as
determined by the SEC) which makes it impracticable for the Fund to dispose of
its securities or to determine fairly the value of its net assets, or during any
other period permitted by the SEC for the protection of investors.

Because the expense of maintaining small accounts is disproportionately
high, the Fund may close accounts with 20 shares or less, and mail the proceeds
to the shareholder. Shareholders who are affected by this policy will be
notified of the Fund's intention to close the account and will have 60 days
immediately following the notice in which to acquire the requisite number of
shares. The minimum does not apply to CGM Retirement Plans and UGMA/UTMA
accounts.

TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

[] Telephone Exchanges
[] Telephone Redemptions By Wire
[] Telephone Redemptions By Check

The terms and provisions for each of these services are explained fully in the
preceding sections. Once a telephone transaction request has been placed, it
cannot be revoked.

The Telephone Exchange privilege and/or Telephone Redemptions By Wire
privilege must be elected by you when you fill out your initial application or
you may select either option later by completing the Account Update Form (with a
signature guarantee) available from the Trust or CGM Shareholder Services. The
Telephone Redemptions By Check privilege is available to shareholders of the
Fund automatically, unless this option is declined in the application or in
writing.

The telephone redemption privileges are not available for IRAs, SEP-IRAs,
403(b)(7) custodial accounts or for money purchase pension and profit sharing
accounts under a CGM Retirement Plan (in which State Street Bank is the
custodian or trustee).

The Fund will employ reasonable procedures to confirm that instructions
received by telephone (including instructions with respect to changes in
addresses) are genuine, such as requesting personal identification information
that appears on your account application and recording the telephone
conversation. You will bear the risk of loss due to unauthorized or fraudulent
instructions regarding your account, although the Fund may be liable if
reasonable procedures are not employed.

DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund intends to declare and pay quarterly dividends consisting of
substantially all of its net investment income. Any capital gains distributions
are normally made annually in December (after applying any available capital
loss carryovers) but may be made more frequently as deemed advisable by the
Board of Trustees. The Fund's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. Certain restrictions may
apply to participants in CGM Retirement Plans.

You may elect to receive income dividends or capital gains distributions, or
both, in cash. However, if you elect to receive capital gains in cash, your
income dividends must also be received in cash. You can elect to receive
payments of cash dividends and capital gains distributions either by check or by
direct deposit to a bank account that you have predesignated. These elections
may be made at the time your account is opened and may be changed at any time by
submitting a written request to CGM Shareholder Services or by calling
800-343-5678. However, changes in bank account information for direct deposits
of cash dividends and capital gains distributions must be made through an
Account Update Form. In order for a change to be effective for any dividend or
distribution, it must be received by CGM Shareholder Services on or before the
record date for such dividend or distribution.

If you elect to receive distributions in cash and checks are returned
"undeliverable" or remain uncashed for six months, your cash election will be
changed automatically and your future dividend and capital gains distributions
will be reinvested in the Fund at the per share net asset value determined as of
the date of payment of the distribution. In addition, following such six-month
period, any undeliverable or uncashed checks shall be cancelled and such amounts
shall be reinvested in the Fund at the per share net asset value determined as
of the date of cancellation of such checks.

The Fund intends to qualify annually as a "regulated investment company"
under the Internal Revenue Code. To qualify, the Fund must meet certain income,
distribution and diversification requirements. In any year in which the Fund so
qualifies it generally will not be subject to federal income or excise tax to
the extent that its taxable income is distributed to shareholders.

The distributions received by the Fund from its investments may, for federal
income tax purposes, consist of ordinary income, long-term capital gains or a
return of capital. The characterization of these distributions to the Fund may,
in turn, affect the tax treatment of the Fund's distributions to its
shareholders. Dividends and distributions are taxable to shareholders in the
same manner whether received in cash or reinvested in additional shares of the
Fund.

Dividends paid by the Fund from net investment income, including dividends,
interest and net short-term capital gains, will be taxable to shareholders as
ordinary income. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) which are designated by the
Fund as capital gains distributions are taxable as long-term capital gains,
regardless of the length of time shareholders have owned shares in the Fund. To
the extent that the Fund makes a distribution in excess of its current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in a shareholder's shares,
and then, to the extent the distribution exceeds such basis, as a taxable gain
to be realized upon sale of such shares.

Distributions that the Fund receives from a real estate investment trust,
and dividends of the Fund attributable to such distributions, will not
constitute "dividends" for purposes of the dividends-received deduction
applicable to corporate shareholders.

A distribution will be treated as paid by the Fund and received by its
shareholders on December 31 of the current calendar year if it is declared by
the Fund in October, November or December of that year with a record date in
such a month and paid by the Fund in January of the subsequent year.

The sale or other disposition of shares of the Fund, including a redemption
of shares or an exchange of shares into another fund, is a taxable event and may
result in a capital gain or loss which will be long-term or short-term,
depending upon the shareholder's holding period for the shares.

Dividend distributions, capital gains distributions and capital gains or
losses from redemptions and exchanges may be subject to state and local taxes.
In certain states, a portion of the Fund's income derived from certain direct
U.S. Government obligations may be exempt from state and local taxes. The Fund
will indicate each year the portion of the Fund's income, if any, which is
derived from such obligations.

The Fund is required to withhold a portion of taxable dividends, capital
gains distributions, and redemptions paid to individuals and certain other
classes of shareholders if they fail to furnish the Fund with their correct
taxpayer identification number and certain certifications regarding their tax
status, or if they are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against a shareholder's normal federal income tax liability. For additional
information about withholding, please see the Statement.

BFDS, the shareholder servicing agent, will send you and the Internal
Revenue Service an annual statement detailing federal tax information, including
information about dividends and distributions paid to you during the preceding
year. If you redeem or exchange shares in any year, following the end of the
year, you will receive a statement providing the cost basis and gain or loss of
each share lot that you sold during such year. Your CGM account cost basis will
be calculated using the "single category average cost method," which is one of
the four calculation methods allowed by the IRS. Shareholders of the Fund
generally will receive these cost basis statements but only for accounts opened
after January 1, 1991. Be sure to keep these statements as permanent records. A
fee may be charged for any duplicate information that you request.

The tax discussion set forth above is included for general information only.
Shareholders and prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.

PRICING OF SHARES

The share price or "net asset value" per share of the Fund is computed daily
by dividing the total value of the investments and other assets of the Fund,
less any liabilities, by the total outstanding shares of the Fund. The net asset
value per share of the Fund is determined as of the close of the regular trading
session of the Exchange on each day the Exchange is open for trading. Portfolio
securities are generally valued at their market value. In certain cases, market
value may be determined on the basis of information provided by a pricing
service approved by the Board of Trustees. Instruments with maturities of sixty
days or less are valued at amortized cost, which approximates market 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. The
valuation of portfolio securities is more fully described in the Statement.

PERFORMANCE INFORMATION

The Fund may include yield and total return information in advertisements or
other written sales material. The Fund will show its average annual total return
for the one-, five- and ten-year periods through the end of the most recent
calendar quarter. Total return is measured by comparing the value of an
investment in the Fund at the beginning of the relevant period to the value of
the investment at the end of the period (assuming automatic reinvestment of all
dividends and capital gains distributions). The Fund may also show total return
over other periods or on an aggregate basis for the period presented.

Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a Fund share on the last day
of the period. The Fund may also present one or more distribution rates in its
sales literature. These rates will be determined by annualizing the Fund's
distributions from net investment income and net short-term capital gains over a
recent twelve-month, three-month or thirty-day period and dividing that amount
by the net asset value on the last day of such period.

The Fund may compare its performance to that of recognized financial indices
or groups of mutual funds. It may also include its ranking among other mutual
funds or its rating as published by mutual fund ranking services or major
financial publications. All performance information is based on past results and
is not an indication of likely future performance.

ADDITIONAL FACTS ABOUT THE FUND

[] The Trust was organized in 1986 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Trust currently has four series -- CGM Mutual Fund (a
successor to Loomis-Sayles Mutual Fund), CGM Fixed Income Fund, CGM American
Tax Free Fund and CGM Realty Fund.

[] When a shareholder invests in the Fund, the shareholder acquires freely
transferable shares of beneficial interest that entitle the shareholder to
receive dividends and to cast one vote at shareholder meetings for each share
owned. On matters affecting the Fund, shares of the Fund vote separately from
shares of other series of the Trust, except as otherwise required by law.

[] The investment objective of the Fund is fundamental and cannot be changed
without shareholder approval. Non-fundamental policies may be changed at any
time without such approval.
<PAGE>
APPENDIX A
RATINGS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:

Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca -- Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C -- Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.
PREFERRED STOCK RATINGS:

aaa -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.

aa -- An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.

a -- An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

baa -- An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.

ba -- An issue which is rated "ba" is considered to have speculative
elements, and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

b -- An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

caa -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

ca -- An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.

c -- This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.

DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:

AAA -- An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

A -- An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB -- An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB, B, CCC, CC and C -- Obligations rated "BB", "B", "CCC", "CC", and "C"
are regarded as having significant speculative characteristics. "BB" indicates
the least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.

BB -- An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B -- An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC -- An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC -- An obligation rated "CC" is currently highly vulnerable to nonpayment.

C -- The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

Plus (+) or Minus (-): The ratings from A to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING
DEFINITIONS:

AAA -- This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

AA -- A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".

A -- An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.

BBB -- An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.

BB, B, CCC -- Preferred stock rated "BB," "B," and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

CC -- The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C -- A preferred stock rated "C" is a nonpaying issue.

PORTFOLIO COMPOSITION

For the fiscal year ending on December 31, 1996, the amount of the Fund's
investments represented by securities below investment grade comprised less than
5% of the Fund's total investments, based on dollar-weighted averages of
month-end portfolio holdings.
<PAGE>

INVESTMENT ADVISER
Capital Growth Management
Limited Partnership
One International Place
Boston, MA 02110

TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS
State Street Bank and Trust Company
Boston, MA 02102

SHAREHOLDER SERVICING AGENT FOR
STATE STREET BANK AND TRUST COMPANY
Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

MFP96A

CGM
MUTUAL FUND

Prospectus & Application

May 1, 1997

A No-Load Fund

[FENCER LOGO]
<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM REALTY FUND

CGM Realty Fund (the "Fund") is a diversified mutual fund and a series of
CGM Trust (the "Trust"), a registered, open-end, no-load management investment
company. The Fund's investment objective is 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. The
Fund seeks to provide a yield in excess of the yield of the Standard and Poor's
500 Composite Index (the "S&P 500"). The Fund's investment manager is Capital
Growth Management Limited Partnership ("CGM" or the "Investment Manager").

PROSPECTUS
May 1, 1997

This prospectus sets forth the information you should know before investing
in the Fund. It should be retained for future reference. A Statement of
Additional Information about the Fund dated May 1, 1997 (the "Statement") has
been filed with the Securities and Exchange Commission (the "SEC") and is
available free of charge. Write to the Trust, c/o CGM Investor Services, 222
Berkeley Street, Boston, MA 02116 or call the telephone number listed below to
obtain a Statement. The SEC maintains a web site (http://www.sec.gov) that
contains the Statement, material incorporated by reference, and other
information regarding the Fund. The Statement contains more detailed information
about the Fund and, as amended or supplemented from time to time, is
incorporated into this prospectus by reference.

- -------------------------------------------------------------------------------
For additional information about:

[] Account procedures and status [] New account procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance

Call 800-343-5678 Call 800-345-4048
- -------------------------------------------------------------------------------

TABLE OF CONTENTS
Page
Schedule of Fees .................................................... 2
Financial Highlights ................................................ 3
Investment Objectives and Policies .................................. 4
Risk Factors ........................................................ 5
Investment Restrictions ............................................. 7
The Funds' Investment Manager ....................................... 7
The Portfolio Manager ............................................... 7
How to Purchase Shares .............................................. 7
Shareholder Services ................................................ 9
How to Redeem Shares ................................................ 10
Telephone Transactions .............................................. 12
Dividends, Capital Gains and Taxes .................................. 12
Pricing of Shares ................................................... 14
Performance Information ............................................. 14
Additional Facts About the Fund ..................................... 15

SCHEDULE OF FEES

Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ........................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) ........................... None
Redemption Fees* .................................................. None
Exchange Fees ..................................................... None

Annual Fund Operating Expenses, After Expense Limitation
(as a percentage of average net assets)
Management Fees, After Waiver ..................................... 0.60%
12b-1 Fees ........................................................ None
Other Expenses .................................................... 0.40%
----
Total Fund Operating Expenses, After Expense Limitation ........... 1.00%
- ----------
*A wire fee (currently $5.00) will be deducted from proceeds if a shareholder
elects to transfer redemption proceeds by wire.

The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly if you
invest in the Fund. CGM has voluntarily agreed, until December 31, 1997, and
thereafter until further notice to the Fund, to limit its management fees and,
if necessary, to bear certain expenses associated with operating the Fund, in
order to limit the Fund's total operating expenses to an annual rate of 1.00% of
the Fund's average net assets. The percentage shown for Management Fees reflects
current fees after such voluntary limitation. For the fiscal year ended December
31, 1996, without the voluntary expense limitation, the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a percentage of average net
assets would have been 0.85%, 0.40% and 1.25%, respectively. For additional
information about the Fund's fees and expenses, please see "The Fund's
Investment Manager" and the Statement.

The following example illustrates the approximate expenses that you would
incur on a $1,000 investment over the following periods, assuming a 5% annual
rate of return and redemption at the end of each period.

CUMULATIVE
------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$10 $32 $55 $122

Please keep in mind that the example shown above is hypothetical and assumes
that the current fee limitation and expense reimbursement will remain in effect.
The information above should not be considered a representation of past or
future return or expenses; the actual return and expenses may be more or less.
<PAGE>
- --------------------------------------------------------------------------------
CGM REALTY FUND
FINANCIAL HIGHLIGHTS

(For a share of the Fund outstanding throughout the indicated period)

These financial highlights have been examined by Price Waterhouse LLP,
independent accountants. The table below should be read in conjunction with the
financial statements and the notes thereto, which, together with the Report of
Independent Accountants thereon, are included in the Fund's Annual Report and
incorporated by reference into the Statement. In addition to the highlights set
forth below, further information about the performance of the Fund is contained
in the Annual Report and the Statement, which may be obtained from the Trust
free of charge.

FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED MAY 13, 1994(c)
DECEMBER 31, DECEMBER 31, THROUGH
1996 1996 DECEMBER 31, 1993
----------- ------------ -----------------
Net asset value at beginning
of period ....................... $10.89 $ 9.71 $10.00
------ ------ ------
Net investment income (after
waiver and reimbursement)(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) -- --
Distributions 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 0.4(d)

Ratios:
Operating expenses to average net
assets (%) ...................... 1.00 1.00 1.00(d)
Operating expenses to average net
assets before expense
limitation (%)................... 1.25 1.68 2.00(d)
Net income to average net
assets (%) ...................... 4.97 5.51 7.40(d)
Portfolio turnover (%) ............ 57 85 47(d)
Average commission rate (e) ....... $0.0660 -- --

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

(a) Fees waived and expenses
reimbursed amounted to ........ $ 0.02 $ 0.07 $ 0.04
(b) The total return would have been lower had management fees and certain
expenses not been waived or reimbursed during the period.
(c) Commencement of operations.
(d) Computed on an annualized basis.
(e) SEC regulations require portfolios to disclose the average commission rate
paid on trades for which commissions were charged for fiscal years beginning
on or aftrer September 1, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is 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. The
Fund seeks to provide a yield in excess of the yield of the S&P 500. There are
no assurances the Fund will achieve its objective and the Fund may change its
objective without shareholder approval.

At least 65% of the Fund's total assets will be invested, under normal
conditions, in equity securities of companies in the real estate industry. A
company is considered in the real estate industry if construction, ownership,
management, financing and sales of residential, commercial or industrial real
estate account for not less than 50% of its gross revenues or net profits.
Companies in the real estate industry include the following: real estate
investment trusts that own properties or make or invest in construction,
development or long-term mortgage loans; brokers or real estate developers; and
companies with significant real estate holdings including but not limited to
hotel chains, supermarkets and mining, lumber and paper companies. Equity
securities in which the Fund may invest include common and preferred stocks,
convertible bonds and warrants.

Up to 35% of the Fund's total assets may be invested in securities of
companies outside the real estate industry. The Fund may invest this portion of
its assets in equity securities or fixed-income securities, including investment
grade securities and, with respect to up to 25% of the Fund's total assets,
lower quality securities which have speculative characteristics and are subject
to special risks. See "Risk Factors -- Non-Investment Grade Risk" and Appendix
for a description of securities ratings. Fixed-income securities include notes,
bonds, preferred stocks, certain asset-backed securities and money market
instruments, including repurchase agreements. Fixed-income securities are
subject to credit risk (the risk that the obligor will default in the payment of
principal and/or interest) and interest rate risk (the risk that the market
value of the securities will change as a result of changes in market rates of
interest). The Fund's investments are also subject to the market risks inherent
in all securities.

REAL ESTATE INVESTMENT TRUSTS

A real estate investment trust ("REIT") is a corporation, or a business
trust that would otherwise be taxed as a corporation, which meets the
definitional requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). The Code permits a qualifying REIT to deduct dividends paid, thereby
effectively eliminating corporate level federal income tax and making the REIT a
pass-through vehicle for federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually 95% or more of its otherwise taxable
income.

REITs are sometimes informally characterized as equity REITs, mortgage REITs
and hybrid REITs. An equity REIT invests primarily in the fee ownership or
leasehold ownership of land and buildings and derives its income primarily from
rental income. An equity REIT may also realize capital gains (or losses) by
selling real estate properties in its portfolio that have appreciated (or
depreciated) in value. A mortgage REIT invests primarily in mortgages on real
estate, which may secure construction, development or long-term loans. A
mortgage REIT generally derives its income primarily from interest payments on
the credit it has extended. A hybrid REIT combines the characteristics of equity
REITs and mortgage REITs, generally by holding both ownership interests and
mortgage interests in real estate. It is anticipated, although not required,
that under normal circumstances a majority of the Fund's investments in REITs
will consist of equity REITs.

Equity REITs may be further characterized as operating companies or
financing companies. To the extent that an equity REIT provides operational and
management expertise to the properties held in its portfolio, the REIT generally
exercises some degree of control over the number and identity of tenants, the
terms of their tenancies, the acquisition, construction, repair and maintenance
of properties and other operational issues. A mortgage REIT or an equity REIT
that provides financing rather than operational and management expertise to the
properties in its portfolio will generally not have control over the operations
that are conducted on the real estate in which the REIT has an interest. It is
anticipated, although not required, that under normal circumstances a majority
of the Fund's equity REIT investments will consist of securities issued by
operating companies.

TEMPORARY DEFENSIVE POLICY

For temporary defensive purposes, the Fund may invest, without limitation,
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"); certificates of deposit,
demand and time deposits and bankers' acceptances of banks whose deposits are
insured by the Federal Deposit Insurance Corporation and have assets of at least
$1 billion, including U.S. branches of foreign banks and foreign branches of
U.S. banks; prime commercial paper, including master demand notes; and
repurchase agreements secured by U.S. Government Securities.

REPURCHASE AGREEMENTS

Up to 25% of the Fund's total assets may be invested in repurchase
agreements entered into with banks and primary dealers in U.S. Government
Securities pursuant to which the Fund buys a security at one price and
simultaneously agrees to sell it back at a specified date and higher price.
Should the counterparty in the repurchase agreement declare bankruptcy or
otherwise default on its obligation, the Fund could experience difficulties and
delays in recovering cash and a possible loss if the value of the security
decreases in the interim or as a result of such difficulties and delays.

ILLIQUID SECURITIES

The Fund may invest up to 10% of its net assets in illiquid securities.
Securities that may be resold without registration pursuant to Rule 144A may be
treated as liquid for these purposes, subject to the supervision and oversight
of the Board of Trustees, in accordance with guidelines established by the Board
of Trustees to determine whether there is a readily available market for such
securities. These securities may include securities issued by certain REITs that
are not publicly traded.

PORTFOLIO TURNOVER

The Fund's objective is above-average income and long-term growth of capital
and the Fund does not purchase securities with the intention of engaging in
short-term trading. The Fund, however, will sell any particular security and
reinvest proceeds when it is deemed prudent by the Investment Manager,
regardless of the length of the holding period. This policy may result in higher
securities transaction costs. To the extent that this policy results in gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate the shareholders' tax liabilities. See "Dividends, Capital Gains and
Taxes."

RISK FACTORS

REAL ESTATE AND REIT RISK

CGM Realty Fund is not intended to constitute a complete investment program.
The Fund invests primarily in companies in the real estate industry and,
therefore, may be subject to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.

REITs in which CGM Realty Fund invests may be affected by changes in
underlying real estate values, which may have an exaggerated effect to the
extent that REITs in which the Fund invests may concentrate investments in
particular geographic regions or property types. Additionally, rising interest
rates may cause investors in REITs to demand a higher annual yield from future
distributions, which may in turn decrease market prices for equity securities
issued by REITs. Rising interest rates also generally increase the costs of
obtaining financing, which could cause the value of the Fund's investments to
decline. During periods of declining interest rates, certain mortgage REITs may
hold mortgages that the mortgagors elect to prepay, which prepayment may
diminish the yield on securities issued by such mortgage REITs. In addition,
mortgage REITs may be affected by the ability of borrowers to repay when due the
debt extended by the REIT and equity REITs may be affected by the ability of
tenants to pay rent.

Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through CGM Realty Fund, a shareholder will bear not only his
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.

NON-INVESTMENT GRADE RISK

The Fund may invest up to 25% of its total assets in securities rated
non-investment grade (lower than Baa by Moody's Investor Services Inc.
("Moody's") or lower than BBB by Standard and Poors Corporation ("S&P")). The
Fund may not invest in securities rated lower than Caa or caa by Moody's or CCC
by S&P. Non-investment grade securities are sometimes referred to as "high
yield" or "junk" bonds. Such securities may include both debt securities
(including asset-backed securities) and preferred stock. See Appendix A for
further information about securities ratings. Investors should consider the
following risks associated with high yield, high risk securities before
investing in the Fund.

High yield securities may be regarded as predominantly speculative with
respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of a Fund to achieve its investment objective may, to the extent of its
investment in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.

High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on high
yield securities will fluctuate. If the issuer of high yield securities
defaults, the Fund may incur additional expenses to seek recovery.

INVESTMENT RESTRICTIONS

The Fund has adopted the following fundamental restrictions, which may not
be changed without the approval of shareholders. Certain other fundamental and
non-fundamental restrictions are set forth in the Statement. The Fund may not:

[] With respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in the securities of any one issuer, except
the U.S. Government, its agencies and instrumentalities; or

[] Borrow money, except that it may borrow from banks in an amount not to
exceed one-third of the value of its total assets and may borrow for
temporary purposes from entities other than banks in an amount not to exceed
5% of the value of its total assets.

THE FUND'S INVESTMENT MANAGER

Until December 31, 1997, and thereafter until further notice to the Fund,
CGM has voluntarily agreed to limit its management fees and, if necessary, to
bear certain expenses associated with operating the Fund, in order to limit the
Fund's total operating expenses to an annual rate of 1.00% of the Fund's average
net assets. Without these waivers and reimbursements, the investment management
fee would be 0.85% on the first $500,000,000 and 0.75% on amounts in excess of
$500,000,000. In 1996, the Fund paid 0.60% of its average annual net assets in
management fees to CGM.

THE PORTFOLIO MANAGER

G. Kenneth Heebner is the manager of CGM Realty Fund. In 1989, Mr. Heebner
founded CGM with Robert L. Kemp. Prior to establishing the new company, Mr.
Heebner managed mutual fund portfolios at Loomis, Sayles & Company,
Incorporated. He currently manages CGM Capital Development Fund and CGM Mutual
Fund, and with Janice H. Saul, co-manages CGM Fixed Income Fund.

HOW TO PURCHASE SHARES

The Trust sells shares of the Fund directly to investors without any sales
load. You may make an initial purchase of Fund shares by submitting a completed
application form and payment to:

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

All investments made by check should be in U.S. dollars and made payable to
CGM Realty Fund. Third party checks (i.e. checks not payable to CGM Realty Fund)
are generally not accepted and checks drawn on credit card accounts will not be
accepted.

After your account has been established, you may send subsequent investments
at any time directly to the shareholder servicing agent at the following
address:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511

The remittance for any subsequent investment must be accompanied by either
the Additional Investment Stub detached from a statement of account, or a note
containing sufficient information to identify the account, i.e., the Fund name,
your account number, your name and social security number.

Subsequent investments may also be made by federal funds wire. Instruct your
bank to wire federal funds to State Street Bank and Trust Company, ABA
#011000028. The text of the wire should read as follows: "DDA 99046336, $
Amount, STATE ST BOS ATTN Mutual Funds. Credit CGM Realty Fund, Shareholder
Name, Shareholder Account Number." Your bank may charge you a fee for
transmitting funds by wire.

The price you pay will be the per share net asset value next calculated
after a proper investment order is received by the Trust (in the case of an
initial investment) or by CGM Shareholder Services (in the case of subsequent
investments).

If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact the
Trust or CGM Shareholder Services for details.

The Fund may accept telephone orders from certain broker-dealers or service
organizations which have been previously approved by the Fund. It is the
responsibility of such broker-dealers or service organizations to promptly
forward purchase orders and payments for shares to the Fund. Shares of the Fund
may be purchased through certain broker-dealers or service organizations who
may charge the investor a transaction fee or other fee for their services at the
time of purchase and/or redemption. Such fees would not otherwise be charged if
the shares were purchased or redeemed directly from the Fund.

SHAREHOLDER SERVICES

The Fund offers the following shareholder services as more fully described
in the Statement. Explanations and forms are available from the Trust.

EXCHANGE PRIVILEGE

Shares of the Fund may be exchanged for shares of money market funds
currently distributed by New England Funds, L.P. ("Money Market Funds"). You may
also exchange shares for shares of CGM Mutual Fund, CGM Fixed Income Fund or CGM
American Tax Free Fund. Additionally, you may exchange shares for shares of CGM
Capital Development Fund, but only if you were a shareholder on September 24,
1993, and have remained a shareholder in the CGM Capital Development Fund
continuously since that date. CGM Capital Development Fund shares are not
generally available to other persons except in special circumstances that have
been approved by, or under the authority of, the Board of Trustees of that Fund.

All exchanges may be made without charge. You may make an exchange by
written instruction or, if a written authorization for telephone exchanges is on
file with CGM Shareholder Services, you may call 800-343-5678. See "Telephone
Transactions." Exchanges must be for amounts of at least $1,000. Under certain
circumstances, before an exchange can be made, additional documents may be
required to verify the authority or legal capacity of the person seeking the
exchange. If you wish to make an exchange into a new account, the exchange must
satisfy the applicable minimum initial investment requirements. Exchange
requests cannot be revoked once they have been received in good order.

SYSTEMATIC WITHDRAWAL PLAN

AUTOMATIC INVESTMENT PLAN ("AIP")

RETIREMENT PLANS

SHAREHOLDER REPORTS

Shareholders will receive the Fund's financial statements and a summary of
the Fund's investments at least semiannually. The Fund intends to consolidate
mailings of annual, semiannual, and quarterly reports to households having
multiple accounts with the same address of record and to furnish a single copy
of each report to that address. Mailing of prospectuses and proxy statements
will not be consolidated and if a report is included in such mailings, each
shareholder will receive a separate copy. You may request additional reports by
notifying the Fund in writing, or by calling the Trust.

Shareholders will receive statements confirming all purchases, redemptions,
and changes of address. You may call CGM Shareholder Services and request a
duplicate statement for the current year without charge. A fee will be charged
for any duplicate information requested for prior years.

HOW TO REDEEM SHARES

If you elect to redeem shares in writing, send your written request to:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511

If you hold certificates representing your investment, you must enclose the
certificates and a properly completed redemption form or stock power. You bear
the risk of loss of such certificates; consequently you may wish to send your
certificates by registered mail.

Proceeds resulting from a written or regular telephone redemption request
will normally be mailed to you within seven days after receipt of your request
in good order. Telephone wire redemption proceeds will normally be wired to your
bank within seven days following receipt of a proper redemption request. If you
purchased your Fund shares by check (or through your AIP) and elect to redeem
shares within 15 days of such purchase, you may experience delays in receiving
redemption proceeds. The Trust will generally postpone sending your redemption
proceeds from such investment until the Trust can verify that your check (or AIP
investment) has been or will be collected. There will be no such delay for
redemptions following investments paid for by federal funds wire or by bank
cashier's check, certified check or treasurer's check. If checks representing
redemption proceeds are returned "undeliverable" or remain uncashed for six
months, such checks shall be cancelled and such proceeds shall be reinvested in
the Fund at the per share net asset value determined as of the date of
cancellation of such checks.

The Fund may not suspend the right of redemption, or postpone payment for
more than seven days, except when the Exchange is closed for other than weekends
or holidays, when trading on the Exchange is restricted, during an emergency (as
determined by the SEC) that makes it impracticable for the Fund to dispose of
its securities or to determine fairly the value of its net assets, or during any
other period permitted by the SEC for the protection of investors.

TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

[] Telephone Exchanges
[] Telephone Redemptions By Wire
[] Telephone Redemptions By Check

The terms and provisions for each of these services are explained fully in the
preceding sections. Once a telephone transaction request has been placed, it
cannot be cancelled.

The Telephone Exchange privilege and/or Telephone Redemptions By Wire
privilege must be elected by you when you fill out your initial application or
you may select either option later by completing the Account Update Form (with a
signature guarantee) available from the Trust or CGM Shareholder Services. The
Telephone Redemptions By Check privilege is available to shareholders of the
Fund automatically unless this option is declined in the application or in
writing.

DIVIDENDS, CAPITAL GAINS AND TAXES

The Fund intends to declare and pay quarterly dividends consisting of
substantially all net investment income. Any capital gains distributions will
normally be made in December (after applying any available capital loss
carryovers) but may be made more frequently as deemed advisable by the Board of
Trustees. The Fund's dividend and capital gains distributions may be reinvested
in additional shares or received in cash. Certain restrictions may apply to
participants in CGM Retirement Plans.

If you elect to receive distributions in cash and checks are returned
"undeliverable" or remain uncashed for six months, your cash election will be
changed automatically and your future dividend and capital gains distributions
will be reinvested in the Fund at the per share net asset value determined as of
the date of payment of the distribution. In addition, following such six month
period, any undeliverable or uncashed checks shall be cancelled and such amounts
reinvested in the Fund at the per share net asset value determined as of the
date of cancellation of such checks.

The distributions received by the Fund from its investments may, for federal
income tax purposes, consist of ordinary income, long-term capital gains, or a
return of capital. The characterization of these distributions to the Fund may,
in turn, affect the tax treatment of the Fund's distributions to its
shareholders. Dividends and distributions are taxable to shareholders in the
same manner whether received in cash or reinvested in additional shares of the
Fund.

A distribution will be treated as paid by the Fund and received by its
shareholders on December 31 of the current calendar year if it is declared by
the Fund in October, November, or December of that year with a record date in
such a month and paid by the Fund in January of the subsequent year.

Dividend distributions, capital gains distributions, and capital gains or
losses from redemptions and exchanges may be subject to state and local taxes.
In certain states, a portion of the Fund's income derived from certain direct
U.S. Government obligations may be exempt from state and local taxes. The Fund
will indicate each year the portion of the Fund's income, if any, that is
derived from such obligations.

BFDS, the shareholder servicing agent, will send you and the Internal
Revenue Service an annual statement detailing federal tax information, including
information about dividends and distributions paid to you during the preceding
year. If you redeem or exchange shares in any year, following the end of the
year, you will receive a statement providing the cost basis and gain or loss of
each share lot that you sold during such year. Your CGM account cost basis will
be calculated using the "single category average cost method," which is one of
the four calculation methods allowed by the IRS. Be sure to keep these
statements as permanent records. A fee may be charged for any duplicate
information that you request.

PRICING OF SHARES

PERFORMANCE INFORMATION

The Fund may include yield and total return information in advertisements or
other written sales material. The Fund will show its average annual total return
for the most recent one-year period and the life of the Fund through the end of
the most recent calendar quarter. Total return is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period to
the value of the investment at the end of the period (assuming automatic
reinvestment of all dividends and capital gains distributions). The Fund may
also show total return over other periods on an aggregate basis for the period
presented.

Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a Fund share on the last day
of the period. The Fund may also present one or more distribution rates in its
sales literature. These rates will be determined by annualizing the Fund's
distributions from net investment income and net short-term capital gains over a
recent twelve-month, three-month, or thirty-day period and dividing that amount
by the net asset value on the last day of such period.

ADDITIONAL FACTS ABOUT THE FUND

[] The Trust was organized in 1986 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Trust currently has four series: CGM Mutual Fund (a
successor to Loomis-Sayles Mutual Fund), CGM Fixed Income Fund, CGM American
Tax Free Fund, and CGM Realty Fund.

[] When a shareholder invests in the Fund, the shareholder acquires freely
transferable shares of beneficial interest that entitle the shareholder to
receive dividends and to cast one vote at shareholder meetings for each
share owned. On matters affecting the Fund, shares of the Fund vote
separately from shares of other series of the Trust, except as otherwise
required by law.

[] The investment objective, investment practices and other non-fundamental
policies of the Fund can be changed without shareholder approval. If there
is a change in the Fund's investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their current
financial position and needs.
<PAGE>
APPENDIX

RATINGS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:

Aaa -- Bonds which are rated "Aaa" are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from "Aa" through "B." The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:

aa -- An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

caa -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:

AAA -- An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

BB, B and CCC -- Obligations rated "BB", "B", "CCC", "CC", and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.

B -- An obligation rated "B" is more vulnerable to nonpayment than
obliglations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING DEFINITIONS:

AAA -- This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

Plus (+) or Minus (-): The ratings from A to CCC may be modified by the
addition of a plus or minus sign to show relative standing within major rating
categories.

PORTFOLIO COMPOSITION
For the fiscal year ending on December 31, 1996, the Fund's investments
did not include any securities below investment grade.

INVESTMENT ADVISER
Capital Growth Management
Limited Partnership
One International Place
Boston, MA 02110

TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS
State Street Bank and Trust Company
Boston, MA 02102

SHAREHOLDER SERVICING AGENT FOR
STATE STREET BANK AND TRUST COMPANY
Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

RFP96

CGM

REALTY FUND

Prospectus & Application

May 1, 1997

A No-Load Fund

[FENCER LOGO]
<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM AMERICAN TAX FREE FUND
CGM FIXED INCOME FUND

CGM American Tax Free Fund and CGM Fixed Income Fund (each the "Fund" and
together, the "Funds") are diversified mutual funds and series of CGM Trust (the
"Trust"), a registered, open-end, no-load management investment company. Each
Fund's investment manager is Capital Growth Management Limited Partnership
("CGM" or the "Investment Manager").

The primary investment objective of CGM AMERICAN TAX FREE FUND is to
provide high current income exempt from federal income tax. The Fund's secondary
investment objective is capital appreciation. CGM American Tax Free Fund may not
be an appropriate investment for retirement plans and similar accounts.

The investment objective of CGM FIXED INCOME 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.

PROSPECTUS
May 1, 1997

This prospectus sets forth the information you should know before investing
in either Fund. It should be retained for future reference. A Statement of
Additional Information about the Funds dated May 1, 1997, (the "Statement") has
been filed with the Securities and Exchange Commission (the "SEC") and is
available free of charge. Write to the Trust, c/o CGM Investor Services, 222
Berkeley Street, Boston, MA 02116 or call the telephone number listed below to
obtain a Statement. The SEC maintains a web site (http:// www.sec.gov) that
contains the Statement, material incorporated by reference, and other
information regarding the Funds. The Statement contains more detailed
information about the Fund and, as amended or supplemented from time to time, is
incorporated into this prospectus by reference.

- -------------------------------------------------------------------------------
For additional information about:

[] Account procedures and status [] New account procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance

Call 800-343-5678 Call 800-345-4048
- -------------------------------------------------------------------------------

Schedule of Fees .................................................... 3
Financial Highlights: CGM American Tax Free Fund .................... 4
Financial Highlights: CGM Fixed Income Fund ........................ 5
Investment Objectives and Policies of CGM American Tax Free Fund .... 6
Investment Objective and Policies of CGM Fixed Income Fund .......... 8
Risk Factors ........................................................ 10
Investment Restrictions ............................................. 14
The Funds' Investment Manager ....................................... 14
The Portfolio Managers .............................................. 14
How to Purchase Shares .............................................. 15
Shareholder Services ................................................ 16
How to Redeem Shares ................................................ 17
Telephone Transactions .............................................. 19
Dividends, Capital Gains and Taxes .................................. 19
Pricing of Shares ................................................... 22
Performance Information ............................................. 22
Additional Facts About the Funds .................................... 23
<PAGE>

SCHEDULE OF FEES
CGM AMERICAN CGM FIXED
TAX FREE FUND INCOME FUND
------------- -----------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .............. None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) .............. None None
Redemption Fees* ................................... None None
Exchange Fees ...................................... None None

ANNUAL FUND OPERATING EXPENSES, AFTER WAIVER AND REIMBURSEMENTS
(as a percentage of average net assets)

Management Fees, After Waiver .................. 0% 0.14%
12b-1 Fees ..................................... None None
Other Expenses, After Reimbursements ........... 0% 0.71%
--- -----
Total Fund Operating Expenses, After Waiver and
Reimbursements ............................... 0% 0.85%
- ----------
*A wire fee (currently $5.00) will be deducted from proceeds if a shareholder
elects to transfer redemption proceeds by wire.

The purpose of this fee schedule is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly if you
invest in the Funds. This fee schedule has been adjusted in the case of CGM
Fixed Income Fund to give effect to the revised management fee that became
effective on December 13, 1996. For additional information about the Funds' fees
and expenses, please see "The Funds" Investment Manager" and the Statement.

CGM has voluntarily agreed, until December 31, 1997, and thereafter until
further notice to CGM AMERICAN TAX FREE FUND, to waive its management fees and
bear all of the expenses of the Fund. The percentages shown for Management Fees
and Other Expenses reflect current fees after such voluntary waiver and
reimbursements. For the fiscal year ended December 31, 1996, without the
voluntary waiver and reimbursements, the Management Fees, Other Expenses and
Total Fund Operating Expenses as a percentage of average net assets would have
been 0.60%, 1.54% and 2.14%, respectively.

CGM has voluntarily agreed, until December 31, 1997, to waive management
fees and, if necessary, bear expenses associated with operating CGM FIXED INCOME
FUND, to the extent necessary to limit CGM Fixed Income Fund's operating
expenses to an annual rate of 0.85% of its average net assets. The percentages
shown for Management Fees and Other Expenses reflect current fees after such
waiver and reimbursements. For the fiscal year ended December 31, 1996, without
the waiver and reimbursements, the Management Fees, Other Expenses and Total
Fund Operating Expenses as a percentage of average net assets would have been
0.65%, 0.71% and 1.36%, respectively.

The following examples illustrate the approximate expenses that you would
incur on a $1,000 investment over the following periods, assuming a 5% annual
rate of return and redemption at the end of each period.

<TABLE>
<CAPTION>
CGM AMERICAN TAX FREE FUND CGM FIXED INCOME FUND
CUMULATIVE CUMULATIVE
- ----------------------------------------------------------------- ----------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------ ------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C> <C> <C>
$0 $0 $0 $0 $9 $27 $47 $105
</TABLE>

Please keep in mind that the examples shown above are hypothetical and
assume that current waivers and expense reimbursements will remain in effect.
The information above should not be considered a representation of past or
future return or expenses; the actual return and expenses may be more or less.
<PAGE>
CGM AMERICAN TAX FREE FUND

FINANCIAL HIGHLIGHTS

(For a share of the Fund outstanding throughout the indicated periods)

These financial highlights have been examined by Price Waterhouse LLP,
independent accountants. The table below should be read in conjunction with the
financial statements and the notes thereto, which, together with the Report of
Independent Accountants thereon, are included in the Fund's Annual Report and
incorporated by reference into the Statement. In addition to the highlights set
forth below, further information about the performance of the Fund is contained
in the Annual Report and the Statement, which may be obtained from the Trust
free of charge.

FOR THE PERIOD
FOR THE NOVEMBER 10,
YEAR ENDED 1993(c)
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
1996 1995 1994 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 (after
waiver and reimbursements)
(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 21.8(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(d)
Net income to average net
assets (%) ...................... 6.10 6.50 6.39 4.95(d)
Portfolio turnover (%) ............ 107 125 169 0
Net assets at end of period
(in thousands) ..................$12,430 $11,855 $10,150 $4,786
(a) Fees waived and expenses
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 or reimbursed during the period.
(c) Commencement of operations.
(d) Computed on an annualized basis.
<PAGE>
CGM FIXED INCOME FUND
FINANCIAL HIGHLIGHTS

(For a share of the Fund outstanding throughout the indicated periods)

These financial highlights have been examined by Price Waterhouse LLP,
indep endent accountants. The table below should be read in conjunction with the
financial statements and the notes thereto, which, together with the Report of
Independent Accountants thereon, are included in the Fund's Annual Report and
incorporated by reference into the Statement. In addition to the highlights set
forth below, further information about the performance of the Fund is contained
in the Annual Report and the Statement, which may be obtained from the Trust
free of charge.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, MARCH 17, 1992(C)
------------------------------------------------------ THROUGH
1996 1995 1994 1993 DECEMBER 31, 1992
---- ---- ---- ---- ---------------------
For a share of the Fund outstanding
throughout each period:
<S> <C> <C> <C> <C> <C>
Net asset value at the beginning of period ......... $11.41 $ 9.57 $11.17 $10.26 $10.00
------ ------ ------ ------ ------
Net investment income (after waiver and
reimbursements) (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
Distributions from net realized gain ............... (0.76) -- -- (0.32) (0.13)
Distributions 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 11.7(d)
Ratios:
Operating expenses to average net assets (%) ....... 0.85 0.85 0.85 0.85 0.85(d)
Operating expenses to average net assets before
expense limitation (%) ........................... 1.26 1.53 1.46 2.02 3.21(d)
Net income to average net assets (%) ............... 6.53 6.46 7.00 6.30 7.29(d)
Portfolio turnover (%) ............................. 149 148 129 149 212(d)
Average commission rate (e) ........................ $0.0700 -- -- -- --
Net assets at end of period (in thousands) ......... $40,646 $31,793 $28,672 $32,883 $9,467
(a) Fees waived and expenses reimbursed amounted to $ 0.05 $ 0.07 $ 0.06 $ 0.12 $ 0.16
(b) The total return would have been lower had management fees and certain expenses not been waived or reimbursed during the period.
(c) Commencement of operations.
(d) Computed on an annualized basis.
(e) 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>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF
CGM AMERICAN TAX FREE FUND

CGM American Tax Free Fund's primary objective is to provide high current
income exempt from federal income tax. The Fund's secondary objective is capital
appreciation. There are no assurances that the Fund will achieve its objectives
and the Fund may change its objectives without shareholder approval or prior
notice.

CGM American Tax Free Fund will seek to achieve its objectives by investing
primarily in investment grade securities that are exempt from federal income
tax. At least 75% of the Fund's assets will be invested in securities rated at
the time of purchase Baa, MIG-2, Prime-2 or higher by Moody's Investors Service,
Inc. ("Moody's"), or BBB, SP-2, A-2 or better by Standard & Poor's Corporation
("S&P"), or, if not rated by Moody's or S&P at the time of purchase, determined
to be of comparable quality by the Investment Manager. Securities rated BBB by
S&P or Baa by Moody's are regarded as having an adequate capacity to pay
interest and repay principal, but such securities also have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal.
Up to 25% of the Fund's assets may be invested in lower quality securities,
which have speculative characteristics and are subject to special risks. See
"Risk Factors -- Non-Investment Grade Risk." See Appendix A to this Prospectus
for a full description of credit ratings.

In an effort to enhance return, CGM American Tax Free Fund intends to take
advantage of pricing inefficiencies between individual issues and groups of
securities that may occur. As a fundamental policy, under normal market
conditions, the Fund will invest at least 80% of its net assets in securities,
the interest from which is, in the opinion of counsel to the issuer, exempt from
federal income tax and excluded from the calculation of the federal alternative
minimum tax for individuals.

CGM American Tax Free Fund will not invest more than 25% of its total assets
in any one industry. Governmental issuers of tax-exempt securities are not
considered part of any industry. However, tax-exempt securities backed only by
the assets and revenues of nongovernmental users may, for this purpose, be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. The Fund may invest more than 25% of its total assets
in a broader segment of the tax-exempt market, such as revenue obligations of
hospitals and other healthcare facilities, housing agency revenue obligations or
airport revenue obligations. The Fund may also invest more than 25% of its total
assets in securities relating to any one or more states (including the District
of Columbia), territories or United States possessions or any of their political
subdivisions.

TAX-EXEMPT SECURITIES

Tax-exempt securities are debt obligations issued by states (including the
District of Columbia), territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities, or by multistate
agencies or authorities to obtain funds for various public purposes, including
projects to construct or rebuild schools, hospitals, roads, utilities and
transportation systems throughout the United States. These securities are
commonly classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source, but not from the general taxing power. Some revenue
bonds are structured as municipal lease obligations or equipment purchase
contracts. Industrial development bonds are revenue bonds that generally do not
carry a pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Tax-exempt securities may bear fixed, floating or
variable rates of interest, which are determined in some instances by formulas
under which the security's interest rate will change directly or inversely
relative to changes in interest rates or an index, or multiples thereof, in many
cases subject to a maximum and a minimum. Certain tax-exempt securities are
subject to redemption at a date earlier than their stated maturity pursuant to
call options, which may be separated from the related security and purchased and
sold independently.

PUT BONDS

CGM American Tax Free Fund may invest in tax-exempt securities (including
securities with variable interest rates) which may be redeemed or sold back
(put) to the issuer of the security or a third party at face value prior to
stated maturity. Such securities will normally trade as if maturity is the
earlier put date, even though stated maturity is longer.

FLOATING AND VARIABLE RATE SECURITIES

CGM American Tax Free Fund may purchase floating and variable rate notes and
bonds, which are tax-exempt obligations ordinarily having stated maturities in
excess of one year, but which permit the holder to demand payment of principal
at any time or at specified intervals. Variable rate demand notes include master
demand notes, which are obligations that permit the Fund to invest fluctuating
amounts that may change daily without penalty pursuant to direct arrangements
between the Fund, as lender, and the borrower. The interest rates on these
obligations fluctuate from time to time. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Use of letters of credit or other support arrangements will not adversely
affect the tax-exempt status of these obligations. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. The Investment Manager, on behalf of the Fund, will consider on an
ongoing basis the creditworthiness of the issuers of the floating and variable
rate demand obligations in the Fund's portfolio.

MUNICIPAL LEASE OBLIGATIONS

CGM American Tax Free Fund may invest in lease obligations or installment
purchase contract obligations, which are instruments supported by lease payments
made by a municipality ("municipal lease obligations"). Although municipal lease
obligations do not normally constitute general obligations of the municipality,
a lease obligation is ordinarily backed by the municipality's agreement to make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses, which provide that the municipality has no
obligation to make lease or installment purchase payments in later years unless
money is appropriated in the future. Municipal lease obligations are a
relatively new form of financing and the market for such obligations is still
developing and is less liquid than other markets for tax-exempt securities.
Municipal lease obligations may be determined to be liquid (for purposes of
complying with the Fund's investment restrictions) in accordance with procedures
adopted by the Board of Trustees.

PORTFOLIO TURNOVER

There is no limitation on the dollar-weighted average maturity of CGM
American Tax Free Fund's portfolio and the maturity may be shortened or
lengthened depending upon the Investment Manager's outlook for interest rates.
Although CGM American Tax Free Fund does not purchase securities with the
intention of engaging in short-term trading, the Fund will sell any particular
security and reinvest proceeds when it is deemed prudent by management,
regardless of the length of the holding period. This policy may result in higher
securities transactions costs. To the extent that this policy results in gains
on investments, the Fund will make distributions to its shareholders, which may
accelerate the shareholders' tax liabilities. See "Dividends, Capital Gains and
Taxes."

TEMPORARY DEFENSIVE POLICY

For temporary defensive purposes, CGM American Tax Free Fund may invest,
without limitation, in securities issued or guaranteed by the U.S. Government,
or any agency or instrumentality thereof ("U.S. Government Securities");
certificates of deposit, demand and time deposits and bankers' acceptances of
banks whose deposits are insured by the Federal Deposit Insurance Corporation
and have assets of at least $1 billion, including U.S. branches of foreign banks
and foreign branches of U.S. banks; prime commercial paper, including master
demand notes; and repurchase agreements secured by U.S. Government Securities.

INVESTMENT OBJECTIVE AND POLICIES OF
CGM FIXED INCOME FUND

CGM Fixed Income Fund's objective is to maximize total return by investing
in debt securities and preferred stocks that provide current income, capital
appreciation or a combination of both income and appreciation. There are no
assurances that the Fund will achieve its objective and the Fund may change its
objective without shareholder approval.

CGM Fixed Income Fund generally seeks to attain its objective by investing
in securities that are believed by the Investment Manager to be undervalued. The
Fund's flexible investment policy allows it to invest in fixed-income securities
and variable-rate securities, including preferred stocks, with varying
maturities and varying qualities ranging from the highest quality to
non-investment grade.

CGM Fixed Income Fund will invest primarily in investment grade debt
securities rated at the time of purchase a minimum of Baa by Moody's or BBB by
S&P, in preferred stocks rated at the time of purchase a minimum of baa by
Moody's or BBB by S&P, and in debt securities not rated by Moody's or S&P at the
time of purchase, but which the Investment Manager believes to be of comparable
quality.

CGM Fixed Income Fund may also invest less than 35% of its assets in
securities that are not rated at least Baa (baa, in the case of preferred
stocks) by Moody's or BBB by S&P or, if not rated by Moody's or S&P, are
believed by the Investment Manager to be of comparable quality. Lower quality
securities purchased by the Fund will generally be limited to securities rated B
(b, in the case of preferred stocks) or better by Moody's or S&P, at the time of
purchase. In addition, the Fund may invest not more than 10% of its total assets
in securities rated at the time of purchase Caa (caa, in the case of preferred
stocks) by Moody's or CCC by S&P if, in the opinion of the Investment Manager,
the financial condition of the issuer or the protection afforded to a particular
security is stronger than would otherwise be indicated by the rating. See "Risk
Factors -- Non-Investment Grade Risk." See Appendix A to this Prospectus for a
full description of credit ratings.

FIXED INCOME AND VARIABLE RATE SECURITIES

CGM Fixed Income Fund may invest in a variety of fixed-income and
variable-rate securities issued by corporations, municipalities, the U.S.
Government and its instrumentalities, and foreign and multinational
institutions, corporations and governments. These securities include bonds,
debentures, notes, equipment trust certificates, asset-backed securities,
mortgage-related securities, preferred stocks and money market instruments such
as commercial paper, Treasury bills, time deposits, bankers' acceptances and
repurchase agreements. Interest payments on such securities may be paid out as
additional securities (commonly referred to as "payment-in-kind securities") or
as cash, or deferred to a future date not to exceed maturity (commonly referred
to as "zero coupon"). Such securities may also have conversion features. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
fixed-income securities.

CONVERTIBLE SECURITIES

CGM Fixed Income Fund may also invest in convertible securities, bonds and
common stocks (or attached warrants) sold as a unit, and preferred stocks.
Convertible securities are securities, such as bonds, notes, debentures or
preferred stocks, which may be converted at a stated price within a specified
period of time into a specified number of shares of common stock of the same or
a different issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing an income stream (generally higher in yield
than the income from a common stock but lower than that of a non-convertible
debt security), a convertible security may also afford an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock. However, investors ordinarily pay a premium to
obtain such conversion feature.

In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income or variable-rate security)
or its "conversion value" (i.e., the value of the underlying security if the
security is converted). To the extent that a convertible security is a
fixed-income security, its market value generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price of
a convertible security also is influenced by the market value of the security's
underlying security, often common stock. Thus, the price of a convertible
security generally increases as the market value of the underlying security
increases, and generally decreases as the market value of the underlying
security declines.

CGM Fixed Income Fund may, from time to time, own stock as a result of the
conversion of a convertible security or the exercise of a warrant.

UNDERVALUED SECURITIES

CGM Fixed Income Fund may invest in undervalued securities, which are
securities that have market prices that are lower than the prices that the
Investment Manager judges to be their true value. Undervaluation may result from
temporary dislocations in the market, market misperceptions of risk, yield curve
movements and cyclical and secular changes in the economy.

ILLIQUID SECURITIES

The Fund may invest up to 10% of its net assets in illiquid securities. In
general, securities that may be resold without registration pursuant to Rule
144A will be treated as liquid for these purposes, in accordance with guidelines
established by the Board of Trustees to determine whether there is a readily
available market for such securities.

BORROWING

Although CGM Fixed Income Fund is permitted to borrow amounts (including
obligations under reverse repurchase agreements) aggregating up to 33.3% of the
value of its total assets, the Fund does not intend to borrow for purposes of
leveraging its portfolio. Under ordinary circumstances, the Fund will borrow
only for temporary purposes in amounts not to exceed 5% of the value of its
total assets. At any time that the Fund's borrowings (including obligations
under reverse repurchase agreements) exceed 5% of the value of its total assets,
the Fund will not purchase or acquire any additional investment securities.

PORTFOLIO TURNOVER

Although CGM Fixed Income Fund's objective is total return and the Fund does
not purchase securities with the intention of engaging in short-term trading,
the Fund will sell any particular security and reinvest the proceeds when it is
deemed prudent by management, regardless of the length of the holding period.
This policy may result in higher securities transactions costs. To the extent
that this policy results in gains on investments, the Fund will make
distributions to its shareholders, which may accelerate the shareholders' tax
liabilities. See "Dividends, Capital Gains and Taxes."

TEMPORARY DEFENSIVE POLICY

For temporary defensive purposes, CGM Fixed Income Fund may invest, without
limitation, in U.S. Government Securities; certificates of deposit, demand and
time deposits and bankers' acceptances of banks whose deposits are insured by
the Federal Deposit Insurance Corporation and have assets of at least $1
billion, including U.S. branches of foreign banks and foreign branches of U.S.
banks; prime commercial paper, including master demand notes; and repurchase
agreements secured by U.S. Government Securities.

RISK FACTORS

INTEREST RATE RISK

Securities purchased by CGM American Tax Free Fund and CGM Fixed Income Fund
will be subject to interest rate risk. Interest rate risk is the potential for a
decline in prices of fixed-income securities due to rising interest rates. In
general, prices of fixed-income securities move inversely with interest rates.
If interest rates rise, prices of fixed-income securities generally fall; if
interest rates fall, prices of fixed-income securities generally rise. In
addition, for a given change in interest rates, longer- maturity securities
normally fluctuate more in price (gaining or losing more in value) than
shorter-maturity securities. To compensate investors for this risk,
longer-maturity securities generally offer higher yields than shorter- maturity
securities, all other factors (including credit quality) being equal. The Funds'
flexible investment policies allow them to invest in securities with varying
maturities.

EVENT RISK

Event risk is the possibility that corporate securities will suffer a
decline in credit quality and market value when the issuer undergoes a corporate
restructuring. Corporate restructurings, such as mergers, acquisitions,
leveraged buyouts or similar events, often can be financed by a significant
expansion of a company's outstanding debt. As a result of the added debt burden,
the credit quality and market value of a firm's existing bonds may decline
sharply.

CREDIT RISK

Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. In general, the lower the credit quality of a
security, the higher the yield and the higher the risk, all other factors (such
as maturity) being equal. In determining the credit quality of a tax-exempt
security, it is necessary to consider the possibility that legislative changes
affecting the taxing and spending authority of a municipality will affect the
ability of the municipality to make payments of principal and interest on its
obligations. Investment policies of the Funds allow them to invest in securities
with credit quality ranging from the highest (Aaa or aaa by Moody's or AAA by
S&P) to as low as Caa or caa by Moody's or CCC by S&P if, in the opinion of the
Investment Manager, the financial condition of the issuer or the protection
afforded to a particular security is stronger than would otherwise be indicated
by the rating. The Funds will generally not purchase securities rated below B or
b by Moody's or B by S&P. In addition, the Funds may not invest more than 10% of
their total assets at the time of purchase in securities rated Caa or caa by
Moody's or CCC by S&P. See Appendix A to this Prospectus for a full description
of credit ratings for the investments held by CGM American Tax Free Fund and CGM
Fixed Income Fund during the previous fiscal year.

NON-INVESTMENT GRADE RISK

High yield securities may be regarded as predominantly speculative with
respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of the Funds to achieve their investment objectives may, to the extent
of their investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Funds were investing in
higher quality securities.

The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Funds
could sell a particular high yield security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the credit worthiness of the issuer, and could adversely affect and cause large
fluctuations in the daily net asset value of the Funds' shares. Adverse
publicity and investor perceptions may decrease the value and liquidity of high
yield securities.

WHEN-ISSUED SECURITIES RISK

CGM American Tax Free Fund and CGM Fixed Income Fund each may purchase some
debt securities on a "when-issued" basis, which means that it may be as long as
60 days after purchase before the securities are delivered to the Fund. Payment
and interest terms, however, are fixed at the time the purchaser enters into the
commitment. The Funds do not pay for when-issued securities or start earning
interest on them until the contractual settlement date. At the time of
settlement, the market value of the security may be more or less than the
purchase price. A segregated account of each Fund consisting of cash, cash
equivalents, U.S. Government Securities or other high quality liquid debt
securities at least equal at all times to the amount of when-issued securities
held by the particular Fund will be established and maintained at the Funds'
custodian bank.

FOREIGN SECURITIES RISK

CGM Fixed Income Fund may invest up to 20% of its net assets at the time of
purchase in debt securities and preferred stocks issued by institutions,
corporations and governments established by or in one or more foreign countries,
which may be developed or undeveloped countries. Such foreign securities will
otherwise satisfy the limitations and restrictions applicable to the Fund,
including the Fund's policies regarding credit quality. In making foreign
investments, the Fund will also give appropriate consideration to the following
factors, among others.

Because some foreign securities CGM Fixed Income Fund may acquire are
purchased with and payable in currencies of foreign countries, the value of
these assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations.
Certain currency exchange expenses may be incurred when the Fund changes
investments from one country to another.

Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly, volume
and liquidity in most foreign securities markets are less than in U.S. markets
and, at times, volatility of prices can be greater than in the United States.
There may be less government supervision and regulation of securities exchanges,
brokers and listed companies. The issuers of some of these securities, such as
foreign bank obligations, may be subject to less stringent or different
regulations than those governing U.S. issuers. In addition, there may be less
publicly available information about a foreign issuer, and foreign issuers are
not subject to uniform accounting and financial reporting standards, practices
and requirements comparable to those applicable to U.S. issuers. Further, it may
be more difficult to obtain current information about corporate actions by
foreign issuers of portfolio securities that affect the prices of such
securities.

Foreign securities are also subject to additional risks of possible adverse
political and economic developments, possible seizure or nationalization of
foreign deposits and possible adoption of governmental restrictions, which might
adversely affect the payment of principal and interest on the foreign securities
or might restrict the payment of principal and interest to investors located
outside the country of the issuer, whether from currency blockage or otherwise.
CGM Fixed Income Fund's ability and decisions to purchase and sell portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets.

Some foreign securities may be subject to transfer taxes levied by foreign
governments, and the income received by CGM Fixed Income Fund from sources
within foreign countries may be reduced by withholding and other taxes imposed
by such countries. The Fund will also incur higher custody costs in connection
with foreign securities.

MORTGAGE-RELATED SECURITIES AND
ASSET-BACKED SECURITIES RISK

CGM Fixed Income Fund may invest in mortgage-related securities and asset-
backed securities. Mortgage-related securities are represented by pools of
mortgage loans or loans assembled for sale to investors by various governmental
agencies, such as the Government National Mortgage Association, and
government-related organizations, such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, as well as by
private issuers, such as commercial banks, savings and loan institutions,
financial corporations, mortgage bankers and private mortgage insurance
companies. Asset-backed securities are pass-through securities backed by
non-mortgage assets, including automobile loans, credit card receivables and
consumer receivables. Although certain mortgage-related and asset-backed
securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, and the yield are not so
secured. If CGM Fixed Income Fund purchases a mortgage-related or an
asset-backed security at a premium, all or part of the premium may be lost if
there is a decline in the market value of the security, whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.

As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, although the value of
a mortgage-related or asset-backed security may decline when interest rates
rise, the converse is not necessarily true, because in periods of declining
interest rates the mortgages or assets underlying the security may be more
likely to be prepaid. For this and other reasons, a mortgage-related or
asset-backed security's stated maturity may be shortened by unscheduled
prepayments on the underlying mortgages or assets and, therefore, it is not
possible to predict accurately the security's return. Such prepayments may
expose CGM Fixed Income Fund to a lower rate of return on reinvestment. To the
extent that such mortgage-related securities are held by the Fund, the
prepayment right of the mortgagors may limit the increase in net asset value of
the Fund because the value of the mortgage-related securities held by the Fund
may not appreciate as rapidly as the price of other debt securities.

CGM Fixed Income Fund may also invest in stripped mortgage-related
securities often referred to as IO (interest-only) and PO (principal-only)
securities. IO and PO securities are formed by separating the principal and
interest payments of a mortgage-related security to create two or more classes
of securities with different characteristics than the underlying security. IOs
receive all of the coupon interest from mortgage-related securities and can be
high yielding securities, while POs receive all of the principal payments from
mortgage-related securities and are seldom high yielding securities. IOs and POs
are extremely sensitive to changes in both interest rates and prepayment rates.

Because an IO receives only the interest payments of an underlying
mortgage-related security, an increase in prepayments (due to lower interest
rates) will result in less interest being paid to the IO investor. The decrease
in interest payments will cause the value of the IO to decline as most other
bonds increase in value. A decline in prepayments (due to higher interest
rates), however, will result in increased interest being paid to the IO
investor. The increase in interest payments will generally result in a higher
value for the IO security. PO securities, on the other hand, are zero coupon
securities, as they receive no interest, but do receive all principal payments
of an underlying mortgage-related security. The value of these securities will
increase as prepayments increase, particularly if interest rates are declining.
Like zero coupon securities, PO securities are extremely volatile securities,
which increase in value as interest rates decline and/or prepayments increase
and decline when rates increase and/or prepayments decline.

IO and PO securities that are issued by the U.S. Government or its agencies
and instrumentalities and are backed by fixed-rate mortgages may be treated as
liquid for purposes of investment restrictions applicable to investments in
illiquid securities, in accordance with guidelines established by the Board of
Trustees, to determine whether there is a readily available market for such
securities. All other IO and PO securities will be treated as illiquid for
purposes of applicable investment restrictions.

ZERO COUPON, DEFERRED INTEREST AND
PAYMENT-IN-KIND SECURITIES RISK

There may be special tax considerations associated with investing in
securities structured as deferred interest, zero coupon or payment-in-kind
securities. CGM Fixed Income Fund records the interest on these securities as
income even though it receives no cash interest until each security's maturity
date. The Fund will be required to distribute all or substantially all such
amounts annually and may have to obtain the cash to do so by selling securities.
Thus, to meet cash distribution obligations, the Fund may be required to
liquidate a portion of its assets, which it would otherwise continue to hold, at
a disadvantageous time. These distributions will be taxable to shareholders as
ordinary income.

In the case of securities structured as deferred interest, zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following fundamental restrictions, which may not
be changed without the approval of shareholders. Certain other fundamental and
non-fundamental restrictions are set forth in the Statement. Each Fund may not:

[] purchase any securities which would cause more than 25% of the market value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in U.S. Government Securities;

[] borrow money, except that it may borrow from banks in an amount not to
exceed one-third of the value of its total assets and may borrow for
temporary purposes from entities other than banks in an amount not to exceed
5% of the value of its total assets; or

[] with respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in the securities of any one issuer, except
the U.S. Government, its agencies and instrumentalities.

THE FUNDS' INVESTMENT MANAGER

Each Fund's investment manager is Capital Growth Management Limited
Partnership, One International Place, Boston, Massachusetts 02110. CGM, an
investment advisory firm founded in 1989, manages eight mutual fund portfolios
and advisory accounts for other clients. The general partner of CGM is a
corporation controlled equally by Robert L. Kemp and G. Kenneth Heebner, who are
trustees and officers of the Funds.

In addition to selecting and reviewing each Fund's investments, CGM provides
executive and other personnel for the management of the Funds. The Trust's Board
of Trustees supervises CGM's management of the affairs of the Funds.

Until December 31, 1997, and thereafter until further notice to CGM American
Tax Free Fund, CGM has voluntarily agreed to waive its management fees and bear
all of the expenses of CGM American Tax Free Fund. Without this waiver and these
reimbursements, the investment management fee would be 0.60% on the first
$500,000,000, 0.55% on the next $500,000,000, and 0.45% on amounts in excess of
$1 billion.

Until December 31, 1997, CGM has voluntarily agreed to waive fees and to
reimburse CGM Fixed Income Fund for expenses to the extent the Fund's expenses
exceed 0.85% of the Fund's average annual net assets. CGM has also agreed not to
modify its commitment thereafter without approval of the Board of Trustees.
Without this waiver and these reimbursements, the investment management fee
would be 0.65% on the first $200,000,000, 0.55% on the next $300,000,000, and
0.40% on amounts in excess of $500,000,000. In 1996, the Fund paid 0.14% of its
average net assets in management fees to CGM.

THE PORTFOLIO MANAGERS

The portfolio manager for CGM American Tax Free Fund is Janice H. Saul, who
is an officer of the Fund. Prior to joining CGM, Ms. Saul was employed as a
portfolio manager by Loomis, Sayles & Company, Incorporated ("Loomis Sayles")
and by Scudder, Stevens and Clark.

CGM Fixed Income Fund's investment portfolio is co-managed by G. Kenneth
Heebner and Janice H. Saul, officers of the Fund's Investment Manager. Mr.
Heebner is responsible for the Fund's investments that are convertible into
equity securities and Ms. Saul has primary responsibility for managing the
Fund's debt securities.

Mr. Heebner, who is a vice president and trustee of CGM Trust, also manages
the investment portfolios of CGM Mutual Fund, CGM Capital Development Fund and
CGM Realty Fund. Prior to March 1, 1990, Mr. Heebner managed the CGM Capital
Development Fund and CGM Mutual Fund in his capacity as vice president and
director of Loomis Sayles.

HOW TO PURCHASE SHARES

The Trust sells shares of the Funds directly to investors without any sales
load. You may make an initial purchase of shares of each Fund by submitting a
completed application form and payment to:

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

The minimum initial investment in each Fund is $2,500 for regular accounts
and $1,000 for retirement accounts (see "Shareholder Services -- Retirement
Plans") and accounts set up under the Uniform Gifts to Minors Act ("UGMA") or
the Uniform Transfers to Minors Act ("UTMA"). Subsequent investments in each
Fund must be at least $50. See "Shareholder Services" below for further
information about minimum investments in certain other circumstances.

All investments made by check should be in U.S. dollars and made payable to
CGM American Tax Free Fund or CGM Fixed Income Fund (as applicable). Third party
checks (i.e. checks payable to anyone other than CGM American Tax Free Fund or
CGM Fixed Income Fund) are generally not accepted and checks drawn on credit
card accounts will not be accepted.

After your account has been established for each Fund, you may send
subsequent investments in such Fund at any time directly to the shareholder
servicing agent at the following address:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P. O. Box 8511
Boston, Massachusetts 02266-8511

The remittance for any subsequent investment must be accompanied by either
the Additional Investment Stub detached from a statement of account, or a note
containing sufficient information to identify the account, i.e., the Fund name,
your account number, your name and social security number.

Subsequent investments may also be made by federal funds wire. Instruct your
bank to wire federal funds to State Street Bank and Trust Company, ABA
#011000028. The text of the wire should read as follows: "DDA 99046336 $ Amount,
STATE ST BOS ATTN Mutual Funds. Credit CGM American Tax Free Fund or CGM Fixed
Income Fund (as applicable), Shareholder Name, Shareholder Account Number." Your
bank may charge you a fee for transmitting funds by wire.

If you wish transactions in your account to be effected by another person
under a power of attorney from you, special rules apply. Please contact the
Trust or CGM Shareholder Services for details.

SHAREHOLDER SERVICES

The Funds offer the following shareholder services as more fully described
in the Statement. Explanations and forms are available from the Trust.

EXCHANGE PRIVILEGE

Shares of either Fund may be exchanged for shares of money market funds
currently distributed by New England Funds, L.P. ("Money Market Funds"). You may
also exchange shares for shares of CGM American Tax Free Fund or CGM Fixed
Income Fund (as applicable), CGM Mutual Fund or CGM Realty Fund. Additionally,
you may exchange shares for shares of CGM Capital Development Fund, but only if
you were a shareholder on September 24, 1993 and have remained a shareholder in
the CGM Capital Development Fund continuously since that date. CGM Capital
Development Fund shares are not generally available to other persons except in
special circumstances that have been approved by, or under the authority of, the
Board of Trustees of that Fund as described in the Statement.

All exchanges may be made without charge. You may make an exchange by
written instruction or, if a written authorization for telephone exchanges is on
file with CGM Shareholder Services, you may call 800-343-5678. See "Telephone
Transactions." Exchanges must be for amounts of at least $1,000. Under certain
circumstances, before an exchange can be made, additional documents may be
required to verify the authority or legal capacity of the person seeking the
exchange. If you wish to make an exchange into a new account, the exchange must
satisfy the applicable minimum initial investment requirements. Exchange
requests cannot be revoked once they have been received in good order.

Investors should not view the exchange privilege as a means for taking
advantage of short-term swings in the market, and each Fund limits the number of
exchanges each shareholder may make to four exchanges per account (or two round
trips) per calendar year. Monthly automatic exchanges from the Money Market
Funds to the Funds are exempt from this restriction. The Trust also reserves the
right to prohibit exchanges during the first 15 days following an investment in
a particular Fund. The Trust may terminate or change the terms of the exchange
privilege. In general, shareholders will receive notice of any material change
to the exchange privilege at least 60 days prior to the change. For federal
income tax purposes, an exchange constitutes a sale of shares, which may result
in a capital gain or loss.

SYSTEMATIC WITHDRAWAL PLAN

If the value of your account is at least $10,000, you may have periodic cash
withdrawals automatically paid to you or any person you designate. If checks are
returned to any Fund as "undeliverable" or remain uncashed for more than six
months, the plan will be cancelled. Undeliverable or uncashed checks shall be
cancelled and such amounts shall be reinvested in the applicable Fund at the per
share net asset value determined as of the date of cancellation of such checks.

AUTOMATIC INVESTMENT PLAN ("AIP")

Once your account has been established for a particular Fund, voluntary
monthly investments of at least $50 may be made automatically by pre-authorized
withdrawals from your checking account. Please contact CGM Shareholder Services
at 800-343-5678 to determine the requirements associated with debits from
savings banks and credit unions. Debits from money market accounts are not
acceptable. You may terminate your participation in the AIP by sending written
notice to CGM Shareholder Services, c/o Boston Financial Data Services, Inc.,
P.O. Box 8511, Boston, Massachusetts 02266-8511 or by calling 800-343-5678 more
than 14 days prior to the next scheduled debit date. The Fund may terminate your
participation in the AIP immediately in the event that any item is unpaid by
your financial institution. The Fund may terminate or modify the AIP at any
time. Additional information about this Plan is set forth in the Statement.

RETIREMENT PLANS

CGM American Tax Free Fund may not be an appropriate investment for: IRA
accounts, SEP-IRA accounts, 403(b)(7) custodial accounts, qualified profit
sharing plans, or qualified money purchase pension plans.

CGM Fixed Income Fund's shares may be purchased by tax-deferred retirement
plans. CGM makes available retirement plan forms and plan documents for IRAs,
SEP-IRAs, 403(b)(7) custodial accounts, and money purchase pension and profit
sharing plans ("CGM Retirement Plans").

SHAREHOLDER REPORTS

Shareholders of each Fund will receive that Fund's financial statements and
a summary of the Fund's investments at least semiannually. The Funds intend to
consolidate mailings of annual, semiannual and quarterly reports to households
having multiple accounts with the same address of record and to furnish a single
copy of each report to that address. Mailing of prospectuses and proxy
statements will not be consolidated, and, if a report is included in such
mailings, each shareholder will receive a separate copy. You may request
additional reports by notifying either Fund in writing, or by calling the Trust.
Shareholders will receive statements confirming all purchases, redemptions and
changes of address. You may call CGM Shareholder Services and request a
duplicate statement for the current year without charge. A fee will be charged
for any duplicate information requested for prior years.

HOW TO REDEEM SHARES

You can redeem all or part of your shares in either Fund in three different
ways: by sending a written request for a check or wire representing the
redemption proceeds, by making a telephone request for redemption by check
(provided that the amount to be redeemed is not more than $25,000 and the check
is being sent to you at your record address, which has not changed in the prior
three months) or by making a telephone request for redemption proceeds to be
wired to a bank that you have predesignated. The redemption price will always be
the net asset value per share next determined after the redemption request is
received by CGM Shareholder Services in good order (including any necessary
documentation). Necessary documentation may include, in certain circumstances,
documents verifying the authority or legal capacity of the person seeking to
redeem shares. Redemption requests cannot be revoked once they have been
received in good order.

If you elect to redeem shares in writing, send your written request to:

CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, Massachusetts 02266-8511

The written request must include the name of the particular Fund, your account
number, the exact name(s) in which your shares are registered, the number of
shares or the dollar amount to be redeemed and mailing or wire instructions. All
owners of shares must sign the request in the exact name(s) in which the shares
are registered (which appear(s) on your confirmation statement) and should
indicate any special capacity in which they are signing (such as trustee or
custodian or on behalf of a partnership, corporation or other entity). If you
are signing in a special capacity, you may wish to contact CGM Shareholder
Services in advance to determine whether additional documentation will be
required before you send a redemption request.

If you hold certificates representing your investment, you must enclose the
certificates and a properly completed redemption form or stock power. You bear
the risk of loss of such certificates; consequently you may wish to send your
certificates by registered mail.

Telephone redemptions by check are available to all shareholders of the
Funds automatically unless this option is declined in the application or in
writing. You may select the telephone redemption wire when you fill out your
initial application or you may select it later by completing the Account Update
Form (with a signature guarantee), available from the Trust or CGM Shareholder
Services.

Proceeds resulting from a written or regular telephone redemption request
will normally be mailed to you within seven days after receipt of your request
in good order. Telephone wire redemption proceeds will normally be wired to your
bank within seven days following receipt of a proper redemption request. If you
purchased your shares of a Fund by check (or through your AIP) and elect to
redeem shares within 15 days of such purchase, you may experience delays in
receiving redemption proceeds. The Trust will generally postpone sending your
redemption proceeds from such investment until the Trust can verify that your
check (or AIP investment) has been or will be collected. There will be no such
delay for redemptions following investments paid for by federal funds wire or by
bank cashier's check, certified check or treasurer's check. If checks
representing redemption proceeds are returned "undeliverable" or remain uncashed
for six months, such checks shall be cancelled and such proceeds shall be
reinvested in the applicable Fund at the per share net asset value determined as
of the date of cancellation of such checks.

No Fund may suspend the right of redemption, or postpone payment for more
than seven days, except when the Exchange is closed for other than weekends or
holidays, when trading on the Exchange is restricted, during an emergency (as
determined by the SEC) that makes it impracticable for that Fund to dispose of
its securities or to determine fairly the value of its net assets, or during any
other period permitted by the SEC for the protection of investors.

Because the expense of maintaining small accounts is disproportionately
high, each Fund may close accounts with 20 shares or less and mail the proceeds
to the shareholder. Shareholders who are affected by this policy will be
notified of a Fund's intention to close the account and will have 60 days
immediately following the notice in which to acquire the requisite number of
shares. The minimum does not apply to CGM Retirement Plans and UGMA/UTMA
accounts.

TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

[] Telephone Exchanges
[] Telephone Redemptions By Wire
[] Telephone Redemptions By Check

The terms and provisions for each of these services are explained fully in the
preceding sections. Once a telephone transaction request has been placed, it
cannot be cancelled.

The Telephone Exchange privilege and/or Telephone Redemptions By Wire
privilege must be elected by you when you fill out your initial application for
each Fund or you may select them later by completing the Account Update Form
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. The Telephone Redemptions By Check privilege is available to
shareholders of each Fund automatically unless this option is declined in the
application or in writing.

Each Fund will employ reasonable procedures to confirm that instructions
received by telephone (including instructions with respect to changes in
addresses) are genuine, such as requesting personal identification information
that appears on your account application and recording the telephone
conversation. You will bear the risk of loss due to unauthorized or fraudulent
instructions regarding your account, although each Fund may be liable if
reasonable procedures are not employed.

DIVIDENDS, CAPITAL GAINS AND TAXES

CGM American Tax Free Fund and CGM Fixed Income Fund each intends to
qualify annually as a "regulated investment company" under the Internal Revenue
Code. To qualify, each Fund must meet certain income, distribution and
diversification requirements. In any year in which a Fund so qualifies, it
generally will not be subject to federal income or excise tax to the extent that
its taxable income is distributed to shareholders.

Each Fund intends to declare and pay monthly dividends consisting of
substantially all of its net investment income. A Fund's dividend and capital
gains distributions may be reinvested in additional shares or received in cash,
although certain restrictions may apply to participants in CGM Retirement Plans.
You may elect to receive income dividends or capital gains distributions, or
both, in cash. However, if you elect to receive capital gains in cash, your
income dividends must also be received in cash. You can elect to receive
payments of cash dividends and capital gains distributions either by check or by
direct deposit to a bank account that you have predesignated. These elections
may be made at the time your account is opened and may be changed at any time by
submitting a written request to CGM Shareholder Services or by calling
800-343-5678. However, changes in bank account information for direct deposits
of cash dividends and capital gains distributions must be made through an
Account Update Form. In order for a change to be effective for any dividend or
distribution, it must be received by CGM Shareholder Services on or before the
record date for such dividend or distribution. If you elect to receive
distributions in cash and checks are returned "undeliverable" or remain uncashed
for six months, your cash election will be changed automatically and your future
dividend and capital gains distributions will be reinvested in the same Fund at
the per share net asset value determined as of the date of payment of the
distribution. In addition, following such six-month period, any undeliverable or
uncashed checks will be cancelled and such amounts shall be reinvested in the
same Fund at the per share net asset value determined as of the date of
cancellation of such checks.

Dividends paid by a Fund from net taxable investment income, including
dividends, interest and net short-term gains, will be taxable to shareholders as
ordinary income. For corporate investors, no portion of dividends paid by either
Fund is expected to qualify for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses) are taxable as long-term capital gains,
regardless of the length of time shareholders have owned shares in the Fund. To
the extent that a Fund makes a distribution in excess of its current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in a shareholder's shares,
and then, to the extent the distribution exceeds such basis, as a taxable gain
to be realized upon sale of such shares. Taxable dividends and distributions are
taxable to shareholders of a Fund in the same manner whether received in cash or
reinvested in additional Fund shares.

CGM American Tax Free Fund anticipates that a substantial portion of its
investment income will be tax-exempt interest income. Dividends paid by the Fund
from net tax-exempt interest income will be excluded from a shareholder's gross
income for federal income tax purposes. Shareholders who are recipients of
Social Security benefits should be aware that exempt interest dividends received
from the Fund are includable in their "modified adjusted gross income" for
purposes of determining the amount of such Social Security benefit, if any, that
is required to be included in their gross income. The exemption of certain
dividends from federal income tax does not necessarily result in exemption under
the income tax laws of any state or local taxing authority. Shareholders should
consult their own tax advisers about the status of dividends and distributions
of CGM American Tax Free Fund in their own states and localities.

If a shareholder of CGM American Tax Free Fund receives an exempt-interest
dividend with respect to any share and redeems or exchanges such share before
holding it for more than six months, any loss on the redemption or exchange will
be disallowed to the extent of such exempt-interest dividend. Similarly, if a
shareholder of the Fund receives a distribution taxable as a long-term capital
gain with respect to any share and redeems or exchanges such share before
holding it for more than six months, any loss on the redemption or exchange (not
otherwise disallowed as attributable to an exempt-interest dividend) will be
treated as a long-term capital loss to the extent of the long-term capital gain
recognized on such distribution.

CGM American Tax Free Fund may invest in private activity bonds. Interest on
private activity bonds issued after August 7, 1986, although generally
excludable from gross income for federal income tax purposes, may be subject to
the federal alternative minimum tax ("AMT"). AMT is imposed on taxpayers who
utilize to a significant degree certain tax deductions and exclusions (known as
"items of tax preference"). Interest from private activity bonds is an item of
tax preference that is included with items of income from certain other sources
in calculating if a taxpayer is subject to AMT in the amount thereof.
Shareholders should consult their own tax advisers regarding the potential
applicability of AMT to them.

If CGM Fixed Income Fund invests in foreign securities, it may be subject to
foreign withholding taxes on income earned on such securities and may be unable
to pass through to shareholders foreign tax credits and deductions with respect
to such taxes.

A distribution will be treated as paid by a Fund and received by its
respective shareholders on December 31 of the current calendar year if it is
declared in October, November, or December of that year with a record date in
such a month and paid in January of the subsequent year.

The sale or other disposition of shares of a Fund, including a redemption of
shares or an exchange of shares into another fund, is a taxable event and may
result in a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares.

Each Fund is required to withhold a portion of taxable dividends, capital
gains distributions, and redemptions paid to individuals and certain other
classes of shareholders if they fail to furnish the Fund with their correct
taxpayer identification numbers and certain certifications regarding their tax
status, or if they are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against a shareholder's normal federal income tax liability. For additional
information about withholding, please see the Statement.

BFDS, the shareholder servicing agent, will send you and the Internal
Revenue Service an annual statement detailing federal tax information, including
information about dividends and distributions paid to you during the preceding
year. If you redeem or exchange shares in any year, following the end of a year,
you will receive a statement providing the cost basis and gain or loss of each
share lot that you sold in each year. Your CGM account cost basis will be
calculated using the "single category average cost method," which is one of the
four calculation methods allowed by the IRS. Be sure to keep these statements as
permanent records. A fee may be charged for any duplicate information that you
request.

Dividend distributions, capital gains distributions, and capital gains or
losses from redemptions and exchanges may also be subject to state and local
taxes. In certain states, a portion of each Fund's income derived from certain
direct U.S. Government obligations may be exempt from state and local taxes.
Each year, each Fund will indicate the portion of its income, if any, that is
derived from such obligations.

PRICING OF SHARES

The share price or "net asset value" per share of each Fund is computed
daily by dividing the total value of the investments and other assets of the
Fund, less any liabilities, by the total outstanding shares of the Fund. The net
asset value per share of each Fund is determined as of the close of the regular
trading session of the Exchange on each day the Exchange is open for trading.
Portfolio securities are generally valued at their market value. In certain
cases, market value may be determined on the basis of information provided by a
pricing service approved by the Board of Trustees. Instruments with maturities
of 60 days or less are valued at amortized cost, which approximates market
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. The valuation of portfolio securities is more fully described in the
Statement.

PERFORMANCE INFORMATION

The Funds may include yield and total return information in advertisements
or other written sales material. Each Fund will show its average annual total
return for the most recent one-year period and the life of the Fund through the
end of the most recent calendar quarter. Total return is measured by comparing
the value of an investment in the Fund at the beginning of the relevant period
to the value of the investment at the end of the period (assuming automatic
reinvestment of all dividends and capital gains distributions). Each Fund may
also show total return over other periods on an aggregate basis for the period
presented.

Yield is computed in accordance with the SEC's standardized formula by
dividing the adjusted net investment income per share earned during a recent
thirty-day period by the maximum offering price of a Fund share on the last day
of the period. Each Fund may also present one or more distribution rates in its
sales literature. These rates will be determined by analyzing the Fund's
distributions from net investment income and net short-term capital gains over a
recent twelve-month, three-month or thirty-day period and dividing that amount
by the net asset value on the last day of such period.

CGM American Tax Free Fund may also utilize tax equivalent yields with
adjustments for assumed income tax rates. Tax equivalent yield is calculated by
determining the pre-tax yield which, after being taxed at a stated rate, would
be equivalent to a stated yield calculated as described above. See Appendix B
for illustrations of this yield.

Each Fund may compare its performance to that of recognized financial
indices or groups of mutual funds. It may also include its ranking among other
mutual funds or its rating as published by mutual fund ranking services or major
financial publications. Each Fund may also compare its performance to that of
money market funds and other investments, such as certificates of deposit, and
may refer to standard measures of performance for such investments, including
the Bank Rate Monitor and data published by the Federal Reserve System.
Investors should note that, although each Fund may experience better returns and
higher yields than money market funds and other investments, the Funds do not
seek to maintain stable net asset values. Thus, particularly during periods of
rising interest rates, the per share net asset value of each Fund may decrease
while the principal value of such other investments will not change. In
addition, unlike certificates of deposit, shares of the Fund are not insured by
the FDIC or any other entity. All performance information is based on past
results and is not an indication of likely future performance.

ADDITIONAL FACTS ABOUT THE FUNDS

[] The Trust was organized in 1986 as a Massachusetts business trust and is
authorized to issue an unlimited number of full and fractional shares in
multiple series. The Trust currently has four series: CGM Mutual Fund (a
successor to Loomis-Sayles Mutual Fund), CGM Fixed Income Fund, CGM American
Tax Free Fund and CGM Realty Fund.

[] When a shareholder invests in either Fund, the shareholder acquires freely
transferable shares of beneficial interest that entitle the shareholder to
receive dividends and to cast one vote at shareholder meetings for each
share owned. On matters affecting any particular Fund, shares of the Fund
vote separately from shares of other series of the Trust, except as
otherwise required by law.

[] The investment objective, investment practices and other non-fundamental
policies of either Fund can be changed without shareholder approval. If
there is a change in either Fund's investment objective, shareholders should
consider whether the particular Fund remains an appropriate investment in
light of their current financial position and needs.
<PAGE>
APPENDIX A

RATINGS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. DEBT RATINGS -- TAXABLE DEBT &
DEPOSITS GLOBALLY:

Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. SHORT-TERM MIG/VMIG RATINGS --
U.S. TAX-EXEMPT MUNICIPALS:

MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.

MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

MIG 3/VMIG 3 -- This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well-established.

MIG 4/VMIG 4 -- This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

S.G. -- This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:

caa -- An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

MOODY'S SHORT-TERM PRIME RATING SYSTEM -- TAXABLE DEBT & DEPOSITS GLOBALLY:

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:

PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:

[] Leading market positions in well-established industries.
[] High rates of return on funds employed.
[] Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
[] Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
[] Well-established access to a range of financial markets and assured sources
of alternate liquidity.

PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.

DESCRIPTION OF STANDARD & POOR'S CORPORATION LONG-TERM ISSUE CREDIT RATINGS:

AAA -- An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

Plus (+) or Minus (-): The ratings from A to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF STANDARD & POOR'S CORPORATION PREFERRED STOCK RATING DEFINITIONS:

AAA -- This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

DESCRIPTION OF STANDARD & POOR'S CORPORATION MUNICIPAL NOTES RATINGS:

An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:

-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it will be treated as a note).

Note rating symbols and definitions are as follows:

SP-1 -- Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus
(+) designation.

SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3 -- Speculative capacity to pay principal and interest.

SHORT-TERM ISSUE CREDIT RATINGS:

A-1 -- A short-term obligation rated "A-1" is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2 -- A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

A-3 -- A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

B -- A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

C -- A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.

PORTFOLIO COMPOSITION

The table below provides a summary of ratings assigned to securities in the
portfolios of CGM American Tax Free Fund and CGM Fixed Income Fund. Consistent
with each Fund's policy, if a security is rated by both Moody's and S&P, the
higher rating is used for purposes of classifying the security. These figures
are dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1996, presented as a percentage of total investments
(excluding short-term investments and, in the case of CGM Fixed Income Fund,
warrants). These percentages are historical and are not necessarily indicative
of the quality of current or future portfolio holdings, which may vary.

DOLLAR-WEIGHTED AVERAGE
---------------------------------
CGM CGM
AMERICAN FIXED
MOODY'S S&P TAX FREE INCOME
RATING OR RATING FUND FUND
- ------------------------------------------------------------------------------
Aaa/Aa/A or AAA/AA/A 54.6% 24.9%
- ------------------------------------------------------------------------------
Baa or BBB 30.7% 39.6%
- ------------------------------------------------------------------------------
Ba or BB 13.5% 13.0%
- ------------------------------------------------------------------------------
B or B 1.2% 18.9%
- ------------------------------------------------------------------------------
Caa or CCC 0.0% 3.6%
- ------------------------------------------------------------------------------

The table above includes securities not rated by Moody's or S&P that CGM has
determined to be of comparable quality to the indicated rating by Moody's or
S&P. The dollar-weighted average of such securities not rated by either Moody's
or S&P amounted to 11.3% for CGM American Tax Free Fund and 1.9% for CGM Fixed
Income Fund. Such securities may include securities rated by other nationally
recognized rating organizations, as well as unrated securities.
<PAGE>
APPENDIX B

CGM AMERICAN TAX FREE FUND
TAXABLE EQUIVALENT YIELD TABLE

<TABLE>
<CAPTION>
A FULLY TAXABLE INVESTMENT
TO WOULD HAVE TO PAY YOU:
MATCH A ---------------------------------------------------------------------------------
TAX-FREE ASSUMING A ASSUMING A ASSUMING A ASSUMING A
YIELD MARGINAL TAX MARGINAL TAX MARGINAL TAX MARGINAL TAX
OF: RATE OF 28% RATE OF 31% RATE OF 36% RATE OF 39.6%
------ -------- -------- -------- ----------
<S> <C> <C> <C> <C>
2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.25% 6.62%
5.00% 6.94% 7.25% 7.81% 8.28%
6.00% 8.33% 8.70% 9.38% 9.93%
</TABLE>
----------------------------------------

This table is a hypothetical illustration and should not be considered an
indication of CGM American Tax Free Fund's performance.

The assumed marginal tax rates are not necessarily the highest possible
marginal tax rates, nor are they the lowest rates. These rates were picked
as exemplary rates that may apply to many taxpayers.
<PAGE>

INVESTMENT ADVISER
Capital Growth Management
Limited Partnership
One International Place
Boston, MA 02110

TRANSFER AND DIVIDEND PAYING AGENT
AND CUSTODIAN OF ASSETS
State Street Bank and Trust Company
Boston, MA 02102

SHAREHOLDER SERVICING AGENT FOR
STATE STREET BANK AND TRUST COMPANY
Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

AFP97

CGM
AMERICAN
TAX FREE FUND

CGM
FIXED INCOME
FUND

Prospectus & Application

May 1, 1997

No-Load Funds

[FENCER LOGO]
<PAGE>

PART B.

Statements of Additional Information for CGM Mutual Fund, CGM Realty Fund,
CGM Fixed Income Fund, and CGM American Tax Free Fund
follow
<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM MUTUAL FUND

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1997

This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM Mutual Fund Prospectus dated May
1, 1997 (the "Prospectus"), and should be read in conjunction therewith. A copy
of the Prospectus may be obtained from CGM Trust, c/o The CGM Funds Investor
Services Division, P.O. Box 449, Boston, Massachusetts 02117 (Telephone:
800-345-4048).

MSAI97
<PAGE>

- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------

Page
----
INTRODUCTION................................................................ 1

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS............................. 1

PORTFOLIO TURNOVER.......................................................... 3

MANAGEMENT OF THE FUND...................................................... 4

INVESTMENT ADVISORY AND OTHER SERVICES...................................... 6
Advisory Agreement................................................. 6
Custodial Arrangements............................................. 7
Independent Accountants............................................ 8
Other Arrangements................................................. 8

PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 8

DESCRIPTION OF THE TRUST.................................................... 9
Shareholder Rights................................................. 10
Shareholder and Trustee Liability.................................. 11

HOW TO BUY SHARES........................................................... 11

ADVERTISING AND PERFORMANCE INFORMATION..................................... 12
Calculation of Total Return........................................ 12
Calculation of Yield............................................... 12
Performance Comparisons............................................ 13
Price-to-Earnings Ratio Comparisons ............................... 14

NET ASSET VALUE AND PUBLIC OFFERING PRICE................................... 15

SHAREHOLDER SERVICES........................................................ 16
Open Accounts...................................................... 16
Systematic Withdrawal Plans ("SWP")................................ 16
Exchange Privilege................................................. 17
Automatic Investment Plans ("AIP")................................. 18
Retirement Plans................................................... 18
Address Changes.................................................... 19

REDEMPTIONS................................................................. 19
Redeeming by Telephone............................................. 19
Check Sent to the Record Address................................... 20
Proceeds Wired to a Predesignated Bank............................. 20
All Redemptions.................................................... 20

INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS ............... 21

FINANCIAL STATEMENTS........................................................ 23
<PAGE>

- -------------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------------

CGM Mutual Fund (the "Fund"), registered with the Securities and
Exchange Commission ("SEC") as a diversified open-end management investment
company, is organized as a separate series of shares of CGM Trust (the "Trust").
The Trust is a Massachusetts business trust established under the laws of
Massachusetts in 1986. The Trust is governed by an Amended and Restated
Agreement and Declaration of Trust (the "Declaration of Trust") dated January
23, 1997. The Trust is a successor in interest to Loomis-Sayles Mutual Fund. On
March 1, 1990, the Trust's name was changed from "Loomis-Sayles Mutual Fund" to
"CGM Mutual Fund" to reflect the assumption by Capital Growth Management Limited
Partnership ("CGM" or the "Investment Manager") of investment advisory
responsibilities with respect to the Trust. On December 20, 1991, the Trust's
name was changed to CGM Trust and the Fund's name was changed to CGM Mutual Fund
in connection with the organization of CGM Fixed Income Fund as a second series
of the Trust.

- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
- -------------------------------------------------------------------------------

The Fund's investment 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. There are no assurances that the
Fund will achieve its objective.

The Fund seeks to attain its objective by investing substantially all
of its assets in equity securities and fixed-income securities. The Fund is
"flexibly managed"; it sometimes will be more heavily invested in equity or
fixed-income securities, depending on management's view of the economic and
investment outlook. The Fund will ordinarily invest its assets so that
approximately 25% (or more) of the Fund's total assets will be invested in debt
or fixed-income securities.

The Fund may invest up to 35% of its total assets in debt or
fixed-income securities of a quality below investment grade at the time of
investment (i.e. securities rated lower than Baa or baa by Moody's Investors
Service, Inc. ("Moody's") or lower than BBB by Standard and Poor's Corporation
("S&P"), or their equivalent as determined by the Investment Manager), including
up to 10% of its total assets in fixed income securities rated at the time of
investment Caa or lower by Moody's or CCC or lower by S&P, or their equivalent
as determined by the Investment Manager. Risks associated with such investments
are described in the Prospectus.

The Fund may not:

(1) Issue any senior securities, except as it may be permitted by the
terms of any exemptive order or similar rule issued by the
Securities and Exchange Commission (the "SEC") relating to multiple
classes of shares of beneficial interest of the Trust, and provided
further that collateral arrangements with respect to forward
contracts, future contracts, short sales or options, including
deposits of initial and variation margin, shall not be considered
to be the issuance of a senior security for the purposes of this
restriction;

(2) Act as underwriter of securities issued by others;

(3) Invest in oil, gas or other mineral leases, rights or royalty
contracts or in real estate, commodities or commodity contracts;

(4) Make loans. (For purposes of this investment restriction, neither
(i) entering into repurchase agreements nor (ii) the purchase of
bonds, debentures, commercial paper, corporate notes and similar
evidences of indebtedness, which are a part of an issue to the
public, is considered the making of a loan);

(5) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of any one issuer or invest more
than 5% of the value of its total assets in the securities of one
issuer, except the U.S. Government, its agencies or
instrumentalities;

(6) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that
there is no limit with respect to investments in the U.S.
Government, its agencies or instrumentalities;

(7) Borrow money in excess of 10% of its total assets (taken at cost)
or 5% of its total assets (taken at current value), whichever is
lower, nor borrow any money except as a temporary measure for
extraordinary or emergency purposes.

If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease resulting from a change in the values of assets
will not constitute a violation of such restriction.

The investment restrictions above have been adopted by the Trust as
fundamental policies of the Fund. Under the 1940 Act, a fundamental policy may
not be changed without the vote of a majority of the outstanding voting
securities of the Fund, as defined under the 1940 Act. "Majority" means the
lesser of (1) 67% or more of the shares present at a meeting of shareholders of
the Fund, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (2) more than 50% of the outstanding
shares of the Fund.

Non-fundamental investment restrictions may be changed at any time by
vote of a majority of the Fund's Board of Trustees. Although it is a fundamental
policy of the Fund not to invest in real estate, the Fund may purchase publicly
traded securities issued by real estate investment trusts. Real estate
investment trusts may be affected by changes in underlying property values and
mortgage real estate investment trusts may also be affected by the quality of
credit extended. Other risks associated with real estate investment trusts
include the possibility of a decline in real estate values, overbuilding,
increased competition, and other risks related to local or general economic
conditions; rising operating costs and property taxes; and fluctuations in
rental income. Additionally, rising interest rates generally decrease the value
of high-yielding securities and increase the costs of obtaining financing, which
could cause the value of the Fund's investments in such securities to decline.

The Fund may invest in repurchase agreements which are agreements by
which the Fund purchases a security and obtains a simultaneous commitment from
the seller (a bank or, to the extent permitted by the 1940 Act, a recognized
securities dealer) to repurchase the security at an agreed-upon price and date
(usually seven days or less from the date of original purchase). The resale
price is in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
minimal market risk. While the underlying security may be a bill, certificate of
indebtedness, note or bond issued by an agency, authority or instrumentality of
the U.S. Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the
underlying security. In such event, the Fund would attempt to exercise rights
with respect to the underlying security, including possible disposition in the
market. However, the Fund may be subject to various delays and risks of loss,
including (1) possible declines in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (2) possible
reduced levels of income and lack of access to income during this period and (3)
inability to enforce rights and the expenses involved in attempted enforcement.

- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- -------------------------------------------------------------------------------

Although the Fund's objective is long-term capital appreciation, it
frequently sells portfolio securities in response to changes in market, industry
or individual company conditions or outlook, even though those securities may
only have been held for short periods of time. This policy may result in higher
securities transaction costs. To the extent that this policy results in gains on
investments, the Fund will make distributions to shareholders, which may
accelerate the shareholders' tax liabilities for realized gains and may result
in the distribution of short-term capital gains taxable as ordinary income. See
"Income Dividends, Capital Gains Distributions and Tax Status."

The Fund's portfolio turnover rate for each of the last ten years is
set forth in the Prospectus in the table entitled "Financial Highlights." The
Fund's portfolio turnover rate has varied significantly from year to year in the
recent past due to the volatility of economic and market conditions, and the
Fund anticipates similar variations in the future.

- -------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------

PETER O. BROWN (Age 55) -- Trustee;
30 Douglas Road, Rochester, NY; Partner, Harter, Secrest & Emery;
formerly Executive Vice President and Chief Operating Officer,
The Glenmede Trust Company; formerly Senior Vice President, Chase
Lincoln First Bank, N.A.

NICHOLAS J. GRANT (Age 80) -- Trustee;
77 Massachusetts Avenue, Cambridge, MA; Professor of Metallurgy
and Materials Science, Massachusetts Institute of Technology.

G. KENNETH HEEBNER (Age 56)* -- Trustee and Vice President;
Employee, CGM; formerly Vice President and Director, Loomis,
Sayles and Company, Incorporated ("Loomis Sayles").

ROBERT L. KEMP (Age 64)* -- Trustee and President;
Employee, CGM; formerly President and Director, Loomis Sayles.

ROBERT B. KITTREDGE (Age 75) -- Trustee;
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly
Vice President, General Counsel and Director, Loomis Sayles.

LAURENS MACLURE (Age 70) -- Trustee;
183 Sohier Street, Cohasset, MA; Retired; formerly President and
Chief Executive Officer, New England Deaconess Hospital.

JAMES VAN DYKE QUEREAU, JR. (Age 48) -- Trustee;
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton
Management Company; formerly Institutional Managing Partner,
Loomis Sayles.

J. BAUR WHITTLESEY (Age 49) -- Trustee;
1521 Locust Street, Philadelphia, PA; Attorney.

- --------
* Trustee deemed to be an "interested person" of the Fund, as defined by
the 1940 Act.

KATHLEEN S. HAUGHTON (Age 36) -- Vice President;
222 Berkeley Street, Boston, MA 02116; Employee -- Investor
Services Division, CGM; formerly Vice President, Boston Financial
Data Services, Inc.

LESLIE A. LAKE (Age 52) -- Vice President and Secretary;
Employee -- Office Administrator, CGM; formerly Office
Administrator, Capital Growth Management Division of Loomis
Sayles.

MARTHA I. MAGUIRE (Age 41) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing
communications consultant (self-employed); formerly Sales
Promotion Consultant, The New England.

MARY L. STONE (Age 52) -- Assistant Vice President;
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.

FRANK N. STRAUSS (Age 35) -- Treasurer;
222 Berkeley Street, Boston, MA 02116; Employee -- Chief
Financial Officer, CGM; formerly Vice President of Fund
Accounting, Freedom Capital Management Corporation and Assistant
Vice President, The Boston Company, Inc.

W. DUGAL THOMAS (Age 59) -- Vice President;
Employee -- Director of Marketing, CGM; formerly Director of
Marketing, Loomis Sayles.

Each of the Fund's trustees is also a trustee of one or more other
investment companies for which CGM acts as investment adviser. Except as
indicated above, the address of each trustee and officer of the Fund affiliated
with CGM is One International Place, Boston, Massachusetts 02110.

As of January 31, 1997, the officers and trustees of the Fund owned
beneficially less than 1% of the outstanding shares of the Fund.

The Fund pays no compensation to its officers or to the trustees listed
above who are interested persons of the Fund. Officers and trustees receive no
pension or retirement benefits paid from Fund expenses. The following table sets
forth the compensation paid by the Trust to its trustees for the year ended
December 31, 1996:

<TABLE>
<CAPTION>
Pension Total
or Retirement Estimated Compensation From
Aggregate Benefits Accrued Annual Registrant and
Name of Compensation as Part of Fund Benefit Upon Fund Complex
Trustee From Trust Expenses Retirement Paid to Trustees(a)
- ------- ---------- -------- ---------- -------------------

<S> <C> <C> <C> <C>
Peter O. Brown $26,430.25 None None $35,750.00
Nicholas J. Grant 30,930.25 None None 41,750.00
G. Kenneth Heebner None None None None
Robert L. Kemp None None None None
Robert B. Kittredge 26,430.25 None None 35,750.00
Laurens Maclure 26,430.25 None None 35,750.00
James Van Dyke Quereau, Jr. 26,430.25 None None 35,750.00
J. Baur Whittlesey 26,430.25 None None 35,750.00
</TABLE>

- ---------------
(a) The Fund Complex is comprised of two Trusts with a total of five funds.

- -------------------------------------------------------------------------------
INVESTMENT ADVISORY AND OTHER SERVICES
- -------------------------------------------------------------------------------

Advisory Agreement. CGM serves as investment manager of the Fund under
an advisory agreement approved by the shareholders of the Fund at a special
meeting held on December 12, 1996 and effective as of December 13, 1996. CGM has
served as investment manager of the Fund since March 1, 1990. Prior to March 1,
1990, the Fund was managed by Loomis Sayles, whose Capital Growth Management
Division was reorganized into CGM on that date.

Under the advisory agreement, CGM manages the investment and
reinvestment of assets of the Fund and generally administers its affairs,
subject to supervision by the Board of Trustees of the Trust. CGM furnishes, at
its own expense, all necessary office supplies, facilities and equipment,
services of executive and other personnel of the Fund and certain administrative
services. For these services, CGM is compensated at the annual percentage rate
of 0.90% of the first $500 million of the Fund's average daily net asset value,
0.80% of the next $500 million of such value and 0.75% of such value in excess
of $1 billion. While this rate is higher than that paid by most other investment
companies, it is comparable to the fees paid by many investment companies having
investment objectives and policies similar to those of the Fund. For the fiscal
years ended December 31, 1994, 1995 and 1996, the advisory fee paid to CGM in
respect of services rendered to the Fund amounted to $7,523,197, $7,637,552 and
$8,033,863, respectively.

The Fund pays the compensation of its trustees who are not partners,
directors, officers or employees of CGM or its affiliates (other than registered
investment companies); registration, filing, and other fees in connection with
requirements of regulatory authorities; all charges and expenses of its
custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; all taxes and fees payable to governmental agencies; the
cost of any certificates representing shares of the Fund; the expenses of
meetings of the shareholders and trustees of the Fund; the charges and expenses
of the Fund's legal counsel; interest, including on any borrowings by the Fund;
the cost of services, including services of counsel, required in connection with
the preparation of, and the costs of printing, registration statements and
prospectuses relating to the Fund, including amendments and revisions thereto,
annual, semiannual, and other periodic reports of the Fund, and notices and
proxy solicitation material furnished to shareholders of the Fund or regulatory
authorities, to the extent that any such materials relate to the Fund or its
shareholders; and the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.

CGM also acts as investment adviser to CGM Capital Development Fund,
CGM Fixed Income Fund, CGM American Tax Free Fund and CGM Realty Fund and three
other mutual fund portfolios. CGM also provides investment advice to other
institutional clients.

Certain officers and trustees of the Fund also serve as officers,
directors or trustees of other investment companies advised by CGM. The other
investment companies and clients served by CGM sometimes invest in securities in
which the Fund also invests. If the Fund and such other investment companies or
clients advised by CGM desire to buy or sell the same portfolio securities at
the same time, purchases and sales will be allocated to the extent practicable
on a pro rata basis in proportion to the amounts desired to be purchased or sold
for each. It is recognized that in some cases the practices described in this
paragraph could have a detrimental effect on the price or amount of the
securities which the Fund purchases or sells. In other cases, however, it is
believed that these practices may benefit the Fund. It is the opinion of the
trustees that the desirability of retaining CGM as adviser for the Fund
outweighs the disadvantages, if any, which might result from these practices.

Custodial Arrangements. State Street Bank and Trust Company ("State
Street Bank"), Boston, Massachusetts 02102, is the Fund's custodian. As such,
State Street Bank holds in safekeeping certificated securities and cash
belonging to the Fund and, in such capacity, is the registered owner of
securities held in book entry form belonging to the Fund. Upon instruction,
State Street Bank receives and delivers cash and securities of the Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of the Fund and calculates the total
net asset value, total net income, and net asset value per share of the Fund on
each business day.

Independent Accountants. The Fund's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of the Fund's financial statements,
assists in the preparation of the Fund's federal and state income tax returns
and consults with the Fund as to matters of accounting and federal and state
income taxation. The information concerning financial highlights in the
Prospectus, and the financial statements incorporated by reference into this
Statement, have been so included in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

Other Arrangements. Certain office space, facilities, equipment and
administrative services for the Fund and other mutual funds under the investment
management of the CGM organization are furnished by CGM. In addition, CGM
provides bookkeeping, accounting, auditing, financial and related clerical
services for which it is reimbursed by the Fund based on the cost of providing
these services. For the services rendered to the Fund for the fiscal year 1996,
fiscal year 1995 and fiscal year 1994, CGM was reimbursed in the amounts of
$83,000, $80,000 and $80,000, respectively.

- -------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -------------------------------------------------------------------------------

In placing orders for the purchase and sale of portfolio securities for
the Fund, CGM always seeks the best price and execution. Transactions in
unlisted securities will be carried out through broker-dealers who make the
primary market for such securities unless, in the judgment of CGM, a more
favorable price can be obtained by carrying out such transactions through other
brokers.

CGM selects only brokers it believes are financially responsible, will
provide efficient and effective services in executing, clearing and settling an
order and will charge commission rates which, when combined with the quality of
the foregoing services, will produce the best price and execution for the
transaction. This does not necessarily mean that the lowest available brokerage
commission will be paid. However, the commissions are believed to be competitive
with generally prevailing rates. CGM will use its best efforts to obtain
information as to the general level of commission rates being charged by the
brokerage community from time to time and will evaluate the overall
reasonableness of brokerage commissions paid on transactions by reference to
such data. In making such evaluation, all factors affecting liquidity and
execution of the order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account. The Fund will not
pay a broker a commission at a higher rate than is otherwise available for the
same transaction in recognition of the value of research services provided by
the broker or in recognition of the value of any other services provided by the
broker which do not contribute to the best price and execution of the
transaction.

Receipt of research services from brokers may sometimes be a factor in
selecting a broker which CGM believes will provide the best price and execution
for a transaction. These research services include not only a wide variety of
reports on such matters as economic and political developments, industries,
companies, securities, portfolio strategy, account performance, daily prices of
securities, stock and bond market conditions and projections, asset allocation
and portfolio structure, but also meetings with management representatives of
issuers and with other analysts and specialists. Although it is not possible to
assign an exact dollar value to these services, they may, to the extent used,
tend to reduce CGM's expenses. Such services may be used by CGM in servicing
other client accounts and in some cases may not be used with respect to the
Fund. Receipt of services or products other than research from brokers is not a
factor in the selection of brokers.

In 1996, brokerage transactions of the Fund aggregating $3,448,420,906
were allocated to brokers providing research services and $3,942,432 in
commissions were paid on these transactions. During 1994, 1995 and 1996 the Fund
paid total brokerage fees of approximately $5,775,145, $5,702,810 and
$4,313,317, respectively. The variation in the Fund's brokerage commissions is
substantially attributable to fluctuating portfolio activity.

- -------------------------------------------------------------------------------
DESCRIPTION OF THE TRUST
- -------------------------------------------------------------------------------

The Declaration of Trust of the Trust currently permits the trustees to
issue an unlimited number of shares of beneficial interest of separate series of
the Trust. Interests in the portfolio described in the Prospectus and in this
Statement are represented by shares of the Fund. Each share of the Fund
represents an interest in such series which is equal to and proportionate with
the interest represented by each other share. The shares of the Fund do not have
any preemptive rights. Upon liquidation of the portfolio, shareholders of the
Fund are entitled to share pro rata in the net assets of such portfolio
available for distribution to shareholders. The Declaration of Trust also
permits the trustees to charge shareholders directly for custodial, transfer
agency and servicing expenses. The trustees have no present intention of making
such direct charges.

The Declaration of Trust also permits the trustees, without shareholder
approval, to create one or more additional series or classes of shares or to
reclassify any or all outstanding shares as shares of particular series or
classes, with such preferences and rights and eligibility requirements as the
trustees may designate. While the trustees have no current intention to exercise
the power to establish separate classes of the existing series of the Fund, it
is intended to allow them to provide for an equitable allocation of the impact
of any future regulatory requirements, which might affect various classes of
shareholders differently. The trustees may also, without shareholder approval,
merge two or more existing series.

Shareholder Rights

On January 31, 1997, there were 38,623,100 shares of the Fund
outstanding. On that date State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts, owned 9,453,938 shares --
about 24% of the total. In almost all cases, State Street Bank does not have the
power to vote or to dispose of the shares except at the direction of the
beneficial owner.

Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and may vote (to the extent
provided herein) in the election of trustees and the termination of the Fund and
on other matters submitted to the vote of shareholders. There will normally be
no meetings of shareholders for the purpose of electing trustees, except that in
accordance with the 1940 Act (i) the Trust will hold a shareholders' meeting for
the election of trustees at such time as less than a majority of the trustees
holding office have been elected by shareholders, and (ii) if the appointment of
a trustee to fill a vacancy in the Board of Trustees would result in less than
two-thirds of the trustees having been elected by shareholders, that vacancy may
only be filled by a vote of the shareholders. In addition, trustees may be
removed from office by a written consent signed by the holders of two-thirds of
the outstanding shares and filed with the Trust's custodian or by a vote of the
holders of two-thirds of the outstanding shares at a meeting duly called for the
purpose, which meeting shall be held upon the written request of the holders of
not less than 10% of the outstanding shares. Upon written request by ten or more
shareholders of record who have been such for at least six months and who hold
in the aggregate shares equal to at least the lesser of (i) $25,000 in net asset
value or (ii) 1% of the outstanding shares, stating that such shareholders wish
to communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust will either provide access to a list of shareholders or disseminate
appropriate materials (at the expense of the requesting shareholders). Except as
set forth above, the trustees shall continue to hold office and may appoint
successor trustees. Voting rights are not cumulative.

No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the holders of the outstanding shares of the
Trust except (i) to change the Trust's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and existing
series or subseries of Trust shares or other provisions relating to Trust shares
in response to applicable laws of regulations. The shareholders of the Fund
shall not be entitled to vote on matters exclusively affecting any other series,
such matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the series and the approval
of the investment advisory contracts of the series. Similarly, no shareholders
of any other series shall be entitled to vote on any such matters exclusively
affecting the Fund. In particular, the phrase "majority of the outstanding
voting securities of the Fund" as used in this Statement shall refer only to the
shares of the Fund.

Shareholder and Trustee Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust;
however, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or trustees. The Declaration of Trust provides for indemnification out of Fund
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote since it
is limited to circumstances in which the disclaimer is inoperative and the Fund
itself would be unable to meet its obligations.

The Declaration of Trust further provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a trustee against any liability to which the
trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Trust provide for indemnification by the Trust of
the trustees and officers of the Trust except with respect to any matter as to
which any such person did not act in good faith in the reasonable belief that
such action was in or not opposed to the best interests of the Trust. No officer
or trustee may be indemnified against any liability to the Trust or the Trust's
shareholders to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.

All persons dealing with the Fund must look only to the assets of the
Fund for the enforcement of any claims against the Fund and no other series of
the Trust assumes any liability for obligations entered into on behalf of the
Fund.

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HOW TO BUY SHARES
- -------------------------------------------------------------------------------

The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."

- -------------------------------------------------------------------------------
ADVERTISING AND PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------

Calculation of Total Return

The Fund may include total return information in advertisements or
written sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any dividends
or capital gains distributions are automatically reinvested in the Fund rather
than paid to the investor in cash. The formula for total return used by the Fund
includes three steps:

(1) adding to the total number of shares purchased by a hypothetical
$1,000 investment in the Fund all additional shares that would have been
purchased if all dividends and distributions paid or distributed during the
period had been automatically reinvested;

(2) calculating the value of the hypothetical initial investment as of
the end of the period by multiplying the total number of shares owned at the end
of the period by the net asset value per share on the last trading day of the
period; and

(3) dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for periods of less
than one year.

For the one, five and ten year periods ended December 31, 1996, the
Fund's average annual total return was 23.7%, 12.4% and 13.8%, respectively. For
the one, five, ten, fifteen and twenty-five year periods ended December 31,
1996, the total return on a hypothetical $1,000 investment in the Fund on an
aggregate basis was 23.7%, 79.3%, 264.5%, 911.9% and 1,390.8%, respectively. In
computing performance information for the Fund, no adjustment has been made for
a shareholder's tax liability on taxable dividends and capital gains
distributions.

Calculation of Yield

The Fund may use yield information in advertisements or written sales
material. The Fund's yield is based on a recent 30 day period, and is determined
in accordance with the SEC's standardized formula by:

(1) calculating the aggregate dividends and adjusted interest earned
during that period, net of recurring expenses accrued for the period; and

(2) dividing that amount by the product of (A) the average daily number
of shares outstanding during the period and (B) the maximum offering price per
share on the last day of the period (less any earned income expected to be
declared as a dividend shortly thereafter).

Performance Comparisons

Total return may be used to compare the performance of the Fund against
certain widely acknowledged standards or indices for stock and bond market
performance or against the U.S. Bureau of Labor Statistics' Consumer Price
Index.

The Standard & Poor's 500 Composite Index (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 400 industrial, 60 transportation and 40 financial services
concerns.

The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.

No brokerage commissions or other fees are factored into the values of
the S&P 500 and the Dow Jones Industrial Average.

The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of change, over time, in the prices of
goods and services in major expenditure groups.

Lipper Analytical Services, Inc., an independent service that monitors
the performance of over 9,505 mutual funds, calculates total return for those
funds grouped by investment objective. From time to time, the Fund may include
its ranking among mutual funds tracked by Lipper in advertisements or sales
literature.

Morningstar, Inc. ("Morningstar") is an independent mutual fund ranking
service. Morningstar proprietary ratings reflect historical risk-adjusted
performance and are subject to change every month. Funds with at least three
years of performance history are assigned ratings from one star (lowest) to five
stars (highest). Morningstar ratings are calculated from the funds' three-,
five-, and ten-year average annual returns (when available) and a risk factor
that reflects the fund performance relative to three-month Treasury bill monthly
returns. Funds' returns are adjusted for fees and sales loads. Ten percent of
the funds in an investment category receive five stars, 22.5% receive four
stars, 35% receive three stars, 22.5% receive two stars, and the bottom 10%
receive one star. From time to time, the Fund may include its ranking among
mutual funds tracked by Morningstar in advertisements or sales literature.

Value Line, Inc. ("Value Line"), an independent mutual fund ranking
service reviews the performance of 6,101 mutual funds. In ranking mutual funds,
Value Line uses two indicators: a Risk Rank to show the total level of risk a
fund has assumed and an Overall Rank measuring various performance criteria
taking risk into account. Funds are ranked from 1 to 5, with 1 the highest
Overall Rank (the best risk-adjusted performance) and the best Risk Rank (the
least risky). From time to time, the Fund may include ranking information
provided by Value Line in advertisements and sales literature.

From time to time, articles about the Fund regarding performance,
rankings and other characteristics of the Fund and information about persons
responsible for its portfolio management may appear in national publications and
major metropolitan newspapers including, but not limited to, The Wall Street
Journal, The Boston Globe, The New York Times and Barron's, Forbes, Fortune,
Money, Worth, Kiplinger's Personal Finance, Mutual Funds, Individual Investor,
Bloomberg Personal and Business Week magazines. In particular, some or all of
these publications may publish their own rankings or performance reviews of
mutual funds, including the Fund. References to or reprints of, or quotations
from, such articles may be used in the Fund's promotional literature.

Price-to-Earnings Ratio Comparisons

From time to time the Fund may include information about the weighted
average price-to-earnings ratio ("P/E ratio") of the equity portion of its
portfolio and the P/E ratio of the equity portion of the portfolios of other
mutual funds tracked by Morningstar in advertisements or written sales material.
Morningstar calculates the P/E ratio monthly based on the Fund's portfolio
statistics provided by One Source, a financial information firm. The P/E ratio
as calculated by Morningstar is the weighted average of the P/E ratios of the
stocks in a fund's portfolio. The P/E ratio of a stock is calculated by dividing
the current price of the stock by its trailing 12 months earnings per share. In
computing the average, Morningstar weighs each portfolio holding by the
percentage of equity assets it represents, so that larger positions have
proportionately greater influence on a fund's final P/E ratio. The statistics
used by Morningstar are based on the most recent information available to
Morningstar concerning a fund's portfolio composition and the price and earnings
of the stocks in its portfolio.

CGM Mutual Fund's P/E ratio at December 31, 1996 was 24.5 as calculated
by Morningstar. Morningstar calculates the P/E ratios of 4,190 U.S. diversified
equity funds.

The Fund has been continuously managed since 1981 by G. Kenneth
Heebner.

- -------------------------------------------------------------------------------
NET ASSET VALUE AND PUBLIC OFFERING PRICE
- -------------------------------------------------------------------------------

The method for determining the public offering price and net asset
value per share is summarized in the Prospectus under "Pricing of Shares."

The net asset value of a share of the Fund is determined by dividing
the Fund's total net assets (the excess of its assets over its liabilities) by
the total number of shares outstanding and rounding to the nearest cent. Such
determination is made as of the close of normal trading on the New York Stock
Exchange on each day on which the Exchange is open for unrestricted trading, and
no less frequently than once daily on each day during which there is sufficient
trading in the Fund's portfolio securities that the value of the Fund's shares
might be materially affected. During the 12 months following the date of this
Statement, the New York Stock Exchange is expected to be closed on the following
holidays: Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas
Day, New Year's Day, Presidents' Day and Good Friday.

Securities which are traded over-the-counter or on a stock exchange
will be valued according to the broadest and most representative market based on
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. U.S. government securities are valued at the most recent quoted price
on the date of valuation.

For equity securities, it is expected that the broadest and most
representative market will ordinarily be either (i) a national securities
exchange, such as the New York Stock Exchange or American Stock Exchange, or
(ii) the NASDAQ National Market System. For corporate bonds, notes, debentures
and other fixed-income securities, it is expected that the broadest and most
representative market will ordinarily be the over-the-counter market.
Fixed-income securities may, however, be valued on the basis of prices provided
by a pricing service approved by the Board of Trustees when such prices are
believed to reflect the fair market value of such securities. The prices
provided by the pricing service may be determined based on 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.
Instruments with maturities of sixty days or less are valued at amortized cost,
which approximates market 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.

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SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------

Open Accounts

A shareholder's investment in the Fund is credited to an open account
maintained for the shareholder by the CGM Shareholder Services Department ("CGM
Shareholder Services") of Boston Financial Data Services, Inc. ("BFDS"), the
shareholder servicing agent for State Street Bank. The address is: CGM
Shareholder Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.

Certificates representing shares are issued only upon written request
to CGM Shareholder Services but are not issued for fractional shares. Following
each transaction in the account, a shareholder will receive an account statement
disclosing the current balance of shares owned and the details of recent
transactions that have taken place during the year. After the close of each
fiscal year, CGM Shareholder Services will send each shareholder a statement
providing federal tax information on dividends and distributions paid to the
shareholder during the year. The year-end statement should be retained as a
permanent record. Shareholders will be charged a fee for duplicate information.

The open account system permits the purchase of full and fractional
shares and, by making the issuance and delivery of certificates representing
shares unnecessary, eliminates problems of handling and safekeeping, and the
cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.

The costs of maintaining the open account system are borne by the Fund,
and no direct charges are made to shareholders. Although the Fund has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.

Systematic Withdrawal Plans ("SWP")

A Systematic Withdrawal Plan, referred to in the Prospectus under
"Shareholder Services--Systematic Withdrawal Plan," provides for monthly,
quarterly, semiannual or annual withdrawal payments of $50 or more from the
account of a shareholder provided that the account has a value of at least
$10,000 at the time the plan is established. A shareholder may establish a SWP
by completing the Account Update Form.

Payments will be made either to the shareholder or to any other person
or entity designated by the shareholder. If payments are issued to an individual
other than the registered owner(s) and/or mailed to an address other than the
address of record, a signature guarantee will be required on the Account Update
Form. Shares to be included in a Systematic Withdrawal Plan must be held in an
Open Account rather than certificated form. Income dividends and capital gain
distributions will be reinvested at the net asset value determined as of the
close of the New York Stock Exchange on the record date for the dividend or
distribution. If withdrawal checks are returned to the Fund as "undeliverable"
or remain uncashed for more than six months, the shareholder's Systematic
Withdrawal Plan will be canceled, such undeliverable or uncashed checks will be
canceled and such amounts reinvested in the Fund at the per share net asset
value determined as of the date of cancellation of the checks.

Since withdrawal payments represent in whole or in part proceeds from
the liquidation of shares, the shareholder should recognize that withdrawals may
reduce and possibly exhaust the value of the account, particularly in the event
of a decline in net asset value. Accordingly, the shareholder should consider
whether a Systematic Withdrawal Plan and the specified amounts to be withdrawn
are appropriate in the circumstances. The Trust makes no recommendations or
representations in this regard. It may be appropriate for the shareholder to
consult a tax adviser before establishing such a plan. See "Redemptions" and
"Income Dividends, Capital Gain Distributions and Tax Status" below for certain
information as to federal income taxes.

Exchange Privilege

A shareholder may exchange shares of the Fund for shares of CGM Fixed
Income Fund, CGM American Tax Free Fund, CGM Realty Fund, New England Cash
Management Trust, New England Tax Exempt Money Market Trust or CGM Capital
Development Fund; however, shares of CGM Capital Development Fund may only be
exchanged for if you were a shareholder on September 24, 1993, and have remained
a shareholder in the CGM Capital Development Fund. CGM Capital Development Fund
shares are not generally available to other persons except in special
circumstances that have been approved by, or under the authority of, the Board
of Trustees of CGM Capital Development Fund. The special circumstances currently
approved by the Board of Trustees of CGM Capital Development Fund are limited to
the offer and sale of shares of such fund to the following additional persons:
trustees of CGM Capital Development Fund, employees of the Investment Manager
and counsel to such fund and the Investment Manager. The value of shares
exchanged must be at least $1,000 and all exchanges are subject to the minimum
investment requirements of the fund into which the exchange is being made. This
option is summarized in the Prospectus under "Shareholder Services--Exchange
Privilege." The Trust reserves the right to terminate or limit the privilege of
a shareholder who makes more than four exchanges (or two round trips) per year
and to prohibit exchanges during the first 15 days following an investment in
the Fund. A shareholder may exercise the exchange privilege only when the fund
into which shares will be exchanged is registered or qualified in the state in
which such shareholder resides.

Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided that a special authorization form is on file
with the Trust, or (ii) a written exchange request to CGM Shareholder Services
accompanied by an account application for the appropriate fund. Exchange
requests cannot be revoked once they have been received in good order. The Trust
reserves the right to modify this exchange privilege without prior notice,
except as otherwise required by law or regulation.

For federal income tax purposes, an exchange constitutes a sale of
shares, which may result in a capital gain or loss.

Automatic Investment Plans ("AIP")

Once initial investment minimums have been satisfied (see "How to
Purchase Shares" in the Prospectus), a shareholder may participate in an
Automatic Investment Plan, pursuant to which the Fund debits $50.00 or more on
or about the same date each month from a shareholder's checking account and
transfers the proceeds into the shareholder's Fund account. To participate, a
shareholder must authorize the Fund and its agents to initiate Automated
Clearing House ("ACH") debits against the shareholder's designated checking
account at a bank or other financial institution. Please contact CGM Shareholder
Services at 800-343-5678 to determine the requirements associated with debits
from savings banks and credit unions. Debits from money market accounts are not
acceptable. Shareholders receive a confirmation of each purchase of Fund shares
under the AIP. If a shareholder elects to redeem shares of the Fund purchased
under the AIP within 15 days of such purchase, the shareholder may experience
delays in receiving redemption proceeds. See "All Redemptions."

Once a shareholder enrolls in the AIP, the Fund and its agents are
authorized to initiate ACH debits against the shareholder's account payable to
the order of The CGM Funds. Such authority remains in effect until revoked by
the shareholder, and, until the Fund actually receives such notice of
revocation, the Fund is fully protected in initiating such debits. Participation
in the AIP may be terminated by sending written notice to CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511, or by calling
800-343-5678 more than 14 days prior to the next scheduled debit date. The Fund
may terminate a shareholder's participation in the AIP immediately in the event
that any item is unpaid by the shareholder's financial institution. The Fund may
terminate or modify the AIP at any time.

Retirement Plans

For participants under age 59 1/2, all income dividends and capital
gain distributions of plan participants must be reinvested. Plan documents and
further information can be obtained from the Trust by writing or calling the
Trust as indicated on the cover of this Statement.

Check with your financial or tax adviser as to the suitability of Fund
shares for your retirement plan.

Address Changes

Shareholders can request to change their record address either by
telephone or in writing (by mail or delivery service, but not by facsimile) in
accordance with policies and procedures of the Trust. After an address change is
made, no telephone or written redemption requests will be honored for three
months unless the registered owner's signature is guaranteed on the request.
Written requests for a change in address may be mailed to: CGM Shareholder
Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.

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REDEMPTIONS
- -------------------------------------------------------------------------------

The procedures for redemption of Fund shares are summarized in the
Prospectus under "How to Redeem Shares."

Except as noted below, signatures on redemption requests must be
guaranteed by an eligible guarantor institution in accordance with procedures
established by the Trust. Signature guarantees by notaries public are not
acceptable.

The procedures established by the Trust provide that an "eligible
guarantor institution" means any of the following: banks (as defined in ss. 3(a)
of the Federal Deposit Insurance Act (the "FDIA") [12 U.S.C. ss. 1813(a)]);
brokers, dealers, municipal securities brokers, government securities dealers
and government securities brokers, as those terms are defined under the
Securities Exchange Act of 1934 (the "Act"); credit unions (as defined in ss.
19(b)(1)(A) of the Federal Reserve Act [12 U.S.C. ss. 461(b)]); national
securities exchanges, registered securities associations and clearing agencies,
as those terms are defined under the Act; and savings associations (as defined
in ss. 3(b) of the FDIA [12 U.S.C. ss. 1813(b)]). However, as noted in the
Prospectus, a signature guarantee will not be required if the proceeds of the
redemption do not exceed $25,000, and the proceeds check is made payable to the
registered owner(s) and mailed to the record address, which has not changed in
the prior three months. If the record address has changed within the prior three
months, a signature guarantee will be required. This policy applies to both
written and telephone redemption requests.

Redeeming by Telephone

There are two ways to redeem by telephone. In either case, a
shareholder should call 800-343-5678 prior to 4:00 p.m. (Eastern time). Requests
made after that time or on a day when the New York Stock Exchange is not open
for business cannot be accepted. Telephone redemptions are not available for
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or money purchase pension and
profit sharing plans under a CGM retirement plan where State Street Bank is the
custodian or trustee.

Check Sent to the Record Address

A shareholder may request that a check be sent to the record address on
the account, provided that the address has not changed for the last three months
and the shareholder is redeeming $25,000 or less. Except in the case of a CGM
retirement plan, the service option of telephone redemption by check is
available to shareholders automatically unless this option is declined in the
application or in writing. The check will be made payable to the registered
owner(s) of the account.

If checks representing redemption proceeds are returned "undeliverable"
or remain uncashed for six months, such checks shall be canceled and such
proceeds shall be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.

Proceeds Wired to a Predesignated Bank

A shareholder may request that the redemption proceeds be wired to the
bank selected on the Fund application or subsequently on the Account Update Form
available from the Trust. A nominal wire fee, currently $5.00, is deducted from
the proceeds. When selecting the service, a shareholder must designate a bank
account to which the redemption proceeds should be wired. Any change in the bank
account so designated may be made by furnishing CGM Shareholder Services a
completed Account Update Form with a signature guarantee. Whenever the Account
Update Form is used, the shareholder's signature must be guaranteed as described
above. Telephone redemptions may be made only if an investor's bank is a member
of the Federal Reserve System or has a correspondent bank that is a member of
the System. If the account is with a savings bank, it must have only one
correspondent bank that is a member of the System.

All Redemptions

The redemption price will be the net asset value per share next
determined after the redemption request is received by CGM Shareholder Services
in good order (including any necessary documentation). Redemption requests
cannot be revoked once they have been received in good order. Proceeds resulting
from a written redemption request will normally be mailed to you within seven
days after receipt of your request in good order. Telephone redemption proceeds
will normally be mailed or wired within seven days following receipt of a proper
redemption request. If you purchased your Fund shares by check (or through your
AIP) and elect to redeem shares within 15 days of such purchase, you may
experience delays in receiving redemption proceeds. The Trust will process your
redemption request upon receipt of a request in good order. However, the Trust
will generally postpone sending your redemption proceeds from such investment
until it can verify that your check (or AIP investment) has been or will be
collected. Under ordinary circumstances, the Trust can not verify collection of
individual checks (or AIP investments) and may therefore automatically holds
proceeds from redemptions requested during the 15 day period following such
investment for a total of up to seven days. There will be no such automatic
delay following investments paid for by federal funds wire or by bank cashier's
check, certified check or treasurer's check although the Trust may in any case
postpone payment of redemption proceeds for up to seven days.

The Trust will normally redeem shares for cash; however, the Trust
reserves the right to pay the redemption price wholly in kind or partly in kind
and partly in cash if the Board of Trustees of the Trust determines it to be
advisable in the interest of the remaining shareholders. If portfolio securities
are distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Trust is obligated to redeem shares solely in cash for any shareholder
during any 90-day period up to the lesser of $250,000 or 1% of the total net
asset value of the Fund at the beginning of such period.

A redemption constitutes a sale of the shares for federal income tax
purposes on which the investor may realize a long- or short-term capital gain or
loss. See "Income Dividends, Capital Gains Distributions and Tax Status."

Because the expense of maintaining small accounts is disproportionately
high, the Trust may close accounts with 20 shares or less and mail the proceeds
to the shareholder. Shareholders who are affected by this policy will be
notified of the Trust's intention to close the account, and will have 60 days
immediately following the notice in which to acquire the requisite number of
shares. The minimum does not apply to retirement and Uniform Gifts to Minors Act
or Uniform Transfers to Minors Act accounts.

- -------------------------------------------------------------------------------
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
- -------------------------------------------------------------------------------

As described in the Prospectus under "Dividends, Capital Gains
Distributions and Taxes" it is the policy of the Fund to pay quarterly, as
dividends, substantially all net investment income and to distribute annually
all net realized capital gains, if any, after offsetting any capital loss
carryovers.

Income dividends and capital gain distributions are payable in full and
fractional shares of the Fund based upon the net asset value determined as of
the close of the New York Stock Exchange on the record date for such dividend or
distribution. Shareholders, however, may elect to receive their income dividends
or capital gain distributions, or both, in cash. However, if a shareholder
elects to receive capital gains in cash, his or her income dividends must also
be received in cash. Shareholders can elect to receive payments of cash
dividends and capital gains distributions either by check or by direct deposit
to a bank account that they have predesignated. These elections can be made at
the time the account is opened and may be changed by the shareholder at any time
by submitting a written request directly to CGM Shareholder Services or by
calling 800-343-5678. However, changes in bank account information for direct
deposits of cash dividends and capital gains distributions must be made through
an Account Update Form. In order for a change to be effective for any dividend
or distribution, it must be received by CGM Shareholder Services on or before
the record date for such dividend or distribution. If a shareholder elects to
receive distributions in cash and checks are returned "undeliverable" or remain
uncashed for six months, such shareholder's cash election will be changed
automatically and the shareholder's future dividend and capital gains
distributions will be reinvested in the Fund at the per share net asset value
determined as of the date of payment of the distribution. In addition, following
such six month period, any undeliverable or uncashed checks will be cancelled
and such amounts reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.

The Fund has met, and intends to continue to meet, the requirements of
the Internal Revenue Code with respect to regulated investment companies.

The distributions received by the Fund from its investments may, for
federal income tax purposes, consist of ordinary income, long-term capital gains
or a return of capital. The characterization of these distributions to the Fund
may, in turn, affect the tax treatment of the Fund's distributions to its
shareholders. Dividends and distributions are taxable to shareholders in the
same manner whether received in cash or reinvested in additional shares of the
Fund.

Dividends paid by the Fund from net investment income, including
dividends, interest and net short-term capital gains, will be taxable to
shareholders as ordinary income. Distributions of net capital gains (the excess
of net long-term capital gains over net short-term capital losses) which are
designated by the Fund as capital gains distributions are taxable as long-term
capital gains, regardless of the length of time shareholders have owned shares
in the Fund. To the extent that the Fund makes a distribution in excess of its
current and accumulated earnings and profits, the distribution will be treated
first as a tax-free return of capital, reducing the tax basis in a shareholder's
shares, and then, to the extent the distribution exceeds such basis, as a
taxable gain to be realized upon sale of such shares.

Distributions that the Fund receives from a REIT, and dividends of the
Fund attributable to such distributions, will not constitute "dividends" for
purposes of the dividends-received deduction applicable to corporate
shareholders. Dividends and distributions on Fund shares received shortly after
their purchase, although in effect a return of capital, are subject to federal
income taxes.

The Fund is required to withhold and remit to the U.S. Treasury 31% of
all dividends from net investment income and capital gains distributions,
whether distributed in cash or reinvested in shares of the Fund, paid or
credited to any shareholder account for which an incorrect or no taxpayer
identification number has been provided or where the Fund is notified that the
shareholder has underreported income in the past (or the shareholder fails to
certify that he is not subject to withholding). In addition, the Fund will be
required to withhold and remit to the U.S. Treasury 31% of the amount of the
proceeds of any redemption of Fund shares from a shareholder account for which
an incorrect or no taxpayer identification number has been provided or where the
Fund is notified that the shareholder has underreported income in the past (or
the shareholder fails to certify that he is not subject to such withholding).

As required by federal law, detailed federal tax information is
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.

- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

The financial statements and Report of Independent Accountants for the
year ended December 31, 1996, included in the Fund's Annual Report to
Shareholders for the year ended December 31, 1996, are incorporated herein by
reference.
<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM REALTY FUND

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1997

This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM Realty Fund Prospectus dated May
1, 1997 (the "Prospectus"), and should be read in conjunction therewith. A copy
of the Prospectus may be obtained from CGM Trust, c/o The CGM Funds Investor
Services Division, P.O. Box 449, Boston, Massachusetts 02117 (Telephone:
800-345-4048).

RSAI97
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------

Page
----

INTRODUCTION............................................................... 1

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS............................ 1

PORTFOLIO TURNOVER......................................................... 5

MANAGEMENT OF THE FUND..................................................... 5

INVESTMENT ADVISORY AND OTHER SERVICES..................................... 7
Advisory Agreement................................................ 7
Custodial Arrangements............................................ 8
Independent Accountants........................................... 9
Other Arrangements................................................ 9

PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 9

DESCRIPTION OF THE TRUST................................................... 10
Shareholder Rights................................................ 11
Shareholder and Trustee Liability................................. 12

HOW TO BUY SHARES.......................................................... 12

ADVERTISING AND PERFORMANCE INFORMATION.................................... 13
Calculation of Total Return....................................... 13
Calculation of Yield.............................................. 13
Performance Comparisons........................................... 14

NET ASSET VALUE AND PUBLIC OFFERING PRICE.................................. 15

SHAREHOLDER SERVICES....................................................... 16
Open Accounts..................................................... 16
Systematic Withdrawal Plans ("SWP")............................... 17
Exchange Privilege................................................ 18
Automatic Investment Plans ("AIP")................................ 19
Retirement Plans.................................................. 19
Address Changes................................................... 19

REDEMPTIONS................................................................ 20
Redeeming by Telephone............................................ 20
Check Sent to the Record Address.................................. 21
Proceeds Wired to a Predesignated Bank............................ 21
All Redemptions................................................... 21

INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS............... 22

FINANCIAL STATEMENTS....................................................... 24
<PAGE>

- -------------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------------

CGM Realty Fund (the "Fund") is organized as a separate series of
shares of CGM Trust (the "Trust"). The Trust is a Massachusetts business trust
established under the laws of Massachusetts in 1986. The Trust is governed by an
Amended and Restated Agreement and Declaration of Trust (the "Declaration of
Trust") dated January 23, 1997. The Trust is a successor in interest to
Loomis-Sayles Mutual Fund. On March 1, 1990, the Trust's name was changed from
"Loomis-Sayles Mutual Fund" to "CGM Mutual Fund" to reflect the assumption by
Capital Growth Management Limited Partnership ("CGM" or the "Investment
Manager") of investment advisory responsibilities with respect to the Trust. On
December 20, 1991, the Trust's name was changed to CGM Trust.

At least 65% of the Fund's total assets will be invested under normal
conditions in equity securities of companies in the real estate industry. A
company is considered in the real estate industry if construction, ownership,
management, financing and sales of residential, commercial or industrial real
estate accounts for not less than 50% of its gross revenues or net profits.
Investments that the Fund makes in companies with significant real estate
holdings (but not otherwise in the real estate industry) will be considered to
be investments in the real estate industry for purposes of evaluating compliance
with the Fund's investment restrictions. The Fund's total investment in
companies possessing such significant real estate holdings within any particular
industry will not exceed 25% of the market value of the Fund's total assets.

The Fund may not:

(1) Borrow money, except that it may borrow from banks in an amount not
to exceed 1/3 of the value of its total assets and may borrow for temporary
purposes from entities other than banks in an amount not to exceed 5% of the
value of its total assets;

(2) Issue any senior securities, except as permitted by the terms of
any exemptive order or similar rule issued by the Securities and Exchange
Commission (the "SEC") relating to multiple classes of shares of beneficial
interest of the Trust, and provided further that collateral arrangements with
respect to forward contracts, futures contracts, short sales or options,
including deposits of initial and variation margin, shall not be considered to
be the issuance of a senior security for purposes of this restriction;

(3) Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;

(4) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in the real estate industry and in securities issued by the U.S.
Government, its agencies and instrumentalities;

(5) Purchase or sell real estate, except that the Fund may invest in
securities of companies that deal in real estate or are engaged in the real
estate business, including real estate investment trusts, and securities secured
by real estate or interests therein and the Fund may hold and sell real estate
acquired as a result of the Fund's ownership of such securities;

(6) Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
similar instruments;

(7) Make loans to other persons except (a) through the lending of
securities held by it, (b) through the use of repurchase agreements, and (c) by
the purchase of debt securities in accordance with its investment policies;

(8) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in securities of any one issuer, except the U.S.
Government, its agencies or instrumentalities.

If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease in such percentage resulting from a change in the
values of assets will not constitute a violation of such restriction.

The investment restrictions above have been adopted by the Trust as
fundamental policies of the Fund. Under the Investment Company Act of 1940, as
amended (the "1940 Act"), a fundamental policy may not be changed without the
vote of a majority of the outstanding voting securities of the Fund, as defined
under the 1940 Act. "Majority" means the lesser of (1) 67% or more of the shares
present at a meeting of shareholders of the Fund, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding shares of the Fund. Non-fundamental
investment restrictions may be changed at any time by vote of a majority of the
Trust's Board of Trustees.

Although the Fund has the ability to invest in REITs without regard to
the expected duration of the REIT, the Fund does not presently intend to invest
in REITs with finite lives without amending the Trust's registration statement
or supplying further information in the Prospectus or Statement of Additional
Information concerning investments in finite-life REITs. Finite-life REITs may
entail special risks, such as the risk that shareholders will elect to continue
the REIT indefinitely or the risk that the REIT will liquidate and make
distributions of capital returns at any time.

Although the Fund has the ability to invest in financial futures
contracts and options thereon, to invest in puts, calls and warrants, to acquire
securities of closed-end investment companies, to sell securities short against
the box and to loan portfolio securities, the Fund has no current intention of
doing so without amending the Trust's registration statement or supplying
further information in the Prospectus or Statement of Additional Information
concerning such activities.

Restricted securities eligible for resale to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended, may
be determined to be liquid by the Investment Manager under guidelines approved
by the Board of Trustees. In its determination of liquidity with respect to such
securities, the Investment Manager will consider the following factors, among
others: (1) the frequency of trades and quotes for the security, (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers, (3) dealer undertakings to make a market in the security,
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The foregoing investment practice could
have the effect of increasing the level of illiquidity in the Fund to the extent
that qualified institutional buyers become uninterested in purchasing the
securities.

The Fund may invest up to 25% of its total assets in repurchase
agreements. A repurchase agreement is an instrument under which the purchaser
acquires ownership of a security and obtains a simultaneous commitment from the
seller (a bank or, to the extent permitted by the 1940 Act, a recognized
securities dealer) to repurchase the security at an agreed-upon price and date
(usually seven days or less from the date of original purchase). The resale
price is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate on the purchased security. Such transactions afford
the Fund the opportunity to earn a return on temporarily available cash at
minimal market risk. While the underlying security may be a bill, certificate of
indebtedness, note or bond issued by an agency, authority or instrumentality of
the U.S. Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the
underlying security. In such event, the Fund would attempt to exercise rights
with respect to the underlying security, including possible disposition in the
market. However, the Fund may be subject to various delays and risks of loss,
including (1) possible declines in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (2) possible
reduced levels of income and lack of access to income during this period, and
(3) inability to enforce rights and the expenses involved in attempted
enforcement.

The Fund may enter into reverse repurchase agreements with banks or
broker-dealers. Reverse repurchase agreements involve the sale of a security
held by the Fund and its agreement to repurchase the instrument at a stated
price, date and interest payment. Reverse repurchase agreements may be
considered to be borrowings by the Fund and entail additional risks such as the
occurrence of interest expenses and fluctuations in the Fund's net asset value.
In connection with entering into reverse repurchase agreements, a segregated
account of the Fund consisting of cash, cash equivalents, U.S. Government
securities or other high quality liquid debt securities with an aggregate value
at all times sufficient to repurchase the securities, or equal to the proceeds
received upon the sale plus accrued interest, will be established with the
Fund's custodian bank.

The Fund may invest in mortgage-related securities and asset-backed
securities. Mortgage-related securities are represented by pools of mortgage
loans or loans assembled for sale to investors by various governmental agencies,
such as the Government National Mortgage Association, and government-related
organizations, such as the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation, as well as by private issuers, such as
commercial banks, savings and loan institutions, financial corporations,
mortgage bankers and private mortgage insurance companies. Asset-backed
securities are pass-through securities backed by non-mortgage assets, including
automobile loans, credit card receivables and consumer receivables. Although
certain mortgage-related and asset-backed securities are guaranteed by a third
party or otherwise similarly secured, the market value of the security, which
may fluctuate, and the yield are not so secured. If the Fund purchases a
mortgage-related or an asset-backed security at a premium, all or part of the
premium may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral.

As with other interest-bearing securities, the prices of such securities
are inversely affected by changes in interest rates. However, although the value
of a mortgage-related or asset-backed security may decline when interest rates
rise, the converse is not necessarily true, because in periods of declining
interest rates the mortgages or assets underlying the security may be more
likely to be prepaid. For this and other reasons, a mortgage-related or
asset-backed security's stated maturity may be shortened by unscheduled
prepayments on the underlying mortgages or assets and, therefore, it is not
possible to predict accurately the security's return. Such prepayments may
expose the Fund to a lower rate of return on reinvestment. To the extent that
such mortgage-related securities are held by the Fund, the prepayment right of
the mortgagors may limit the increase in net asset value of the Fund because the
value of the mortgage-related securities held by the Fund may not appreciate as
rapidly as the price of other debt securities.

- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- -------------------------------------------------------------------------------

Although the Fund's objective is long-term growth and above-average
income and the Fund does not purchase securities with the intention of engaging
in short term trading, the Fund will sell any particular security and reinvest
proceeds when it is deemed prudent by the Investment Manager, regardless of the
length of the holding period. This policy may result in higher securities
transaction costs. To the extent that this policy results in gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate the shareholders' tax liabilities for realized gains and may result
in the distribution of short-term capital gains taxable as ordinary income. See
"Income Dividends, Capital Gains Distributions and Tax Status." The Fund's
portfolio turnover rate for each full or partial year of its operation is set
forth in the Prospectus in the table entitled "Financial Highlights."

- -------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------

PETER O. BROWN (Age 55) -- Trustee;
30 Douglas Road, Rochester, NY; Partner, Harter, Secrest & Emery;
formerly Executive Vice President and Chief Operating Officer, The
Glenmede Trust Company; formerly Senior Vice President, Chase Lincoln
First Bank, N.A.

NICHOLAS J. GRANT (Age 80) -- Trustee;
77 Massachusetts Avenue, Cambridge, MA; Professor of Metallurgy and
Materials Science, Massachusetts Institute of Technology.

G. KENNETH HEEBNER(Age 56)* -- Trustee and Vice President;
Employee, CGM; formerly Vice President and Director, Loomis, Sayles and
Company, Incorporated ("Loomis Sayles").

ROBERT L. KEMP(Age 64)* -- Trustee and President;
Employee, CGM; formerly President and Director, Loomis Sayles.

ROBERT B. KITTREDGE (Age 75) -- Trustee;
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis Sayles.

LAURENS MACLURE (Age 70) -- Trustee;
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.

JAMES VAN DYKE QUEREAU, JR. (Age 48) -- Trustee;
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management
Company; formerly Institutional Managing Partner, Loomis Sayles.

J. BAUR WHITTLESEY (Age 49) -- Trustee;
1521 Locust Street, Philadelphia, PA; Attorney.

KATHLEEN S. HAUGHTON (Age 36) -- Vice President;
222 Berkeley Street, Boston, MA 02116; Employee -- Investor Services
Division, CGM; formerly Vice President, Boston Financial Data Services,
Inc.

LESLIE A. LAKE (Age 52) -- Vice President and Secretary;
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis Sayles.

MARTHA I. MAGUIRE (Age 41) -- Vice President;
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The
New England.

MARY L. STONE (Age 52) -- Assistant Vice President;
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis Sayles.

FRANK N. STRAUSS (Age 35) -- Treasurer;
222 Berkeley Street, Boston, MA 02116; Employee -- Chief Financial
Officer, CGM; formerly Vice President of Fund Accounting, Freedom
Capital Management Corporation and Assistant Vice President, The Boston
Company, Inc.

W. DUGAL THOMAS (Age 59) -- Vice President;
Employee -- Director of Marketing, CGM; formerly Director of Marketing,
Loomis Sayles.

- --------
* Trustees deemed "interested persons" of the Fund, as defined under the
1940 Act.

Each of the Fund's trustees is also a trustee of one or more other
investment companies for which CGM acts as investment manager. Except as
indicated above, the address of each trustee and officer of the Fund affiliated
with CGM is One International Place, Boston, Massachusetts 02110.

As of January 31, 1997, the officers and trustees of the Fund owned
beneficially less than 1.0% of the outstanding shares of the Fund.

(a) The Fund Complex is comprised of two Trusts with a total of five funds.

Advisory Agreement. CGM serves as investment manager of the Fund under
an advisory agreement which became effective on August 30, 1996 upon the merger
of New England Mutual Life Insurance Company into Metropolitan Life Insurance
Company. Under the advisory agreement, CGM manages the investment and
reinvestment of assets of the Fund and generally administers its affairs,
subject to supervision by the Board of Trustees of the Trust. CGM furnishes, at
its own expense, all necessary office supplies, facilities and equipment,
services of executive and other personnel of the Fund and certain administrative
services. For these services, CGM is compensated at the annual percentage rate
of 0.85% of the first $500 million of the Fund's average daily net asset value,
and 0.75% of such value in excess of $500 million. CGM has voluntarily agreed,
until December 31, 1997, and thereafter until further notice to the Fund, to
limit its management fees and, if necessary, to bear certain expenses associated
with operating the Fund, in order to limit the Fund's total operating expenses
to an annual rate of 1.0% of the Fund's average net assets. For the period from
May 13, 1994 (commencement of operations) through December 31, 1994, the fiscal
year ended December 31, 1995 and the fiscal year ended December 31, 1996 the
investment advisory fees that would have been payable to CGM in respect of
services rendered to the Fund amounted to $113,421, $333,264 and $717,641,
respectively. As a result of such limitation, the Fund paid no investment
advisory fee to CGM for such 1994 period, $65,432 for the fiscal year ended
December 31, 1995 and $508,519 for the fiscal year ended December 31, 1996.

The Fund pays the compensation of its trustees who are not partners,
directors, officers or employees of CGM or its affiliates (other than registered
investment companies); registration, filing, and other fees in connection with
requirements of regulatory authorities; all charges and expenses of its
custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; all taxes and fees payable to governmental agencies; the
cost of any certificates representing shares of the Fund; the expenses of
meetings of the shareholders and trustees of the Fund; the charges and expenses
of the Fund's legal counsel; interest, including on any borrowings by the Fund;
the cost of services, including services of counsel, required in connection with
the preparation of, and the costs of printing registration statements and
prospectuses relating to the Fund, including amendments and revisions thereto,
annual, semiannual, and other periodic reports of the Fund, and notices and
proxy solicitation material furnished to shareholders of the Fund or regulatory
authorities, to the extent that any such materials relate to the Fund or its
shareholders; and the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.

CGM also acts as investment adviser to CGM Capital Development Fund,
CGM Mutual Fund, CGM Fixed Income Fund and CGM American Tax Free Fund and three
other mutual fund portfolios. CGM also provides investment advice to other
institutional clients.

Other Arrangements. Certain office space, facilities, equipment and
administrative services for the Fund and other mutual funds under the investment
management of the CGM organization are furnished by CGM. In addition, CGM
provides bookkeeping, accounting, auditing, financial recordkeeping and related
clerical services for which it is entitled to be reimbursed by the Fund based on
the cost of providing these services. As a result of the expense provisions
described above, CGM received no reimbursement by the Fund for any of such costs
in 1994. For services rendered to the Fund for fiscal years 1995 and 1996, CGM
was reimbursed by the Fund $12,300 and $18,000, respectively for such expenses.

- -------------------------------------------------------------------------------
DESCRIPTION OF THE TRUST
- -------------------------------------------------------------------------------

Shareholder Rights

On January 31, 1997, there were 16,100,647 shares of the Fund
outstanding. On that date, State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts, owned 2,133,916
shares--about 13% of the total. In almost all cases, State Street Bank does not
have the power to vote or to dispose of the shares except at the direction of
the beneficial owner.

Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and may vote (to the extent
provided herein) in the election of trustees of the Trust and the termination of
the Fund and on other matters submitted to the vote of shareholders. There will
normally be no meetings of shareholders for the purpose of electing trustees,
except that in accordance with the 1940 Act (i) the Trust will hold a
shareholders' meeting for the election of trustees at such time as less than a
majority of the trustees holding office have been elected by shareholders, and
(ii) if the appointment of a trustee to fill a vacancy in the Board of Trustees
would result in less than two-thirds of the trustees having been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders of record who have been such
for at least six months and who hold in the aggregate shares equal to at least
the lesser of (i) $25,000 in net asset value or (ii) 1% of the outstanding
shares, stating that shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a trustee, the Trust will either provide access
to a list of shareholders or disseminate appropriate materials (at the expense
of the requesting shareholders). Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees. Voting rights are
not cumulative.

No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the holders of the outstanding shares of the
Trust except (i) to change the Trust's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and existing
series or subseries of Trust shares or other provisions relating to Trust shares
in response to applicable laws or regulations. The shareholders of the Fund
shall not be entitled to vote on matters exclusively affecting any other series,
such matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the series and the approval
of the investment advisory contracts of the series. Similarly, no shareholders
of any other series shall be entitled to vote on any such matters exclusively
affecting the Fund. In particular, the phrase "majority of the outstanding
voting securities of the Fund" as used in this Statement shall refer only to the
shares of the Fund.

Shareholder and Trustee Liability

- -------------------------------------------------------------------------------
HOW TO BUY SHARES
- -------------------------------------------------------------------------------

The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."

Calculation of Total Return

(1) adding to the total number of shares purchased by a
hypothetical $1,000 investment in the Fund all additional shares that
would have been purchased if all dividends and distributions paid or
distributed during the period had been automatically reinvested;

(2) calculating the value of the hypothetical initial
investment as of the end of the period by multiplying the total number
of shares owned at the end of the period by the net asset value per
share on the last trading day of the period; and

(3) dividing this account value for the hypothetical investor
by the amount of the initial investment, and annualizing the result for
periods of less than one year.

For the one-year period ended December 31, 1996, and for the period
from inception (May 13, 1994) through December 31, 1996, the average annual
total return of the Fund was 44.1% and 23.1%, respectively. If CGM had not
agreed to fee limitations and expense provisions described above, the Fund's
total return for such periods would have been lower.

In computing performance information for the Fund, no adjustment will
be made for a shareholder's tax liability on taxable dividends and capital gains
distributions.

Calculation of Yield

(1) calculating the aggregate dividends and adjusted interest
earned during that period, net of recurring expenses accrued for the
period; and

(2) dividing that amount by the product of (A) the average
daily number of shares outstanding during the period and (B) the
maximum offering price per share on the last day of the period (less
any earned income expected to be declared as a dividend shortly
thereafter).

The result is annualized, assuming a quarterly compounding, to
determine the Fund's yield. Interest earned during the period will be adjusted
to reflect amortization of any premium or discount from par on the Fund's fixed
income securities (other than obligations backed by mortgages or other assets),
using the market value for these securities on the last day of the period, or,
for securities purchased during the period, using actual cost. The Fund's yield
will vary from time to time depending upon market conditions, the composition of
the Fund's portfolio and operating expenses of the Fund. The 30-day yield of the
Fund for the period ended December 31, 1996, was 5.32%.

Performance Comparisons

The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.

No brokerage commissions or other fees are factored into the values of
the S&P 500 and the Dow Jones Industrial Average.

The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of change, over time, in the prices of
goods and services in major expenditure groups.

The Fund may compare its total return or yield or both to that of the
National Association of Real Estate Investment Trusts' (NAREIT) Equity REIT
Index.

From time to time, articles about the Fund regarding performance,
rankings and other characteristics of the Fund, information about persons
responsible for its portfolio management, and information about the
characteristics and performance of the real estate industry, REITs and mutual
funds that invest in real estate securities may appear in national publications
and major metropolitan newspapers including, but not limited to, The Wall Street
Journal, The Boston Globe, The New York Times and Barron's, Forbes, Fortune,
Money, Worth, Kiplinger's Personal Finance, Mutual Funds, Individual Investor,
Bloomberg Personal and Business Week magazines. In particular, some or all of
these publications may publish their own rankings or performance reviews of
mutual funds, including the Fund. References to or reprints of, or quotations
from, such articles may be used in the Fund's promotional literature.

Mr. Heebner has continuously managed the Fund since its inception on
May 13, 1994.

The method for determining the public offering price and net asset
value per share is summarized in the Prospectus under "Pricing of Shares."

Securities which are traded over-the-counter or on a stock exchange
will be valued according to the broadest and most representative market based on
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. U.S. Government securities are valued at the most recent quoted price
on the date of valuation.

- -------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------

Open Accounts

Systematic Withdrawal Plans ("SWP")

Payments will be made either to the shareholder or to any other person
or entity designated by the shareholder. If payments are issued to an individual
other than the registered owner(s) and/or mailed to an address other than the
address of record, a signature guarantee will be required on the Account Update
Form. Shares to be included in a Systematic Withdrawal Plan must be held in an
Open Account rather than certificated form. Income dividends and capital gain
distributions will be reinvested at the net asset value determined as of the
close of the New York Stock Exchange on the record date for the dividend or
distribution. If withdrawal checks are returned to the Fund as "undeliverable"
or remain uncashed for more than six months the shareholder's Systematic
Withdrawal Plan will be cancelled, such undeliverable or uncashed checks will be
cancelled and such amounts reinvested in the Fund at the per share net asset
value determined as of the date of cancellation of the checks.

Exchange Privilege

A shareholder may exchange shares of the Fund for shares of CGM Mutual
Fund, CGM Fixed Income Fund, CGM American Tax Free Fund, New England Cash
Management Trust, New England Tax Exempt Money Market Trust or CGM Capital
Development Fund; however, shares of CGM Capital Development Fund may be
exchanged for only if you were a shareholder on September 24, 1993, and have
continuously remained a shareholder in the CGM Capital Development Fund since
that date. CGM Capital Development Fund shares are not generally available to
other persons except in special circumstances that have been approved by, or
under the authority of, the Board of Trustees of CGM Capital Development Fund.
The special circumstances currently approved by the Board of Trustees of CGM
Capital Development Fund are limited to the offer and sale of shares of such
fund to the following additional persons: trustees of CGM Capital Development
Fund, employees of the Investment Manager and counsel to such fund and the
Investment Manager. The value of shares exchanged must be at least $1,000 and
all exchanges are subject to the minimum investment requirements of the fund
into which the exchange is being made. This option is summarized in the
Prospectus under "Shareholder Services--Exchange Privilege." Exchange requests
cannot be revoked once they have been received in good order. The Trust reserves
the right to terminate or limit the privilege of a shareholder who makes more
than four exchanges (or two round trips) per year and to prohibit exchanges
during the first 15 days following an investment in the Fund. A shareholder may
exercise the exchange privilege only when the fund into which shares will be
exchanged is registered or qualified in the state in which such shareholder
resides.

Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided a special authorization form is on file with
the Trust, or (ii) a written exchange request to BFDS accompanied by an account
application for the appropriate fund. The Trust reserves the right to modify
this exchange privilege without prior notice, except as otherwise required by
law or regulation.

For federal income tax purposes, an exchange constitutes a sale of
shares, which may result in a capital gain or loss.

Automatic Investment Plans ("AIP")

Retirement Plans

Check with your financial or tax adviser as to the suitability of Fund
shares for your retirement plan.

Address Changes

Shareholders can request to change their record address either by
telephone or in writing (by mail or delivery service, but not by facsimile) in
accordance with the policies and procedures of the Trust. After an address
change is made, no telephone or written redemption requests will be honored for
three months unless the registered owner's signature is guaranteed on the
request. Written requests for a change of address may be mailed to: CGM
Shareholder Services, c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.

- -------------------------------------------------------------------------------
REDEMPTIONS
- -------------------------------------------------------------------------------

The procedures for redemption of Fund shares are summarized in the
Prospectus under "How to Redeem Shares."

The procedures provide that an "eligible guarantor institution" means
any of the following: banks (as defined in ss. 3(a) of the Federal Deposit
Insurance Act (the "FDIA") [12 U.S.C. ss. 1813(a)]); brokers, dealers, municipal
securities brokers, government securities dealers and government securities
brokers, as those terms are defined under the Securities Exchange Act of 1934
(the "Act"); credit unions (as defined in ss. 19(b)(1)(A) of the Federal Reserve
Act [12 U.S.C. ss. 461(b)]); national securities exchanges, registered
securities associations and clearing agencies, as those terms are defined under
the Act; and savings associations (as defined in ss. 3(b) of the FDIA [12 U.S.C.
ss. 1813(b)]). However, as noted in the Prospectus, a signature guarantee will
not be required if the proceeds of the redemption do not exceed $25,000, and the
proceeds check is made payable to the registered owner(s) and mailed to the
record address, which has not changed in the prior three months. If the record
address has changed within the prior three months, a signature guarantee will be
required. This policy applies to both written and telephone redemption requests.

Redeeming by Telephone

Check Sent to the Record Address

If checks representing redemption proceeds are returned "undeliverable"
or remain uncashed for six months, such checks shall be cancelled and such
proceeds shall be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation of such checks.

Proceeds Wired to a Predesignated Bank

A shareholder may request that the redemption proceeds be wired to the
bank selected on the Fund application or subsequently on the Account Update Form
available from the Trust or BFDS. A nominal wire fee, currently $5.00, is
deducted from the proceeds. When selecting the service, a shareholder must
designate a bank account to which the redemption proceeds should be wired. Any
change in the bank account so designated may be made by furnishing BFDS a
completed Account Update Form with a signature guarantee. Whenever the Account
Update Form is used, the shareholder's signature must be guaranteed as described
above. Telephone redemptions may be made only if an investor's bank is a member
of the Federal Reserve System or has a correspondent bank that is a member of
the System. If the account is with a savings bank, it must have only one
correspondent bank that is a member of the System.

All Redemptions

The redemption price will be the net asset value per share next
determined after the redemption request is received by CGM Shareholder Services
in good order (including any necessary documentation). Redemption requests
cannot be revoked once they have been received in good order. Proceeds resulting
from a written redemption request will normally be mailed to you within seven
days after receipt of your request in good order. Telephone redemption proceeds
will normally be mailed or wired within seven days following receipt of a proper
redemption request. If you purchased your Fund shares by check (or through your
AIP) and elect to redeem shares within 15 days of such purchase, you may
experience delays in receiving redemption proceeds. The Trust will process your
redemption request upon receipt of a request in good order. However, the Trust
will generally postpone sending your redemption proceeds from such investment
until it can verify that your check (or AIP investment) has been or will be
collected. Under ordinary circumstances, the Trust cannot verify collection of
individual checks (or AIP investments) and may therefore automatically hold
proceeds from redemptions requested during the 15 day period following such
investment for a total of up to seven days. There will be no such automatic
delay following investments paid for by federal funds wire or by bank cashier's
check, certified check or treasurer's check although the Trust may in any case
postpone payment of redemption proceeds for up to seven days.

The Trust will normally redeem shares for cash; however, the Trust
reserves the right to pay the redemption price wholly in kind or partly in kind
and partly in cash if the board of trustees of the Trust determines it to be
advisable in the interest of the remaining shareholders. If portfolio securities
are distributed in lieu of cash, the shareholder will normally incur brokerage
commissions upon subsequent disposition of any such securities. However, the
Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Trust is obligated to redeem shares solely in cash for any shareholder
during any 90-day period up to the lesser of $250,000 or 1% of the total net
asset value of the Fund at the beginning of such period.

The Fund intends to meet the requirements of the Internal Revenue Code
with respect to regulated investment companies.

The distributions received by the Fund from its investments may, for
federal income tax purposes, consist of ordinary income, long-term capital gains
or a return of capital. The characterization of these distributions to the Fund
may, in turn, affect the tax treatment of the Fund's distributions to its
shareholders. Dividends and distributions are taxable to shareholders in the
same manner whether received in cash or reinvested in additional shares of the
Fund.

Dividends paid by the Fund from net investment income, including
dividends, interest and net short-term capital gains, will be taxable to
shareholders as ordinary income. Distributions of net capital gains (the excess
of net long-term capital gains over net short-term capital losses) which are
designated by the Fund as capital gains distributions are taxable as long-term
capital gains, regardless of the length of time shareholders have owned shares
in the Fund. To the extent that the Fund makes a distribution in excess of its
current and accumulated earnings and profits, the distribution will be treated
first as a tax-free return of capital, reducing the tax basis in a shareholder's
shares, and then, to the extent the distribution exceeds such basis, as a
taxable gain to be realized upon sale of such shares.

Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.

As required by federal law, detailed federal tax information is
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.

- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

The financial statements for the year ended December 31, 1996, included
in the Fund's Annual Report to shareholders for the year ended December 31,
1996, are incorporated herein by reference.
<PAGE>

Rule 497(c)
1933 Act File No. 2-10653
1940 Act File No. 811-82

CGM AMERICAN TAX FREE FUND

CGM FIXED INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1997

This Statement of Additional Information (the "Statement") is not a
prospectus. This Statement relates to the CGM American Tax Free Fund and CGM
Fixed Income Fund Prospectus dated May 1, 1997 (the "Prospectus"), and should be
read in conjunction therewith. A copy of the Prospectus may be obtained from CGM
Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449, Boston,
Massachusetts 02117 (Telephone: 800-345-4048).

CGM AMERICAN TAX FREE FUND MAY NOT BE AN APPROPRIATE INVESTMENT FOR
RETIREMENT PLAN AND SIMILAR ACCOUNTS.

AFSAI 97
<PAGE>

- -------------------------------------------------------------------------------

TABLE OF CONTENTS
- -------------------------------------------------------------------------------

Page
----
INTRODUCTION................................................................ 1

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM AMERICAN TAX FREE FUND ..................................... 1

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM FIXED INCOME FUND........................................... 4

PORTFOLIO TURNOVER.......................................................... 7

MANAGEMENT OF THE FUND...................................................... 8

INVESTMENT ADVISORY AND OTHER SERVICES...................................... 10
Advisory Agreement................................................. 10
Custodial Arrangements............................................. 12
Independent Accountants............................................ 12
Other Arrangements................................................. 12

PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 12

DESCRIPTION OF THE TRUST.................................................... 14
Shareholder Rights................................................. 14
Shareholder and Trustee Liability.................................. 15

HOW TO BUY SHARES........................................................... 16

ADVERTISING AND PERFORMANCE INFORMATION..................................... 16
Calculation of Total Return........................................ 16
Calculation of Yield............................................... 17
Performance Comparisons............................................ 18

NET ASSET VALUE AND PUBLIC OFFERING PRICE................................... 19

SHAREHOLDER SERVICES........................................................ 20
Open Accounts...................................................... 20
Systematic Withdrawal Plans ("SWP")................................ 21
Exchange Privilege................................................. 22
Automatic Investment Plans ("AIP")................................. 22
Retirement Plans................................................... 23
Address Changes.................................................... 23

REDEMPTIONS................................................................. 24
Redeeming by Telephone............................................. 24
Check Sent to the Record Address................................... 24
Proceeds Wired to a Predesignated Bank............................. 25
All Redemptions.................................................... 25

INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS................ 26

FINANCIAL STATEMENTS ....................................................... 29
<PAGE>
- -------------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------------

CGM American Tax Free Fund and CGM Fixed Income Fund (each the "Fund"
and, collectively, the "Funds") are each organized as separate series of shares
of CGM Trust (the "Trust"). The Trust is a Massachusetts business trust
established under the laws of Massachusetts in 1986. The Trust is governed by an
Amended and Restated Agreement and Declaration of Trust (the "Declaration of
Trust") dated January 23, 1997. The Trust is a successor in interest to
Loomis-Sayles Mutual Fund. On March 1, 1990 the Trust's name was changed from
"Loomis-Sayles Mutual Fund" to "CGM Mutual Fund" to reflect the assumption by
Capital Growth Management Limited Partnership ("CGM" or the "Investment
Manager") of investment advisory responsibilities with respect to the Trust. On
December 20, 1991, the Trust's name was changed to CGM Trust.

- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM AMERICAN TAX FREE FUND
- -------------------------------------------------------------------------------

CGM American Tax Free Fund's primary investment objective is to provide
high current income exempt from federal income tax. The Fund's secondary
objective is capital appreciation. There are no assurances that CGM American Tax
Free Fund will achieve its objectives.

At least 75% of CGM American Tax Free Fund's assets will be invested in
securities rated at the time of purchase Baa, MIG-2, Prime-2 or higher by
Moody's Investors Service, Inc. ("Moody's"); or BBB, SP-2, A-2 or better by
Standard and Poor's Corporation ("Standard and Poor's"); or, if not rated by
Moody's or Standard and Poor's, determined to be of comparable quality by the
Investment Manager. Up to 25% of the Fund's assets may be invested in lower
quality securities, which have speculative characteristics and are subject to
special risks described in the Prospectus.

As a fundamental policy, under normal market conditions, CGM American
Tax Free Fund will invest at least 80% of its net assets in securities, the
interest from which is, in the opinion of counsel to the issuer, exempt from
federal income tax and excluded from the calculation of the federal alternative
minimum tax for individuals.

CGM American Tax Free Fund may not:

(3) Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;

(4) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in securities issued by the U.S. Government, its agencies and
instrumentalities;

(5) Purchase or sell real estate, except that the Fund may invest in
securities of companies that deal in real estate and securities secured by real
estate or interests therein and the Fund may hold and sell real estate acquired
as a result of the Fund's ownership of such securities;

(6) Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
similar instruments;

(8) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of one issuer or invest more than 5% of the
value of its total assets in securities of any one issuer, except the U.S.
Government, its agencies or instrumentalities.

The investment restrictions above have been adopted by the Trust as
fundamental policies of CGM American Tax Free Fund. Under the Investment Company
Act of 1940 as amended (the "1940 Act"), a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of CGM
American Tax Free Fund, as defined under the 1940 Act. "Majority" means the
lesser of (1) 67% or more of the shares present at a meeting of shareholders of
the Fund, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (2) more than 50% of the outstanding
shares of the Fund. Non-fundamental investment restrictions may be changed at
any time by vote of a majority of the Trust's Board of Trustees.

Although CGM American Tax Free Fund has the ability to invest in
financial futures contracts and options thereon, to invest in puts, calls and
warrants, to acquire securities of closed-end investment companies, to sell
securities short against the box, to purchase publicly traded securities issued
by real estate investment trusts and to loan portfolio securities, the Fund has
no current intention of doing so without amending the Trust's registration
statement or supplying further information in the Prospectus or Statement of
Additional Information concerning such activities.

Restricted securities eligible for resale to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended, may
be determined to be liquid by the Investment Manager under guidelines approved
by the Board of Trustees. In its determination of liquidity with respect to such
securities, the Investment Manager will consider the following factors, among
others: (1) the frequency of trades and quotes for the security, (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers, (3) dealer undertakings to make a market in the security,
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The foregoing investment practice could
have the effect of increasing the level of illiquidity in CGM American Tax Free
Fund to the extent that qualified institutional buyers become uninterested in
purchasing the securities.

CGM American Tax Free Fund may invest up to 5% of its total assets in
repurchase agreements. A repurchase agreement is an instrument under which the
purchaser acquires ownership of a security and obtains a simultaneous commitment
from the seller (a bank or, to the extent permitted by the 1940 Act, a
recognized securities dealer) to repurchase the security at an agreed-upon price
and date (usually seven days or less from the date of original purchase). The
resale price is in excess of the purchase price and reflects an agreed upon
market rate unrelated to the coupon rate on the purchased security. Such
transactions afford CGM American Tax Free Fund the opportunity to earn a return
on temporarily available cash at minimal market risk. While the underlying
security may be a bill, certificate of indebtedness, note or bond issued by an
agency, authority or instrumentality of the U.S. Government, the obligation of
the seller is not guaranteed by the U.S. Government and there is a risk that the
seller may fail to repurchase the underlying security. In such event, CGM
American Tax Free Fund would attempt to exercise rights with respect to the
underlying security, including possible disposition in the market. However, the
Fund may be subject to various delays and risks of loss, including (1) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (2) possible reduced levels of income
and lack of access to income during this period, and (3) inability to enforce
rights and the expenses involved in attempted enforcement.

CGM American Tax Free Fund may enter into reverse repurchase agreements
with banks or broker-dealers. Reverse repurchase agreements involve the sale of
a security held by the Fund and its agreement to repurchase the instrument at a
stated price, date and interest payment. Reverse repurchase agreements may be
considered to be borrowings by the Fund and entail additional risks such as the
occurrence of interest expenses and fluctuations in the Fund's net asset value.
In connection with entering into reverse repurchase agreements, a segregated
account of the Fund consisting of cash, cash equivalents, U.S. Government
securities or other high quality liquid debt securities with an aggregate value
at all times sufficient to repurchase the securities, or equal to the proceeds
received upon the sale plus accrued interest, will be established with the
Fund's custodian bank.

CGM American Tax Free Fund may purchase municipal lease obligations. In
determining the liquidity of municipal lease obligations, the Board of Trustees
will consider the following factors: (1) the frequency of trades and quotes; (2)
the number of dealers willing to purchase or sell the security; (3) the
willingness of dealers to undertake to make a market; (4) the nature of the
marketplace trades; and (5) the likelihood that the obligation will continue to
be marketable based on the credit quality of the municipality or relevant
obligor.

While CGM American Tax Free Fund may not invest more than 25% of its
total assets in any one industry, the Fund may invest more than 25% of its total
assets in a broader segment of the tax-exempt market, such as revenue
obligations of hospitals and other healthcare facilities, housing agency revenue
obligations or airport revenue obligations. The Fund may also invest more than
25% of its total assets in securities relating to any one or more states
(including the District of Columbia), territories or United States possessions
or any of their political subdivisions.

- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
OF CGM FIXED INCOME FUND
- -------------------------------------------------------------------------------

CGM Fixed Income Fund's investment objective is to maximize total
return by investing in debt securities and preferred stocks that provide current
income, capital appreciation or a combination of both income and appreciation.
Under normal circumstances, CGM Fixed Income Fund will invest at least 65% of
its total assets in fixed-income securities. There are no assurances that the
Fund will achieve its objective and the Fund may change its objective without
shareholder approval.

CGM Fixed Income Fund may invest up to 35% of its assets in securities
with ratings lower than Baa (baa in the case of preferred stocks) by Moody's or
BBB by Standard and Poor's. The Fund may invest up to 10% of its total assets in
securities rated at the time of purchase Caa by Moody's (caa in the case of
preferred stocks) or CCC by Standard and Poor's if, in the opinion of the
Investment Manager, the financial condition of the issuer or the protection
afforded to the particular security is stronger than would otherwise be
indicated by the rating. Risks associated with such investments are described in
the Prospectus.

CGM Fixed Income Fund may invest up to 20% of its net assets at the
time of purchase in debt securities and preferred stocks of foreign issuers.
Risks associated with such investments are described in the Prospectus.

At any time that CGM Fixed Income Fund's borrowings (including
obligations under reverse repurchase agreements) exceed 5% of the value of its
total assets, the Fund will not purchase or acquire any additional investment
securities.

CGM Fixed Income Fund may not:

(2) Issue any senior securities, except as it may be permitted by the
terms of any exemptive order or similar rule issued by the SEC relating to
multiple classes of shares of beneficial interest of the Trust, and provided
further that collateral arrangements with respect to forward contracts, futures
contracts, short sales or options, including deposits of initial and variation
margin, shall not be considered to be the issuance of a senior security for the
purposes of this restriction;

(3) Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;

(4) Purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limit with respect to
investments in the U.S. Government, its agencies and instrumentalities;

(6) Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
similar instruments;

(8) With respect to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in the securities of any one issuer, except the
U.S. Government, its agencies or instrumentalities.

The investment restrictions above have been adopted by the Trust as
fundamental policies of CGM Fixed Income Fund. Under the 1940 Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Fund, as defined under the 1940 Act. "Majority" means
the lesser of (1) 67% or more of the shares present at a meeting of shareholders
of the Fund, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy, or (2) more than 50% of the
outstanding shares of the Fund. Non-fundamental investment restrictions may be
changed at any time by vote of a majority of the Trust's Board of Trustees.

Although CGM Fixed Income Fund has the ability to invest in financial
futures contracts and options thereon, to acquire securities of closed-end
investment companies, to sell securities short against the box, to purchase
publicly traded securities issued by real estate investment trusts and to loan
portfolio securities, the Fund has no current intention of doing so without
amending the Trust's registration statement or supplying further information in
the Prospectus or Statement of Additional Information concerning such
activities.

Restricted securities eligible for resale to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended, and
IO and PO securities issued by the U.S. Government and its agencies and
instrumentalities and backed by fixed-rate mortgages may be determined to be
liquid by the Investment Manager under guidelines approved by the Board of
Trustees. In its determination of liquidity with respect to such securities, the
Investment Manager will consider the following factors, among others: (1) the
frequency of trades and quotes for the security, (2) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers, (3) dealer undertakings to make a market in the security, and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer). The foregoing investment practice could have the effect
of increasing the level of illiquidity in CGM Fixed Income Fund to the extent
that qualified institutional buyers become uninterested in purchasing the
securities.

CGM Fixed Income Fund may invest up to 5% of its total assets in
repurchase agreements. A repurchase agreement is an instrument under which the
purchaser acquires ownership of a security and obtains a simultaneous commitment
from the seller (a bank or, to the extent permitted by the 1940 Act, a
recognized securities dealer) to repurchase the security at an agreed-upon price
and date (usually seven days or less from the date of original purchase). The
resale price is in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate on the purchased security. Such
transactions afford CGM Fixed Income Fund the opportunity to earn a return on
temporarily available cash at minimal market risk. While the underlying security
may be a bill, certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the U.S. Government, the obligation of the
seller is not guaranteed by the U.S. Government and there is a risk that the
seller may fail to repurchase the underlying security. In such event, CGM Fixed
Income Fund would attempt to exercise rights with respect to the underlying
security, including possible disposition in the market. However, the Fund may be
subject to various delays and risks of loss, including (1) possible declines in
the value of the underlying security during the period while the Fund seeks to
enforce its rights thereto, (2) possible reduced levels of income and lack of
access to income during this period, and (3) inability to enforce rights and the
expenses involved in attempted enforcement.

CGM Fixed Income Fund may enter into reverse repurchase agreements with
banks or broker-dealers. Reverse repurchase agreements involve the sale of a
security held by the Fund and its agreement to repurchase the instrument at a
stated price, date and interest payment. Reverse repurchase agreements may be
considered to be borrowings by the Fund and entail additional risks such as the
occurrence of interest expenses and fluctuations in the Fund's net asset value.
In connection with entering into reverse repurchase agreements, a segregated
account of the Fund consisting of cash, cash equivalents, U.S. Government
securities or other high quality liquid debt securities with an aggregate value
at all times sufficient to repurchase the securities, or equal to the proceeds
received upon the sale plus accrued interest, will be established with the
Fund's custodian bank.

- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER
- -------------------------------------------------------------------------------

Although CGM American Tax Free Fund's objective is to provide high
current income exempt from federal income tax and the Fund does not purchase
securities with the intention of engaging in short term trading, the Fund will
sell any particular security and reinvest proceeds when it is deemed prudent by
the Investment Manager, regardless of the length of the holding period. CGM
American Tax Free Fund's portfolio turnover rate for each full or partial year
of its operation is set forth in the Prospectus in the table entitled "Financial
Highlights."

Although CGM Fixed Income Fund's objective is total return and the Fund
does not purchase securities with the intention of engaging in short term
trading, the Fund will sell any particular security and reinvest proceeds when
it is deemed prudent by the Investment Manager, regardless of the length of the
holding period. CGM Fixed Income Fund's portfolio turnover rate for each full or
partial year of its operation is set forth in the Prospectus in the table
entitled "Financial Highlights."

The policies described above may result in higher securities
transaction costs. To the extent that such policies result in gains on
investments, the Funds will make distributions to their shareholders, which may
accelerate the shareholders' tax liabilities for realized gains and may result
in the distribution of short-term capital gains taxable as ordinary income. See
"Income Dividends, Capital Gains Distributions and Tax Status."

- -------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- -------------------------------------------------------------------------------

PETER O. BROWN (Age 55) -- Trustee;
30 Douglas Road, Rochester, NY; Partner, Harter, Secrest &
Emery; formerly Executive Vice President and Chief Operating
Officer, The Glenmede Trust Company; formerly Senior Vice
President, Chase Lincoln First Bank, N.A.

NICHOLAS J. GRANT (Age 80) -- Trustee;
77 Massachusetts Avenue, Cambridge, MA; Professor of
Metallurgy and Materials Science, Massachusetts Institute of
Technology.

G. KENNETH HEEBNER(Age 56)* -- Trustee and Vice President;
Employee, CGM; formerly Vice President and Director, Loomis,
Sayles and Company, Incorporated ("Loomis Sayles").

ROBERT L. KEMP(Age 64)* -- Trustee and President;
Employee, CGM; formerly President and Director, Loomis Sayles.

ROBERT B. KITTREDGE (Age 75) -- Trustee;
21 Sturdivant Street, Cumberland Foreside, ME; Retired;
formerly Vice President, General Counsel and Director, Loomis
Sayles.

LAURENS MACLURE (Age 70) -- Trustee;
183 Sohier Street, Cohasset, MA; Retired; formerly President
and Chief Executive Officer, New England Deaconess Hospital.

JAMES VAN DYKE QUEREAU, JR. (Age 48) -- Trustee;
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton
Management Company; formerly Institutional Managing Partner,
Loomis Sayles.

J. BAUR WHITTLESEY (Age 49) -- Trustee;
1521 Locust Street, Philadelphia, PA; Attorney.

KATHLEEN S. HAUGHTON (Age 36) -- Vice President;
222 Berkeley Street, Boston, MA 02116; Employee - Investor
Services Division, CGM; formerly Vice President, Boston
Financial Data Services, Inc.

LESLIE A. LAKE (Age 52) -- Vice President and Secretary;
Employee -- Office Administrator, CGM; formerly Office
Administrator, Capital Growth Management Division of Loomis
Sayles.

MARTHA I. MAGUIRE (Age 41) -- Vice President;
Employee -- Funds Marketing, CGM; formerly marketing
communications consultant (self-employed); formerly Sales
Promotion Consultant, The New England.

JANICE H. SAUL (Age 41) -- Vice President;
Employee -- Senior Portfolio Manager, CGM; formerly Senior
Portfolio Manager, Loomis Sayles.

MARY L. STONE (Age 52) -- Assistant Vice President;
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM;
formerly Coordinator, Mutual Fund Recordkeeping, Loomis
Sayles.

FRANK N. STRAUSS (Age 35) -- Treasurer;
222 Berkeley Street, Boston, MA 02116; Employee -- Chief
Financial Officer, CGM; formerly Vice President of Fund
Accounting, Freedom Capital Management Corporation and
Assistant Vice President, The Boston Company, Inc.

W. DUGAL THOMAS (Age 59) -- Vice President;
Employee -- Director of Marketing, CGM; formerly Director of
Marketing, Loomis Sayles.

- --------
* Trustees deemed "interested persons" of the Funds, as defined under the
1940 Act.

As of January 31, 1997, the officers and trustees of CGM American Tax
Free Fund owned beneficially approximately 5.8% of the outstanding shares of the
Fund, and the officers and trustees of CGM Fixed Income Fund owned beneficially
less than 1.0% of the outstanding shares of the Fund.

The Funds pay no compensation to their officers or to the trustees
listed above who are interested persons of the Funds. Officers and trustees of
the Funds receive no pension or retirement benefits paid from expenses of the
respective Funds. The following table sets forth the compensation paid by the
Trust to its trustees for the year ended December 31, 1996:

<TABLE>
<CAPTION>
Pension Total
or Retirement Estimated Compensation From
Aggregate Benefits Accrued Annual Registrant and
Name of Compensation as Part of Fund's Benefit Upon Fund Complex
Trustee From Trust Expenses Retirement Paid to Trustees(a)
- ------- ---------- -------- ---------- -------------------

(a) The Fund Complex is comprised of two Trusts with a total of five funds.

Advisory Agreement. CGM serves as investment manager of CGM American
Tax Free Fund under an advisory agreement which became effective on August 30,
1996 upon the merger of New England Mutual Life Insurance Company into
Metropolitan Life Insurance Company. CGM serves as investment manager of CGM
Fixed Income Fund under an advisory agreement approved by the shareholders of
CGM Fixed Income Fund at a special meeting held on December 12, 1996 and
effective as of December 13, 1996. Under each advisory agreement, CGM manages
the investment and reinvestment of assets of the Funds and generally administers
their affairs, subject to supervision by the Board of Trustees of the Trust. CGM
furnishes, at its own expense, all necessary office supplies, facilities and
equipment, services of executive and other personnel of the Funds and certain
administrative services. For these services, CGM American Tax Free Fund
compensates CGM at the annual percentage rate of 0.60% of the first $500 million
of the Fund's average daily net asset value, 0.55% of the next $500 million of
such value and 0.45% of such value in excess of $1 billion, and CGM Fixed Income
Fund compensates CGM at the annual percentage rate of 0.65% of the first $200
million of the Fund's average daily net asset value, 0.55% of the next $300
million of such value and 0.40% of such value in excess of $500 million.

CGM has voluntarily agreed, until December 31, 1997, and thereafter
until further notice to CGM American Tax Free Fund, to waive its management fees
and bear all of the expenses of the Fund. For the fiscal years ended December
31, 1994, 1995 and 1996, the investment advisory fees that would have been
payable to CGM in respect of services rendered to CGM American Tax Free Fund
amounted to $63,445, $66,010 and $70,051, respectively. As a result of such
waiver, the fund paid no investment advisory fees to CGM during these periods.

With respect to CGM Fixed Income Fund, CGM has voluntarily agreed,
until December 31, 1997, to waive its management fee and, if necessary, bear
certain expenses associated with operating CGM Fixed Income Fund, in order to
limit CGM Fixed Income Fund's operating expenses to an annual rate of 0.85% of
its average net assets. CGM has also agreed to obtain approval of the Board of
Trustees of CGM Fixed Income Fund prior to any modification of this commitment
thereafter. For the fiscal years ended December 31, 1994, 1995 and 1996, the
investment advisory fees that would have been payable to CGM in respect of
services rendered to CGM Fixed Income Fund amounted to $185,360, $167,688 and
$200,912, respectively. As a result of such waiver, the Fund paid no investment
advisory fees to CGM for the fiscal years ended December 31, 1994 and 1995 and
$51,667 for the fiscal year ended December 31, 1996.

Each Fund pays the compensation of its trustees who are not partners,
directors, officers or employees of CGM or its affiliates (other than registered
investment companies); registration, filing, and other fees in connection with
requirements of regulatory authorities; all charges and expenses of its
custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; all taxes and fees payable to governmental agencies; the
cost of any certificates representing shares of the Fund; the expenses of
meetings of the shareholders and trustees of the Fund; the charges and expenses
of the Fund's legal counsel; interest, including on any borrowings by the Fund;
the cost of services, including services of counsel, required in connection with
the preparation of, and the costs of printing registration statements and
prospectuses relating to the Fund, including amendments and revisions thereto,
annual, semiannual, and other periodic reports of the Fund, and notices and
proxy solicitation material furnished to shareholders of the Fund or regulatory
authorities, to the extent that any such materials relate to the Fund or its
shareholders; and the Fund's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses.

CGM also acts as investment adviser to CGM Capital Development Fund,
CGM Mutual Fund, CGM Realty Fund and three other mutual fund portfolios. CGM
also provides investment advice to other institutional clients.

Certain officers and trustees of the Funds also serve as officers,
directors or trustees of other investment companies advised by CGM. The other
investment companies and clients served by CGM sometimes invest in securities in
which the Funds also invest. If a Fund and such other investment companies or
clients advised by CGM desire to buy or sell the same portfolio securities at
the same time, purchases and sales will be allocated to the extent practicable
on a pro rata basis in proportion to the amounts desired to be purchased or sold
for each. It is recognized that in some cases the practices described in this
paragraph could have a detrimental effect on the price or amount of the
securities that each Fund purchases or sells. In other cases, however, it is
believed that these practices may benefit the Funds. It is the opinion of the
trustees that the desirability of retaining CGM as adviser for the Funds
outweighs the disadvantages, if any, that might result from these practices.

Custodial Arrangements. State Street Bank and Trust Company ("State
Street Bank"), Boston, Massachusetts 02102, is the Funds' custodian. As such,
State Street Bank holds in safekeeping certificated securities and cash
belonging to each Fund and, in such capacity, is the registered owner of
securities held in book entry form belonging to each Fund. Upon instruction,
State Street Bank receives and delivers cash and securities of each Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of each Fund and calculates the
total net asset value, total net income, and net asset value per share of each
Fund on each business day.

Independent Accountants. Each Fund's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of each Fund's financial statements,
assists in the preparation of each Fund's federal and state income tax returns
and consults with each Fund as to matters of accounting and federal and state
income taxation. The information concerning financial highlights in the
Prospectus, and the financial statements incorporated by reference into this
Statement, have been so included in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

Other Arrangements. Certain office space, facilities, equipment and
administrative services for each Fund and other mutual funds under the
investment management of the CGM organization are furnished by CGM. In addition,
CGM provides bookkeeping, accounting, auditing, financial recordkeeping, and
related clerical services for which it is entitled to be reimbursed by each Fund
based on the cost of providing these services. As a result of the expense
provisions described above, CGM received no reimbursement from either Fund for
any of such costs in 1994 and 1995. For services rendered to CGM Fixed Income
Fund for fiscal year 1996, CGM was reimbursed by CGM Fixed Income Fund $10,000
for such expenses. As a result of the expense provisions described above, CGM
received no reimbursement for any such costs from CGM American Tax Free Fund for
fiscal year 1996.

In placing orders for the purchase and sale of portfolio securities for
each Fund, CGM always seeks the best price and execution. Transactions in
unlisted securities will be carried out through broker-dealers who make the
primary market for such securities unless, in the judgment of CGM, a more
favorable price can be obtained by carrying out such transactions through other
brokers.

CGM selects only brokers it believes are financially responsible, will
provide efficient and effective services in executing, clearing and settling an
order and will charge commission rates which, when combined with the quality of
the foregoing services, will produce the best price and execution for the
transaction. This does not necessarily mean that the lowest available brokerage
commission will be paid. However, the commissions are believed to be competitive
with generally prevailing rates. CGM will use its best efforts to obtain
information as to the general level of commission rates being charged by the
brokerage community from time to time and will evaluate the overall
reasonableness of brokerage commissions paid on transactions by reference to
such data. In making such evaluation, all factors affecting liquidity and
execution of the order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account. The Funds will not
pay a broker a commission at a higher rate than is otherwise available for the
same transaction in recognition of the value of research services provided by
the broker or in recognition of the value of any other services provided by the
broker that do not contribute to the best price and execution of the
transaction.

Receipt of research services from brokers may sometimes be a factor in
selecting a broker that CGM believes will provide the best price and execution
for a transaction. These research services include not only a wide variety of
reports on such matters as economic and political developments, industries,
companies, securities, portfolio strategy, account performance, daily prices of
securities, stock and bond market conditions and projections, asset allocation
and portfolio structure, but also meetings with management representatives of
issuers and with other analysts and specialists. Although it is not possible to
assign an exact dollar value to these services, they may, to the extent used,
tend to reduce CGM's expenses. Such services may be used by CGM in servicing
other client accounts and in some cases may not be used with respect to the
Funds. Receipt of services or products other than research from brokers is not a
factor in the selection of brokers.

CGM American Tax Free Fund pays no brokerage commissions, as such. The
tax-exempt security market is typically a "dealer" market in which investment
dealers buy and sell bonds for their own accounts, rather than for customers,
and although the price of a tax-exempt security may reflect a dealer's mark-up
or mark-down, such mark-up or mark-down is not considered to be a commission. In
addition, some securities may be purchased directly from issuers.

In 1996, brokerage transactions of CGM Fixed Income Fund aggregating
$20,277,436 were allocated to brokers providing research services and $32,412 in
commissions were paid on these transactions. During 1994, 1995, and 1996, CGM
Fixed Income Fund paid total brokerage fees of approximately $4,249, $21,273 and
$32,412, respectively.

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DESCRIPTION OF THE TRUST
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The Declaration of Trust of the Trust currently permits the trustees to
issue an unlimited number of shares of beneficial interest of separate series of
the Trust. Interests in the portfolio described in the Prospectus and in this
Statement are represented by shares of each Fund. Each share of a Fund
represents an interest in such series which is equal to and proportionate with
the interest represented by each other share. The shares of the Funds do not
have any preemptive rights. Upon liquidation of the portfolio, shareholders of
each Fund are entitled to share pro rata in the net assets of such portfolio
available for distribution to shareholders. The Declaration of Trust also
permits the trustees to charge shareholders directly for custodial, transfer
agency and servicing expenses. The trustees have no present intention of making
such direct charges.

Shareholder Rights

On January 31, 1997, there were 1,336,054 shares of CGM American Tax
Free Fund outstanding.

On January 31, 1997, there were 3,630,211 shares of CGM Fixed Income
Fund outstanding. On that date, State Street Bank, acting as trustee for various
retirement plans and individual retirement accounts owned 1,050,169 shares -
about 29% of the total. In almost all cases, State Street Bank does not have the
power to vote or dispose of the shares except at the direction of the beneficial
owner.

Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and may vote (to the extent
provided herein) in the election of trustees of the Trust and the termination of
the applicable Fund and on other matters submitted to the vote of shareholders.
There will normally be no meetings of shareholders for the purpose of electing
trustees, except that in accordance with the 1940 Act (i) the Trust will hold a
shareholders' meeting for the election of trustees at such time as less than a
majority of the trustees holding office have been elected by shareholders, and
(ii) if the appointment of a trustee to fill a vacancy in the Board of Trustees
would result in less than two-thirds of the trustees having been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders of record who have been such
for at least six months and who hold in the aggregate shares equal to at least
the lesser of (i) $25,000 in net asset value or (ii) 1% of the outstanding
shares, stating that shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a trustee, the Trust will either provide access
to a list of shareholders or disseminate appropriate materials (at the expense
of the requesting shareholders). Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees. Voting rights are
not cumulative.

No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the holders of the outstanding shares of the
Trust except (i) to change the Trust's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and existing
series or subseries of Trust shares or other provisions relating to Trust shares
in response to applicable laws or regulations. The shareholders of one Fund
shall not be entitled to vote on matters exclusively affecting any other series,
such matters including, without limitation, the adoption or change in the
investment objectives, policies or restrictions of the series and the approval
of the investment advisory contracts of the series. Similarly, no shareholders
of any other series shall be entitled to vote on any such matters exclusively
affecting a particular Fund. In particular, the phrase "majority of the
outstanding voting securities of the Fund" as used in this Statement shall refer
only to the shares of the applicable Fund.

Shareholder and Trustee Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust;
however, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or trustees. The Declaration of Trust provides for indemnification out of each
Fund property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which the disclaimer is
inoperative and the particular Fund itself would be unable to meet its
obligations.

All persons dealing with a particular Fund must look only to the assets
of that Fund for the enforcement of any claims against that Fund and no other
series of the Trust assumes any liability for obligations entered into on behalf
of that Fund.

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HOW TO BUY SHARES
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The procedures for purchasing shares of the Fund are summarized in the
Prospectus under "How to Purchase Shares."

Calculation of Total Return

Each Fund may include total return information in advertisements or
written sales material. Total return is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any dividends
or capital gains distributions are automatically reinvested in the Fund rather
than paid to the investor in cash. The formula for total return used by the Fund
includes three steps:

(3) dividing this account value for the hypothetical investor by the
amount of the initial investment, and annualizing the result for periods of less
than one year.

For the one-year and three-year periods ended December 31, 1996, and
for the period from inception (November 10, 1993) through December 31, 1996, CGM
American Tax Free Fund's average annual total return was 2.9%, 3.7% and 4.4%,
respectively. If CGM were not waiving its fee and was receiving reimbursement
from CGM American Tax Free Fund for its expenses, that Fund's total return for
those periods would have been lower.

For the one-year and three-year periods ended December 31, 1996, and
for the period from inception (March 17, 1992) through December 31, 1996, the
average annual total return of CGM Fixed Income Fund was 15.4%, 10.5% and 12.4%,
respectively. For the one and three year periods ended December 31, 1996, and
for the period from inception (March 17, 1992) through December 31, 1996, the
total return on a hypothetical $1,000 investment in CGM Fixed Income Fund was
15.4%, 35.1% and 75.4%, respectively. If CGM were not limiting CGM Fixed Income
Fund's expenses to 0.85% of its average net assets, the annual total return and
total return on a hypothetical $1,000 investment for those periods would have
been lower. In computing performance information for CGM Fixed Income Fund, no
adjustment has been made for a shareholder's tax liability on taxable dividends
and capital gains distributions.

In computing performance information for the Funds, no adjustment has
been made for a shareholder's tax liability on taxable dividends and capital
gains distributions.

Calculation of Yield

Each Fund may include yield information in advertisements or written
sales material. Each Fund's yield is based on a recent 30 day period, and is
determined in accordance with the SEC's standardized formula by:

(1) calculating the aggregate dividends and adjusted interest earned
during that period, net of recurring expenses accrued for the period; and

The result is annualized, assuming a quarterly compounding, to
determine the Fund's yield. Interest earned during the period will be adjusted
to reflect amortization of any premium or discount from par on the Fund's fixed
income securities (other than obligations backed by mortgages or other assets),
using the market value for these securities on the last day of the period, or,
for securities purchased during the period, using actual cost. Each Fund's yield
will vary from time to time depending upon market conditions, the composition of
the Fund's portfolio and operating expenses of the Fund. CGM American Tax Free
Fund may also utilize tax equivalent yields with adjustments for assumed income
tax rates. The 30-day yields of CGM American Tax Free Fund and CGM Fixed Income
Fund for the period ended December 31, 1996, were 6.13% and 7.22%, respectively.

Performance Comparisons

The Dow Jones Industrial Average is a market value-weighted and
unmanaged index of 30 large industrial stocks traded on the New York Stock
Exchange.

No brokerage commissions or other fees are factored into the values of
the S&P 500 and the Dow Jones Industrial Average.

The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of change, over time, in the prices of
goods and services in major expenditure groups.

Morningstar, Inc. ("Morningstar") is an independent mutual fund ranking
service. Morningstar proprietary ratings reflect historical risk-adjusted
performance and are subject to change every month. Funds with at least three
years of performance history are assigned ratings from one star (lowest) to five
stars (highest). Morningstar ratings are calculated from the funds' three-,
five-, and ten-year average annual returns (when available) and a risk factor
that reflects the fund performance relative to three-month Treasury bill monthly
returns. Funds' returns are adjusted for fees and sales loads. Ten percent of
the funds in an investment category receive five stars, 22.5% receive four
stars, 35% receive three stars, 22.5% receive two stars, and the bottom 10%
receive one star. From time to time, the Funds may include their respective
rankings among mutual funds tracked by Morningstar in advertisements or sales
literature.

Value Line, Inc. ("Value Line"), an independent mutual fund ranking
service reviews the performance of 6,101 mutual funds. In ranking mutual funds,
Value Line uses two indicators: a Risk Rank to show the total level of risk a
fund has assumed and an Overall Rank measuring various performance criteria
taking risk into account. Funds are ranked from 1 to 5, with 1 the highest
Overall Rank (the best risk-adjusted performance) and the best Risk Rank (the
least risky). From time to time, the Funds may include ranking information
provided by Value Line in advertisements and sales literature.

The Funds may also compare their respective total return or yield or
both to that of money market funds and other investments, such as certificates
of deposit and may refer to standard measures of performance for such
investments, including information published by the Bank Rate Monitor and the
Federal Reserve System. Investors should note that, although the Fund may
experience better returns and higher yields than money market funds and other
investments, they do not seek to maintain stable net asset values. Thus,
particularly during periods of rising interest rates, the per share net asset
value of each Fund may decrease while the principal value of such other
investments will not change. Each Fund may invest in securities of varying
qualities, although 75% of CGM American Tax Free Fund's portfolio and 65% of CGM
Fixed Income Fund's portfolio will consist of investment grade securities. In
addition, unlike certificates of deposit, shares of the Funds are not insured by
the FDIC or any other entity.

Bank Rate Monitor is an independent financial service that generates
indexes of bank products, including an index of stated rates for certificates of
deposit and bank money market accounts in the ten largest metropolitan areas in
the U.S. The Federal Reserve System publishes data about the U.S. banking
system. Average rates for certificates of deposit traded in the secondary market
are published by the Board of Governors of the Federal Reserve System in
Selected Interest Rates.

From time to time, articles about a particular Fund's performance,
rankings and other characteristics, and information about persons responsible
for the Fund's portfolio management may appear in national publications and
major metropolitan newspapers including, but not limited to, The Wall Street
Journal, The Boston Globe, The New York Times and Barron's, Forbes, Fortune,
Money, Worth, Kiplinger's Personal Finance, Mutual Funds, Individual Investor,
Bloomberg Personal and Business Week magazines. In particular, some or all of
these publications may publish their own rankings or performance reviews of
mutual funds, including the Funds. References to, or reprints of, or quotations
from, such articles may be used in the Funds' promotional literature.

The method for determining the public offering price and net asset
value per share is summarized in the Prospectus under "Pricing of Shares."

The net asset value of a share of each Fund is determined by dividing
the particular Fund's total net assets (the excess of its assets over its
liabilities) by the total number of shares outstanding and rounding to the
nearest cent. Such determination is made as of the close of normal trading on
the New York Stock Exchange on each day on which the Exchange is open for
unrestricted trading, and no less frequently than once daily on each day during
which there is sufficient trading in the Fund's portfolio securities that the
value of the Fund's shares might be materially affected. During the 12 months
following the date of this Statement the New York Stock Exchange is expected to
be closed on the following holidays: Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, New Year's Day, Presidents' Day and Good
Friday.

For equity securities, it is expected that the broadest and most
representative market will ordinarily be either (i) a national securities
exchange, such as the New York Stock Exchange or American Stock Exchange, or
(ii) the NASDAQ National Market System. For corporate bonds, notes, debentures
and other fixed-income securities, it is expected that the broadest and most
representative market will ordinarily be the over-the-counter market.
Fixed-income securities may, owever, be valued on the basis of prices provided
by a pricing service approved by the Board of Trustees when such prices are
believed to reflect the fair market value of such securities. The prices
provided by the pricing service may be determined based on 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.
Instruments with maturities of sixty days or less are valued at amortized cost,
which approximates market 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.

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SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------

Open Accounts

A shareholder's investment is credited to an open account maintained
for the shareholder by the CGM Shareholder Services Department ("CGM Shareholder
Services") of Boston Financial Data Services, Inc. ("BFDS"), the shareholder
servicing agent for State Street Bank. The address is: CGM Shareholder Services,
c/o BFDS, P.O. Box 8511, Boston, MA 02266-8511.

The costs of maintaining the open account system are borne by the
Funds, and no direct charges are made to shareholders. Although the Funds have
no present intention of making such direct charges to shareholders, they reserve
the right to do so. Shareholders will receive prior notice before any such
charges are made.

Systematic Withdrawal Plans ("SWP")

Payments will be made either to the shareholder or to any other person
or entity designated by the shareholder. If payments are issued to an individual
other than the registered owner(s) and/or mailed to an address other than the
address of record, a signature guarantee will be required on the Account Update
Form. Shares to be included in a Systematic Withdrawal Plan must be held in an
Open Account rather than certificated form. Income dividends and capital gain
distributions will be reinvested at the net asset value determined as of the
close of the New York Stock Exchange. If withdrawal checks are returned to the
Funds as "undeliverable" or remain uncashed for more than six months the
shareholder's Systematic Withdrawal Plan will be cancelled, such undeliverable
or uncashed checks will be cancelled and such amounts reinvested in the Funds at
the per share net asset value determined as of the date of cancellation of the
checks.

Exchange Privilege

A shareholder may exchange shares of CGM American Tax Free Fund or CGM
Fixed Income Fund for shares of CGM Mutual Fund, CGM Realty Fund, CGM Fixed
Income Fund or CGM American Tax Free Fund (as applicable), New England Cash
Management Trust, New England Tax Exempt Money Market Trust or CGM Capital
Development Fund; however, shares of CGM Capital Development Fund may be
exchanged only if you were a shareholder on September 24, 1993, and have
continuously remained a shareholder in the CGM Capital Development Fund since
that date. CGM Capital Development Fund shares are not generally available to
other persons except in special circumstances that have been approved by, or
under the authority of, the Board of Trustees of CGM Capital Development Fund.
The special circumstances currently approved by the Board of Trustees of CGM
Capital Development Fund are limited to the offer and sale of shares of such
fund to the following additional persons: trustees of CGM Capital Development
Fund, employees of the Investment Manager and counsel to such fund and the
Investment Manager. The value of shares exchanged must be at least $1,000 and
all exchanges are subject to the minimum investment requirements of the fund
into which the exchange is being made. This option is summarized in the
Prospectus under "Shareholder Services--Exchange Privilege." Exchange requests
cannot be revoked once they have been received in good order. The Trust reserves
the right to terminate or limit the privilege of a shareholder who makes more
than four exchanges (or two round trips) per year and to prohibit exchanges
during the first 15 days following an investment in a particular Fund. A
shareholder may exercise the exchange privilege only when the fund into which
shares will be exchanged is registered or qualified in the state in which such
shareholder resides.

Exchanges may be effected by (i) a telephone request to CGM Shareholder
Services at 800-343-5678, provided a special authorization form is on file with
the Trust, or (ii) a written exchange request to CGM Shareholder Services
accompanied by an account application for the appropriate fund. The Trust
reserves the right to modify this exchange privilege without prior notice,
except as otherwise required by law or regulation.

Automatic Investment Plans ("AIP")

Once initial investment minimums have been satisfied with respect to a
particular Fund (see "How to Purchase Shares" in the Prospectus), a shareholder
may participate in an Automatic Investment Plan, pursuant to which the Fund
debits $50.00 or more on or about the same date each month from a shareholder's
checking account and transfers the proceeds into the shareholder's Fund account.
To participate, a shareholder must authorize the Fund and its agents to initiate
Automated Clearing House ("ACH") debits against the shareholder's designated
checking account at a bank or other financial institution. Please contact CGM
Shareholder Services at 800-343-5678 to determine the requirements associated
with debits from savings banks and credit unions. Debits from money market
accounts are not acceptable. Shareholders receive a confirmation of each
purchase of Fund shares under the AIP. If a shareholder elects to redeem shares
of the Fund purchased under the AIP within 15 days of such purchase, the
shareholder may experience delays in receiving redemption proceeds. See "All
Redemptions."

Retirement Plans

Under "Shareholder Services--Retirement Plans" the Prospectus refers to
several retirement plans. These include tax deferred money purchase pension or
profit sharing plans, as well as SEP-IRAs, IRAs and 403(b)(7) custodial accounts
established under retirement plans sponsored by CGM. These plans may be funded
with shares of CGM Fixed Income Fund. CGM American Tax Free Fund may not be an
appropriate investment for: IRA accounts, SEP-IRA accounts, 403(b)(7) custodial
accounts, qualified profit sharing plans, or qualified money purchase plans.

Check with your financial or tax adviser as to the suitability of Fund
shares for your retirement plan.

Address Changes

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REDEMPTIONS
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The procedures for redemption of Fund shares are summarized in the
Prospectus under "How to Redeem Shares."

Except as noted below, signatures on redemption requests must be
guaranteed by an eligible guarantor institution, in accordance with procedures
established by the Trust. Signature guarantees by notaries public are not
acceptable.

Redeeming by Telephone

Check Sent to the Record Address

If checks representing redemption proceeds are returned "undeliverable"
or remain uncashed for six months, such checks shall be cancelled and such
proceeds shall be reinvested in the applicable Fund at the per share net asset
value determined as of the date of cancellation of such checks.

Proceeds Wired to a Predesignated Bank

A shareholder may request that the redemption proceeds be wired to the
bank selected on the Fund application or subsequently on the Account Update Form
available from the Trust. A nominal wire fee, currently $5.00, is deducted from
the proceeds. When selecting the service, a shareholder must designate a bank
account to which the redemption proceeds should be wired. Any change in the bank
account so designated may be made by furnishing CGM Shareholder Services a
completed Account Update Form with a signature guarantee. Whenever the Account
Update Form is used, the shareholder's signature must be guaranteed as described
above. Telephone redemptions may only be made if an investor's bank is a member
of the Federal Reserve System or has a correspondent bank that is a member of
the System. If the account is with a savings bank, it must have only one
correspondent bank that is a member of the System.

All Redemptions

The redemption price will be the net asset value per share next
determined after the redemption request is received by CGM Shareholder Services
in good order (including any necessary documentation). Redemption requests
cannot be revoked once they have been received in good order. Proceeds resulting
from a written redemption request will normally be mailed to you within seven
days after receipt of your request in good order. Telephone redemption proceeds
will normally be mailed or wired within seven days following receipt of a proper
redemption request. If you purchased your Fund shares by check (or through your
AIP) and elect to redeem shares within 15 days of such purchase, you may
experience delays in receiving redemption proceeds. The Trust will process your
redemption request upon receipt of a request in good order. However, the Trust
will generally postpone sending your redemption proceeds from such investment
until it can verify that your check (or AIP investment) has been or will be
collected. Under ordinary circumstances, the Trust cannot verify collection of
individual checks (or AIP investments) and may therefore automatically hold
proceeds from redemptions requested during the 15 day period following such
investment for a total of up to seven days. There will be no such automatic
delay following investments paid for by federal funds wire or by bank cashier's
check, certified check or treasurer's check although the Trust may in any case
postpone payment of redemption proceeds for up to seven days.

As described in the Prospectus under "Dividends, Capital Gains and
Taxes" it is the policy of each Fund to qualify annually as a "regulated
investment company" under the Internal Revenue Code and to declare and pay
monthly substantially all net investment income in the form of dividends and to
distribute annually all net realized capital gains, if any, after offsetting any
capital loss carryovers.

Income dividends and capital gain distributions are payable in full and
fractional shares of each Fund based upon the net asset value determined as of
the close of the New York Stock Exchange on the record date for such dividend or
distribution. Shareholders, however, may elect to receive their income dividends
or capital gains distributions, or both, in cash. However, if a shareholder
elects to receive capital gains in cash, his or her income dividends must also
be received in cash. Shareholders can elect to receive payments of cash
dividends and capital gains distributions either by check or by direct deposit
to a bank account that they have predesignated. These elections can be made at
the time the account is opened and may be changed by the shareholder at any time
by submitting a written request directly to CGM Shareholder Services or by
calling 800-343-5678. However, changes in bank account information for direct
deposits of cash dividends and capital gains distributions must be made through
an Account Update Form. In order for a change to be effective for any dividend
or distribution, it must be received by CGM Shareholder Services on or before
the record date for such dividend or distribution. If a shareholder elects to
receive distributions in cash and checks are returned "undeliverable" or remain
uncashed for six months, such shareholder's cash election will be changed
automatically and the shareholder's future dividend and capital gains
distributions will be reinvested in the same Fund at the per share net asset
value determined as of the date of payment of the distribution. In addition,
following such six-month period, any undeliverable or uncashed checks will be
cancelled and such amounts reinvested in the same Fund at the per share net
asset value determined as of the date of cancellation of such checks.

Dividends paid by a Fund from net taxable investment income, including
dividends, interest and net short-term gains, will be taxable to shareholders as
ordinary income. For corporate investors, no portion of dividends paid by either
Fund is expected to qualify for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses) are taxable as long-term capital gains,
regardless of the length of time shareholders have owned shares in a Fund. To
the extent that a Fund makes a distribution in excess of its current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in a shareholder's shares,
and then, to the extent the distribution exceeds such basis, as a taxable gain
to be realized upon sale of such shares. Taxable dividends and capital gains are
taxable to shareholders of a Fund in the same manner whether received in cash or
reinvested in additional Fund shares.

CGM American Tax Free Fund anticipates that a substantial portion of
its investment income will be tax-exempt interest income. Dividends paid by the
Fund from net tax-exempt interest income will be excluded from a shareholder's
gross income for federal income tax purposes. Shareholders who are recipients of
Social Security benefits should be aware that exempt-interest dividends received
from the Fund are includable in their "modified adjusted gross income" for
purposes of determining the amount of such Social Security benefits, if any,
that is required to be included in their gross income. The exemption of certain
dividends from federal income tax does not necessarily result in exemption under
the income tax laws of any state or local taxing authority. Shareholders should
consult their own tax advisers about the status of dividends and distributions
of CGM American Tax Free Fund in their own states and localities.

If a shareholder of CGM American Tax Free Fund receives an
exempt-interest dividend with respect to any share and redeems or exchanges such
share before holding it for more than six months, any loss on the redemption or
exchange will be disallowed to the extent of such exempt-interest dividend.
Similarly, if a shareholder of CGM American Tax Fee Fund receives a distribution
taxable as long-term capital gain with respect to any share and redeems or
exchanges such share before holding it for more than six months, any loss on the
redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss to the
extent of the long-term capital gain recognized on such distribution.

CGM American Tax Free Fund may invest in private activity bonds.
Interest on private activity bonds issued after August 7, 1986, although
generally excludable from gross income for federal income tax purposes, may be
subject to the federal alternative minimum tax ("AMT"). AMT is imposed on
taxpayers who utilized to a significant degree certain tax deductions and
exclusions (known as "items of tax preference"). Interest from private activity
bonds is an item of tax preference that is included with items of income from
certain other sources in calculating if a taxpayer is subject to AMT and the
amount thereof. Shareholders should consult their own tax advisers regarding the
potential applicability of the AMT to them.

If CGM Fixed Income Fund invests in foreign securities, it may be
subject to foreign withholding taxes on income earned on such securities and may
be unable to pass through to shareholders foreign tax credits and deductions
with respect to such taxes.

A distribution will be treated as paid by a Fund and received by its
respective shareholders on December 31 of the current calender year if it is
declared in October, November, or December of that year with a record date in
such a month and paid in January of
the subsequent year.

Any dividends or distributions paid shortly after a purchase of shares
will have the effect of reducing the per share net asset value of the shares by
the amount of the dividends or distributions. Although in effect a return of
capital, these distributions (if derived from taxable investment income or net
capital gains) are subject to tax, even if their effect is to reduce the per
share net asset value below a shareholder's cost. To the extent that a Fund
makes a distribution in excess of its current and accumulated earnings and
profits, the distribution will be treated first as a tax-free return of capital,
reducing the tax basis in a shareholder's shares, and then, to the extent the
distribution exceeds such basis, as a taxable gain to be realized upon the sale
of such shares. Each Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.

The sale or other disposition of shares of a Fund, including a
redemption of shares or an exchange of shares into another fund, is a taxable
event and may result in a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares.

Each Fund is required to withhold and remit to the U.S. Treasury 31% of
all dividends from net investment income and capital gains distributions,
whether distributed in cash or reinvested in shares of the Fund, paid or
credited to any shareholder account for which an incorrect or no taxpayer
identification number has been provided or where the Fund is notified that the
shareholder has underreported income in the past (or the shareholder fails to
certify that he is not subject to withholding). In addition, each Fund will be
required to withhold and remit to the U.S. Treasury 31% of the amount of the
proceeds of any redemption of Fund shares from a shareholder account for which
an incorrect or no taxpayer identification number has been provided or where the
Fund is notified that the shareholder has underreported income in the past (or
the shareholder fails to certify that he is not subject to such withholding).

As required by federal law, detailed federal tax information is
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year. BFDS, the shareholder servicing agent, will send you and
the Internal Revenue Service an annual statement detailing federal tax
information, including information about dividends and distributions paid to you
during the preceding year. If you redeem or exchange shares in any year,
following the end of a year, you will receive a statement providing the cost
basis and gain or loss of each share lot that you sold in each year. Your CGM
account cost basis will be calculated using the "single category average cost
method," which is one of the four calculation methods allowed by the IRS. Be
sure to keep these statements as permanent records. A fee may be charged for any
duplicate information that you request.

Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may also be subject to state and local
taxes. In certain states, a portion of each Fund's income derived from certain
direct U.S. Government obligations may be exempt from state and local taxes.
Each year, each Fund will indicate the portion of its income, if any, that is
derived from such obligations.

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FINANCIAL STATEMENTS
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The financial statements and Report of Independent Accountants for the
year ended December 31, 1996 for each Fund, which are included in the respective
Fund's Annual Report to Shareholders for the year ended December 31, 1996, are
incorporated herein by reference.