CGM TRUST, 485BPOS, 1999-04-30

CGM TRUST
485BPOS, 1999-04-30

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<PAGE>

File Nos. 2-10653
811-82

As filed with the Securities and Exchange Commission on April 30, 1999

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /

POST-EFFECTIVE AMENDMENT NO. 88 /X/

and

REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 43 /X/

CGM TRUST
(Exact Name of Registrant as Specified in Charter)

One International Place, Boston, Massachusetts 02110
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: (617) 737-3225

Jeremiah J. Bresnahan, Jr., Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
(Name and Address of Agent for Service)

It is proposed that this filing will become effective on May 1, 1999,
pursuant to paragraph (b) of Rule 485.

<PAGE>

- -----------
CGM
MUTUAL FUND
- -----------
A No-Load Fund

PROSPECTUS & APPLICATION o MAY 1, 1999

[logo] The Fund's investment objective is reasonable long-term capital
appreciation with a prudent approach to protection of capital from undue risks.
While the investment manager considers current income in the selection of the
Fund's portfolio securities, it is not a controlling factor.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

<PAGE>

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

FUND SUMMARY ---------------------------------------------------- 1

Investment Objective ------------------------------------------- 1
Summary of Principal Investment Strategies --------------------- 1
Summary of Principal Risks ------------------------------------- 2
PAST PERFORMANCE ------------------------------------------------ 3
EXPENSES -------------------------------------------------------- 4
ADDITIONAL FUND INFORMATION ------------------------------------- 4
Principal Investment Strategies -------------------------------- 5
Principal Risks ------------------------------------------------ 5
MANAGEMENT ------------------------------------------------------ 7
HOW TO PURCHASE SHARES ------------------------------------------ 7
SHAREHOLDER SERVICES -------------------------------------------- 8
HOW TO sell SHARES ---------------------------------------------- 9
TELEPHONE TRANSACTIONS ------------------------------------------ 12
DIVIDENDS, CAPITAL GAINS AND TAXES ------------------------------ 12
PRICING OF SHARES ----------------------------------------------- 14
YEAR 2000 ------------------------------------------------------- 14
FINANCIAL HIGHLIGHTS -------------------------------------------- 15

CONTACT INFORMATION ------------------------------------- Back Cover

[logo] FUND SUMMARY

INVESTMENT OBJECTIVE

The Fund's investment objective is reasonable long-term capital appreciation
with a prudent approach to protection of capital from undue risks. While the
investment manager considers current income in the selection of the Fund's
portfolio securities, it is not a controlling factor.

SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to attain its objective by investing in a managed mix of equity
and debt securities of predominately U.S. issuers. Under normal circumstances
the Fund expects to invest approximately 75% of its assets in equity securities
and 25% of its assets in debt or fixed-income securities. However, the Fund is
flexibly managed so that, depending on the investment manager's view of the
economy and investment outlook, it sometimes will be more heavily invested in
debt or fixed-income securities. The fixed-income securities that the Fund
invests in will generally have a maturity ranging from 30 days to over 30 years.
The investment manager may change the weighting of the Fund's investments in
equity and fixed-income securities based on the relative attractiveness of the
returns available from these securities. Generally, the Fund will increase its
investments in fixed-income securities when the return on bonds exceeds the
anticipated return on equity.

The Fund may invest in equity securities of companies in the real estate
industry, including real estate investment trusts (REITs), when the investment
manager believes that the total return potential for REITs is greater than that
offered by more traditional equity securities.

The Fund may invest in companies of any size, but primarily invests in companies
with market capitalizations of over $500 million.

The Fund may invest up to 25% of its assets in securities issued by companies in
any single industry.

The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade, including securities commonly referred to
as "junk bonds". The Fund need not sell these securities if the 35% limitation
is exceeded because of a downgrade in a fixed income security held by the Fund.
The Fund may purchase below investment grade securities:

o in order to obtain the potentially higher yield that these securities offer
relative to investment grade securities, and

o when the investment manager believes that the difference in the yield offered
by investment grade and below investment grade securities is large enough to
compensate for the increased risks associated with investing in lower rated
securities.

In making an investment decision, the investment manager analyzes:

o the overall economic factors that may affect a potential investment, and

o certain industries and companies, evaluating the fundamentals of each on a
case-by-case basis and focusing on companies that it determines are
attractively valued.

The investment manager will sell a security if it determines that:

o its investment expectations are not being met,

o better opportunities are identified, or

o its price objective has been attained.

SUMMARY OF PRINCIPAL RISKS

Like all mutual funds, you may lose money if you invest in the Fund. The Fund's
investments are subject to the MARKET RISKS inherent in all securities. This
means that you may lose money on your investment due to a fall in prices of
stocks or periods of below-average performance in the stock market.

In addition, because the Fund may also invest in debt or fixed-income
securities, it is subject to CREDIT RISK (the risk that the obligor will default
in the payment of principal and/or interest) and to INTEREST RATE RISK (the risk
that the market value of the securities will decline as a result of increases in
market rates of interest). Increases in interest rates may lead to a slower than
expected rate of principal PREPAYMENTS, effectively lengthening the maturity of
the affected securities. Conversely, declines in interest rates may lead to an
accelerated rate of principal prepayments. The Fund may not be able to reinvest
that principal at attractive rates.

The Fund may also invest a significant portion of its assets in REAL ESTATE
INVESTMENT TRUSTS, which are subject to risks associated with the direct
ownership of real estate as well as credit and interest rate risks generally
associated with fixed-income securities.

Investments in LOWER QUALITY SECURITIES such as junk bonds are also subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.

CONVERTIBLE SECURITIES are subject to the market risk of stocks, and, like other
debt securities, are also subject to interest rate risk and the credit risk of
their issuers.

The FOREIGN ISSUERS that the fund may invest in through depository receipts
(receipts representing the right to receive the securities of foreign issuers
deposited in U.S. banks or a local branch of a foreign bank) are subject to
risks of possible adverse political and economic developments.

[logo] PAST PERFORMANCE

The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.

The bar chart shows how the Fund's performance has varied from year to year. The
table compares the Fund's performance over time for the periods indicated to
that of the Standard and Poor's 500 Composite Index, a widely recognized
unmanaged index of common stock prices.

Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how the
Fund will perform in the future.

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

1989 21.7%
1990 1.1%
1991 40.9%
1992 6.1%
1993 21.8%
1994 -9.7%
1995 24.3%
1996 23.7%
1997 8.2%
1998 8.2%

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

During the ten-year period shown in the bar chart, the highest quarterly return
was 19.3% (for the quarter ended 12/31/98) and the lowest quarterly return was
- -13.8% (for the quarter ended 9/30/98).

AVERAGE ANNUAL TOTAL RETURN
(as of 12/31/98)
1 Year 5 Years 10 Years
- -----------------------------------------------------
Fund 8.2% 10.2% 13.8%
S&P 500 Index 28.6% 24.1% 19.2%

[logo] EXPENSES

The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

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

SCHEDULE OF FEES

Shareholder Transaction Expenses (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases -------------------- None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends --------- None
Redemption Fees* ---------------------------------------------------- None
Exchange Fees ------------------------------------------------------- None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)

Management Fees ----------------------------------------------------- 0.84%
Distribution (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.
- --------------------------------------------------------------------------------

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

o you invest $10,000 in the Fund for the time periods indicated;

o you redeem your shares at the end of each period;

o your investment has a 5% return each year (the assumption of a 5% return is
required by the SEC and is not a prediction of the Fund's future
performance); and

o the Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, under these assumptions your
costs would be:

Number of years 1 3 5 10
----- ----- ----- ------
Cost $ 104 $ 325 $ 563 $1,248

[logo] ADDITIONAL FUND INFORMATION

The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
invest-ment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.

The Fund may also use strategies and invest in securities that are not described
below but which are described in the Statement of Additional Information
("SAI"). Of course, the Fund's investment manager may decide, as a matter of
investment strategy, not to use the investments and investment techniques
described below and in the SAI at any particular time.

The Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, the Fund may hold a substantial portion of
its assets in cash or investment grade fixed-income securities and may not be
pursuing its investment objective.

PRINCIPAL INVESTMENT STRATEGIES

The Fund may invest up to 25% of its total assets in securities issued by
companies in any single industry.

The Fund may invest up to 35% of its total assets in debt or fixed-income
securities of a quality below investment grade (i.e. securities rated lower than
Baa or baa by Moody's Investors Service, Inc. or lower than BBB by Standard and
Poor's Corporation, or their equivalent as determined by the investment
manager), including up to 10% of its total assets in debt or 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. These
securities are commonly referred to as "junk bonds". Investing in junk bonds is
an aggressive approach to income investing.

Management Style. Rather than following a particular style, the Fund's
investment manager employs a flexible approach and seeks to take advantage of
opportunities as they arise. In making an investment decision, the Fund's
investment manager will generally employ the following method:

o It uses a top-down approach, meaning that it first analyzes the overall
economic factors that may affect a potential investment.

o It then conducts a thorough analysis of certain industries and companies,
evaluating the fundamentals of each on a case-by-case basis and focusing on
companies that it determines are attractively valued.

o The investment manager will sell a security if it determines that its
investment expectations are not being met, if better opportunities are
identified, or if its price objective has been attained.

PORTFOLIO TURNOVER. 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. Frequent trading involves higher
securities transaction costs which may adversely affect the Fund's performance.
To the extent that this policy results in the realization of gains on
investments, the Fund will make distributions to its shareholders. These
distributions will generally be subject to taxes.

PRINCIPAL RISKS

Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described below. More
information about risks appears in the Fund's SAI. Remember that you may receive
little or no return on your investment in the Fund. You may lose money if you
invest in the Fund.

MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of the Fund's shares will change daily as the
value of its underlying securities changes. This means that your Fund shares may
be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.

INTEREST RATE RISK. Interest rate risk is the risk that the market value of debt
and fixed income securities will fall when market interest rates increase. In
general, the prices of debt or fixed-income securities rise when interest rates
fall, and fall when interest rates rise. Longer term obligations are usually
more sensitive to interest rate changes than shorter term obligations. A change
in interest rates could cause the Fund's share price to go up or down.
Generally, the longer the average maturity of the bonds in the Fund, the more
the Fund's share price will fluctuate in response to interest rate changes.

CREDIT RISK. Credit risk is the possibility that an issuer will fail to make
timely payments of interest or principal. Some issuers may not make payments on
debt securities held by the Fund, causing a loss. Or, an issuer may suffer
adverse changes in its financial condition that could lower the credit quality
of a security, leading to greater volatility in the price of the security and in
shares of the Fund. A change in the quality rating of a bond or other security
can also affect the security's liquidity and make it more difficult for the Fund
to sell. The lower quality debt securities in which the Fund may invest are more
susceptible to these problems than higher quality obligations.

RISKS ASSOCIATED WITH REITS. REITs are sensitive to factors such as changes in
real estate values, property taxes, interest rates, cash flow of underlying real
estate assets, occupancy rates, government regulations affecting zoning, land
use, and rents, and the management skill and creditworthiness of the issuer.
REITs may also be subject to liabilities under environmental and hazardous waste
laws.

LOWER RATED DEBT SECURITIES. Lower rated debt securities, including securities
commonly referred to as "junk bonds", are very risky because the issuers may
fail to make payments of interest and principal. Part of the reason for this
high risk is that, in the event of a default or bankruptcy, holders of lower
rated debt securities generally will not receive payments until the holders of
all other debt have been paid. In addition, the market for lower rated debt
securities has in the past been more volatile than the markets for other
securities. Lower rated debt securities are also often less liquid than higher
rated debt securities.

PREPAYMENT RISK. The issuers of debt securities held by the Fund may be able to
prepay principal due on the securities, particularly during periods of declining
interest rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund, and the Fund may lose any premium
paid. On the other hand, rising interest rates may cause prepayments to occur at
slower than expected rates. This effectively lengthens the maturities of the
affected securities, making them more sensitive to interest rate changes and the
Fund's share price more volatile.

SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible securities, which
are debt securities that may be converted into stock or other equity interests,
are subject to the market risk of stocks, and, like other debt securities, are
also subject to interest rate risk and the credit risk of their issuers.

FOREIGN ISSUERS. The Fund may invest a portion of its assets in foreign issuers.
Investing in foreign issuers involves risks in addition to those of investing
in U.S. securities, including risks relating to political, social and economic
developments abroad and risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.

[logo] MANAGEMENT

THE INVESTMENT MANAGER

The Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Fund's daily investment
and business affairs subject to the policies established by the Fund's Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.

In 1998, the Fund paid 0.84% of its average annual net assets in management fees
to CGM.

THE PORTFOLIO MANAGER

G. Kenneth Heebner has been the portfolio manager of the Fund or its predecessor
since 1981. In 1990, 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. In addition to the Fund, he currently
manages CGM Capital Development Fund, CGM Realty Fund, CGM Focus Fund and, with
Janice H. Saul, co-manages CGM Fixed Income Fund.

[logo] HOW TO PURCHASE SHARES

The Fund sells its shares directly to investors without any sales load.

NEW ACCOUNTS

You may make a purchase of Fund shares in a new regular account or retirement
plan account by submitting a completed application form and check, made payable
to CGM Mutual Fund, 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 or the Uniform Transfers to Minors
Act.

EXISTING ACCOUNTS

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

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

You must include either the Additional Investment Stub detached from an account
statement 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 must be at least $50.

PAYMENT BY CHECK

If you pay for Fund shares by check, your 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 are not accepted.

PAYMENT BY WIRE

You may also make subsequent investments 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.

ADDITIONAL INFORMATION

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 Fund 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 Fund's system for
recording investments eliminates the problems of handling and safekeeping
certificates.

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

The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.

[logo] SHAREHOLDER SERVICES

The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.

EXCHANGE PRIVILEGE

You may exchange your shares of CGM Mutual Fund for shares of CGM Fixed Income
Fund, CGM American Tax Free Fund, CGM Realty Fund and CGM Focus Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.

Additionally, you may exchange shares of CGM Mutual Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of CGM Capital
Development Fund on September 24, 1993, and have remained a shareholder of 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 SAI.

All exchanges are free of 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" on page 12. Exchange requests cannot be revoked once they have
been received in good order. 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.

You 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 you
can make to four exchanges per account (or two round trips) per calendar year.
Monthly automatic exchanges from money market funds distributed by New England
Funds, L.P. to the Fund are not subject to this restriction. The Fund also
reserves the right to prohibit exchanges during the first 15 days following an
investment in the Fund.

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

The Fund may terminate or change the terms of the exchange privilege.

SYSTEMATIC WITHDRAWAL PLAN ("SWP")

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 will be
cancelled and the amounts will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation of the checks. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks. The Fund may terminate or modify the SWP at any time. Additional
information about this Plan is set forth in the SAI.

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 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 SAI.

RETIREMENT PLANS

The Fund's shares may be purchased by tax-deferred retirement plans. CGM makes
available retirement plan forms and plan documents for Traditional and Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money Purchase Pension and
Profit Sharing plans ("CGM Retirement Plans").

CONFIRMATION STATEMENTS

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.

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 Fund at 800-345-4048.

[logo] HOW TO SELL SHARES

You can sell (redeem) all or part of your shares in the Fund in three different
ways:

o by sending a written request for a check or wire representing the redemption
proceeds,

o except for CGM Retirement Plans, 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

o except for CGM Retirement Plans, by making a telephone request for redemption
proceeds to be wired to a bank account 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 documen-tation
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.

WRITTEN REDEMPTION REQUESTS

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, 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), or
requesting that the proceeds be wired to a bank account that you have not
predesignated, 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.

TELEPHONE REDEMPTION REQUESTS

If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" on page 12. 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 otherwise in
writing. You may select the telephone redemption wire service when you fill out
your initial applica-tion or you may select it later by completing the Service
Options Form (with a signature guarantee), available from the Fund 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. 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 Fund 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 Service Options Form with a signature guarantee.

REDEMPTION PROCEEDS

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 an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. The Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan 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, the checks will be cancelled and the proceeds
will be reinvested in the Fund at the per share net asset value determined as of
the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.

POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT

The Fund may postpone payment of redemption proceeds for up to seven days. The
Fund may not postpone payment for more than seven days or suspend the right of
redemption, except: if you purchased your Fund shares by check (or through an
automatic investment plan) and redeem shares within 15 days of the purchase as
described in the preceding section, when the New York Stock 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.

REDEMPTION IN KIND

The Fund will normally redeem shares for cash; however, the Fund 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 Fund determines it to be advisable in the
interests 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.

MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION

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
min-imum does not apply to CGM Retirement Plans or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.

[logo] TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

o telephone exchanges;

o telephone redemptions by wire; and

o 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.

You must select the telephone exchange privilege and/or telephone redemption by
wire privilege when you fill out your initial application or you may select
either option later by completing the Service Options Form (with a signature
guarantee) available from the Fund or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise in writing.

The telephone redemption privileges are not available for Traditional or Roth
IRAs, SEP-IRAs, 403(b)(7) custodial accounts or for Money Purchase Pension and
Profit Sharing accounts under a CGM Retirement Plan for 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.

During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the Fund
or CGM Shareholder Services by telephone. In this case, please consider sending
written instructions.

[logo] DIVIDENDS, CAPITAL GAINS AND TAXES

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays out quarterly dividends consisting of substantially
all of its net investment income. Any capital gains distributions are normally
made annually in December but may be made more frequently as deemed advisable by
the Board of Trustees. Certain restrictions may apply to participants in CGM
Retirement Plans.

You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income divi-dends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.

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 a Service Options 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 the six-month
period, any undeliverable or uncashed checks will be cancelled and the amounts
will be reinvested in the Fund at the per share net asset value determined as of
the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.

TAXES

TAXATION OF DISTRIBUTIONS. Dividends paid by the Fund from net investment income
(including dividends and interest) and net short-term capital gains will be
taxable to you as ordinary income. If a portion of the Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may be eligible 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 to you as long-term capital gains, regardless of how
long you have owned your 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
your tax basis in your shares, and then, to the extent the distribution exceeds
such basis, as a taxable gain from the sale of your shares. Dividends and
distributions are taxable to you in the same manner whether received in cash or
reinvested in additional shares.

A distribution will be treated as paid by the Fund and received by you 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.

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 are subject to taxes, even if their effect is to reduce the per
share net asset value below a shareholder's cost. The Fund will notify you
annually as to the tax status of dividend and capital gains distributions paid
by the Fund.

FOREIGN TAXES. If the Fund invests in foreign issuers, it may be subject to
foreign withholding taxes on income earned on those securities and may be unable
to pass through to you foreign tax credits and deductions with respect to those
taxes.

DISPOSITION OF SHARES. 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, generally depending upon how long you held your shares.

BACKUP WITHHOLDING. 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.

GENERAL INFORMATION. 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. In limited circumstances,
your actual cost basis may differ from your CGM account cost basis. 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. Some restrictions apply; for
more information, please call 800-343-5678. 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, local and foreign
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.
Each year the Fund will indicate the portion of the Fund's income, if any, which
is derived from such obligations.

The tax discussion set forth here is included for general information only. You
should consult your own tax adviser concerning the tax consequences of an
investment in the Fund.

[logo] 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 New York Stock Exchange (normally 4 p.m. Eastern time) 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 SAI.

Trading may take place in foreign issuers held by the Fund on days when the Fund
is not open for business. As a result, the Fund's net asset value may change on
days on which it is not possible to purchase or sell shares of the Fund.

[logo] YEAR 2000

Like other mutual funds and other organizations around the world, the Fund could
be adversely affected if the computer systems used by the Fund or its service
providers do not properly process and calculate date-related information from
and after January 1, 2000. This is commonly known as the "Y2K Problem." Failure
to successfully address the Y2K Problem could result in interruptions to and
other material adverse effects on the Fund's business and operations, such as
problems calculating net asset value and difficulties in implementing the Fund's
purchase and redemption procedures. CGM has taken steps that it believes are
reasonably designed to address any potential Y2K Problem for computer programs
used by the Fund or CGM. Each of the Fund's and CGM's service providers are
taking steps that they believe are reasonably designed to address the Y2K
Problem with respect to computer systems that they use. At this time, however,
there can be no assurance that these steps being taken by third party service
providers will be sufficient to avoid any adverse impact to the Fund. In
addition, there can be no assurances that the Y2K Problem will not have an
adverse effect on the issuers whose securities are held by the Fund or on the
market or the economy in general.

<PAGE>

FINANCIAL HIGHLIGHTS

The following Financial Highlights table is intended to help you understand
the Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represents the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained
from the Fund free of charge.

<TABLE>
<CAPTION>
CGM MUTUAL FUND YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
For a share of the Fund
outstanding throughout each period:

Net asset value at beginning of
period ......................... $25.52 $31.42 $29.43 $25.05 $28.88
------ ------ ------ ------ ------
Net investment income ............ 1.00 0.66 0.75 0.73 1.09
Dividends from net investment
income ......................... (0.98) (0.67) (0.74) (0.77) (1.04)
Net realized and unrealized gain
(loss) on investments .......... 1.07 1.92 6.13 5.31 (3.88)
Distribution from net realized
gain ........................... (0.25) (7.81) (4.15) (0.89) --
------ ------ ------ ------ ------
Net increase (decrease) in net
asset value .................... 0.84 (5.90) 1.99 4.38 (3.83)
------ ------ ------ ------ ------
Net asset value at end of period . $26.36 $25.52 $31.42 $29.43 $25.05
====== ====== ====== ====== ======
Total Return (%) ................. 8.2 8.2 23.7 24.3 -9.7

Ratios:
Operating expenses to average net
assets (%) ..................... 1.02 0.98 0.87 0.91 0.92
Net investment income to average
net assets (%) ................. 3.56 1.91 2.33 2.55 4.39
Portfolio turnover (%) ........... 280 386 192 291 173
Net assets at end of period
(in thousands) ($) ............. 940,930 1,192,154 1,216,523 1,154,439 1,063,375
</TABLE>

<PAGE>

CONTACT INFORMATION-------------------------------------------------------------

CGM MUTUAL FUND
c/o The CGM Funds
P.O. Box 449
Boston, MA 02117

SHAREHOLDER SERVICING AGENT
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

INVESTMENT MANAGER
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

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

More information about this Fund is available free by calling 800-345-4048,
including the following:

ANNUAL/QUARTERLY REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and quarterly reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund and is incorporated
into this prospectus by reference (i.e. is legally considered part of it).

For additional information about:

o Account procedures/status o Prospectuses
o Redemptions o SAI
o Exchanges o Annual/Quarterly Reports
o New account procedures o Performance

Call CGM Shareholder Call CGM Marketing
Services at 800-343-5678 Department at 800-345-4048

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

Information about the Fund (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

MFP99 SEC File No. 811-82
<PAGE>

-----------
CGM
Realty Fund
-----------

A No-Load Fund

PROSPECTUS & APPLICATION o MAY 1, 1999

[logo] The Fund's investment objective is above-average income and long-term
growth of capital. The Fund seeks to provide a yield in excess of the
yield of the Standard and Poor's 500 Composite Index.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

<PAGE>

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

FUND SUMMARY -------------------------------------------------- 1

Investment Objective ---------------------------------------- 1
Summary of Principal Investment Strategies ------------------ 1
Summary of Principal Risks ---------------------------------- 2
PAST PERFORMANCE ---------------------------------------------- 2
EXPENSES ------------------------------------------------------ 3
ADDITIONAL FUND INFORMATION ----------------------------------- 4
Principal Investment Strategies ----------------------------- 4
Principal Risks --------------------------------------------- 5
MANAGEMENT ---------------------------------------------------- 6
HOW TO PURCHASE SHARES ---------------------------------------- 7
SHAREHOLDER SERVICES ------------------------------------------ 8
HOW TO sell SHARES -------------------------------------------- 9
TELEPHONE TRANSACTIONS ---------------------------------------- 12
DIVIDENDS, CAPITAL GAINS AND TAXES ---------------------------- 12
PRICING OF SHARES --------------------------------------------- 14
YEAR 2000 ----------------------------------------------------- 14
FINANCIAL HIGHLIGHTS ------------------------------------------ 15

CONTACT INFORMATION ----------------------------------- Back Cover

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

[logo] FUND SUMMARY

INVESTMENT OBJECTIVE

The Fund's investment objective is above-average income and long-term growth of
capital. The Fund seeks to provide a yield in excess of the yield of the
Standard and Poor's 500 Composite Index.

SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES

The Fund pursues its objective by investing primarily in equity securities of
companies in the real estate industry, including real estate investment trusts
("REITs"). Under normal circumstances the Fund expects to invest at least 65% of
its assets in these securities. Equity securities in which the Fund may invest
include common and preferred stocks, convertible securities and warrants.

The Fund may invest up to 35% of its assets in equity or debt securities of
companies outside the real estate industry. The Fund may invest up to 25% of its
assets in debt or fixed-income securities of a quality below investment grade,
including securities commonly referred to as "junk bonds". The Fund will
consider investing in equity and debt securities, including junk bonds, outside
of the real estate industry when the investment manager believes the potential
return on these securities is greater than that of REITs.

In making an investment decision, the investment manager analyzes:

o the overall economic factors that may affect a potential investment, and

o certain industries and companies, evaluating the fundamentals of each on a
case-by-case basis and focusing on companies that it determines are
attractively valued.

The investment manager will sell a security if it determines that:

o its investment expectations are not being met,

o better opportunities are identified, or

o its price objective has been attained.

SUMMARY OF PRINCIPAL RISKS

The Fund invests primarily in companies in the real estate industry, including
REITs, and is, therefore, subject to the SPECIAL RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY AND MARKET. Securities of companies in the real estate industry
are sensitive to factors such as changes in real estate values, property taxes,
interest rates, cash flow of underlying real estate assets, occupancy rates,
government regulations affecting zoning, land use, and rents, and the management
skill and creditworthiness of the issuer. Companies in the real estate industry
may also be subject to liabilities under environmental and hazardous waste laws.

In addition, because the Fund may also invest in debt and fixed-income
securities and repurchase agreements, it is subject to CREDIT RISK (the risk
that the obligor will default in the payment of principal and/or interest) and
to INTEREST RATE RISK (the risk that the market value of the securities will
decline as a result of increases in market rates of interest).

Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.

The FOREIGN ISSUERS the Fund may invest in through depository receipts (receipts
representing the right to receive the securities of foreign issuers deposited in
U.S. banks or a local branch of a foreign bank) are subject to risks of possible
adverse political and economic developments.

[logo] PAST PERFORMANCE

The bar chart below and table in the next column show the Fund's annual returns
and its long-term performance, and provide some indication of the risks of
investing in the Fund.

- --------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURN (as of 12/31 each year)

1995 19.8%
1996 44.1%
1997 26.7%
1998 -21.2%

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

During the four-year period shown in the bar chart, the highest quarterly return
was 22.0% (for the quarter ended 12/31/96) and the lowest quarterly return was
- -11.6% (for the quarter ended 9/30/98).

Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how the
Fund will perform in the future.

AVERAGE ANNUAL TOTAL RETURN
(as of 12/31/98)
Since Inception
1 Year (5/13/94)
- --------------------------------------------------------------------------------
Fund -21.2% 12.5%
S&P 500 Index 28.6% 26.7%

[logo] EXPENSES

The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

- --------------------------------------------------------------------------------
SCHEDULE OF FEES
Shareholder Transaction Expenses (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases ----------------- None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ------ None
Redemption Fees*-------------------------------------------------- None
Exchange Fees ---------------------------------------------------- None

Annual Fund Operating Expenses (expenses that are deducted from Fund
assets) (as a percentage of average net assets, based on expenses
for year ended 12/31/98)

Management Fees--------------------------------------------------- 0.84%
Distribution (12b-1) Fees ---------------------------------------- None
Other Expenses --------------------------------------------------- 0.20%
Total Fund Operating Expenses------------------------------------- 1.04%

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

o you invest $10,000 in the Fund for the time periods indicated;

o you redeem your shares at the end of each period;

o your investment has a 5% return each year (the assumption of a 5% return
is required by the SEC and is not a prediction of the Fund's future
performance); and

o the Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, under these assumptions your
costs would be:

Number of years 1 3 5 10
----- ----- ----- ------
Cost $ 106 $ 331 $ 574 $1,271

[logo] ADDITIONAL FUND INFORMATION

The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
investment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.

PRINCIPAL INVESTMENT STRATEGIES

The Fund pursues its objective by investing primarily in equity securities of
companies in the real estate industry. Under normal circumstances the Fund
expects to invest at least 65% of its assets in these securities. Equity
securities in which the Fund may invest include common and preferred stocks,
convertible securities and warrants.

In deciding whether or not to purchase these securities, the investment manager
considers:

o the security's potential yield,

o the issuer's management, and

o the issuer's prospects for growth.

A company is considered to be in the real estate industry if construction,
ownership, management, financing or sales of residential, commercial or
industrial real estate account for at least 50% of its gross revenues or net
profits. Companies in the real estate industry include the following:

o REITs that own properties or make or invest in construction, development or
long-term mortgage loans;

o real estate brokers or developers; and

o companies with significant real estate holdings, including hotel chains,
supermarkets and mining, lumber and paper companies.

REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. An equity REIT owns or leases real estate 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. A mortgage REIT
invests primarily in loans secured by real estate. A mortgage REIT generally
derives its income primarily from interest payments on its mortgage loans. A
hybrid REIT combines the characteristics of both equity REITs and mortgage
REITs, generally by holding both ownership and mortgage interests in real
estate. The Fund anticipates that under normal circumstances a majority of its
investments in REITs will consist of equity REITs, but this is not a
requirement.

Equity REITs may be further classified as operating companies or financing
companies. An operating company generally exercises some degree of control over
the operation of its real estate assets, including selecting tenants,
establishing lease terms, and arranging for property maintenance and repair.
Conversely, a financing company will generally not have control over the
operations that are conducted on its real estate assets. The Fund anticipates
that under normal circumstances a majority of its equity REIT investments will
consist of securities issued by operating companies but this is not a
requirement.

Under normal market circumstances the Fund may invest up to 35% of its assets in
equity or debt securities of companies outside the real estate industry.

The Fund may invest up to 25% of its total assets in debt or fixed-income
securities of a quality below investment grade (i.e. securities rated lower than
Baa or baa by Moody's Investors Service, Inc. or lower than BBB by Standard and
Poor's Corporation, or their equivalent as determined by the investment
manager). These may include securities commonly referred to as "junk bonds".
Investing in junk bonds is an aggressive approach to income investing.

The Fund may also invest up to 25% of its assets in repurchase agreements, by
which the Fund buys securities with the understanding that the seller will buy
them back with interest at a later date.

MANAGEMENT STYLE. Rather than following a particular style, the Fund's
investment manager employs a flexible approach and seeks to take advantage of
opportunities as they arise. In making an investment decision, the Fund's
investment manager will generally employ the following method:

o It uses a top-down approach, meaning that it first analyzes the overall
economic factors that may affect sectors of the real estate industry and
potential investments.

o It then conducts a thorough analysis of certain companies, evaluating the
fundamentals of each on a case-by-case basis and focusing on companies that
it determines are attractively valued.

o The investment manager will sell a security if it determines that its
investment expectations are not being met, if better opportunities are
identified, or if its price objective has been attained.

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 will, however, sell any particular
security and reinvest proceeds when it is deemed prudent by the Fund's
investment manager, regardless of the length of the holding period. Frequent
trading involves higher securities transaction costs which may adversely affect
the Fund's performance. To the extent that this policy results in the
realization of gains on investments, the Fund will make distributions to its
shareholders. These distributions will generally be subject to taxes.

PRINCIPAL RISKS

MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing eco- nomic, political or market conditions, or due to a
company's individual situation. The value of the Fund's shares will change daily
as the value of its underlying securities change. This means that your Fund
shares may be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.

RISKS OF REAL ESTATE AND REITs. The Fund invests primarily in companies in the
real estate industry, including REITs, and is, therefore, subject to the special
risks associated with the real estate industry and market. Securities of
companies in the real estate industry are sensitive to factors such as changes
in real estate values, property taxes, interest rates, cash flow of underlying
real estate assets, occupancy rates, government regulations affecting zoning,
land use, and rents, and the management skill and creditworthiness of the
issuer. Companies in the real estate industry may also be subject to liabilities
under environmental and hazardous waste laws. Changes in underlying real estate
values may have an exaggerated effect to the extent that REITs concentrate
investments in particular geographic regions or property types.

Investments in REITs may be adversely affected by rising interest rates. Rising
interest rates may cause investors in REITs to demand a higher annual yield,
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, many mortgages may be refinanced. This may reduce
the yield from mortgage REITs. REITs depend on payments under their mortgage
loans and leases to generate cash to make distributions to their shareholders.
Accordingly, REITs may be affected by defaults on their mortgage loans or
leases.

Some REITs have relatively small market capital-izations, which tends to
increase the volatility of the market price of securities issued by these 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 the Fund, a shareholder will bear
expenses of the REITs in addition to expenses of the Fund.

REPURCHASE AGREEMENTS. The Fund may invest a significant portion of its assets
in repurchase agreements, by which the Fund buys securities with the
understanding that the seller will buy them back with interest at a later date.
If the seller is unable to honor its commitment to repurchase the securities,
the Fund could lose money.

DEBT AND FIXED-INCOME SECURITIES. While the Fund expects to invest primarily in
equity securities, the Fund may also invest in debt and fixed-income securities.
Debt and fixed-income securities are subject to credit risk (the risk that the
obligor will default in the payment of principal and/or interest) and to
interest rate risk (the risk that the market value of the securities will
decline as a result of changes in market rates of interest). These securities
are also subject to the risk that interest rate changes may affect prepayment
rates and their effective maturity.

FOREIGN ISSUERS. The Fund may invest a portion of its assets in foreign issuers.
Investing in foreign issuers involves risks in addition to those of investing in
U.S. securities, including risks relating to political, social and economic
developments abroad and risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.

[logo] MANAGEMENT

THE INVESTMENT MANAGER

In 1998, the Fund paid 0.84% of its average annual net assets in management fees
to CGM.

THE PORTFOLIO MANAGER

G. Kenneth Heebner has been the portfolio man-ager of the Fund since its
inception in 1994. In 1990, 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. In addition to the Fund, he currently
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Focus Fund and, with
Janice H. Saul, co-manages CGM Fixed Income Fund.

[logo] HOW TO PURCHASE SHARES

The Fund sells its shares directly to investors without any sales load.

NEW ACCOUNTS

You may make a purchase of Fund shares in a new regular account or retirement
plan account by submitting a completed application form and check, made payable
to CGM Realty Fund, to:

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

EXISTING ACCOUNTS

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

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

PAYMENT BY CHECK

If you pay for Fund shares by check, your 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 are not accepted.

PAYMENT BY WIRE

You may also make subsequent investments 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 Realty Fund, Shareholder Name,
Shareholder Account Number." Your bank may charge you a fee for transmitting
funds by wire.

ADDITIONAL INFORMATION

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 Fund 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.

The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.

[logo] SHAREHOLDER SERVICES

The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.

EXCHANGE PRIVILEGE

You may exchange your shares of CGM Realty Fund for shares of CGM Fixed Income
Fund, CGM American Tax Free Fund, CGM Mutual Fund and CGM Focus Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.

Additionally, you may exchange shares of CGM Realty Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of CGM Capital
Development Fund 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 SAI.

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.

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

The Fund may terminate or change the terms of the exchange privilege.

SYSTEMATIC WITHDRAWAL PLAN ("SWP")

AUTOMATIC INVESTMENT PLAN ("AIP")

RETIREMENT PLANS

CONFIRMATION STATEMENTS

SHAREHOLDER REPORTS

[logo] HOW TO SELL SHARES

You can sell (redeem) all or part of your shares in the Fund in three different
ways:

o by sending a written request for a check or wire representing the redemption
proceeds,

o except for CGM Retirement Plans, by making a telephone request for redemption
proceeds to be wired to a bank account that you have predesig-nated.

The redemption price will always be the net asset value per share next
determined after the redemp-tion 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.

WRITTEN REDEMPTION REQUESTS

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 certifi-cates; consequently, you may wish to send your
certificates by registered mail.

TELEPHONE REDEMPTION REQUESTS

Telephone redemptions by check are available to all shareholders of the Fund
automatically unless this option is declined in the application or otherwise 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 Service
Options Form (with a signature guarantee), available from the Fund or CGM
Shareholder Services.

REDEMPTION PROCEEDS

POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT

REDEMPTION IN KIND

MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION

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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.

{logo] TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

o telephone exchanges;

o telephone redemptions by wire; and

o 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.

[logo] DIVIDENDS, CAPITAL GAINS AND TAXES

DIVIDENDS AND CAPITAL GAINS

You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.

TAXES

The tax discussion set forth here is included for general information only. You
should consult your own tax adviser concerning the tax consequences of an
investment in the Fund.

[logo] PRICING OF SHARES

Trading may take place in foreign securities held by the Fund on days when the
Fund is not open for business. As a result, the Fund's net asset value may
change on days on which it is not possible to purchase or sell shares of the
Fund.

[logo] YEAR 2000

<PAGE>

FINANCIAL HIGHLIGHTS

The following Financial Highlights table is intended to help you understand
the Fund's financial performance since its inception. Certain information
reflects financial results for a single Fund share. The total returns in the
table represents the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained
from the Fund free of charge.

<TABLE>
<CAPTION>
CGM REALTY FUND
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, MAY 13, 1994(C)
------------------------------------------- THROUGH
1998 1997 1996 1995 DECEMBER 31, 1994
------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:
Net asset value at the beginning of period ............ $15.60 $14.50 $10.89 $ 9.71 $10.00
------ ------ ------ ------ ------
Net investment income (a) ............................. 0.59 0.64 0.52 0.54 0.31
Dividends from net investment income .................. (0.59) (0.64) (0.52) (0.54) (0.23)
Distributions from net realized gain .................. -- (2.03) (0.41) -- --
Distributions from tax return of capital .............. (0.16) (0.04) -- (0.14) (0.08)
Distributions in excess of net investment income ...... -- -- (0.12) -- --
Net realized and unrealized gain
(loss) on investments ............................... (3.85) 3.17 4.14 1.32 (0.29)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value ............ (4.01) 1.10 3.61 1.18 (0.29)
------ ------ ------ ------ ------
Net asset value at end of period ...................... $11.59 $15.60 $14.50 $10.89 $ 9.71
====== ====== ====== ====== ======
Total Return (%) ...................................... -21.2 26.7(b) 44.1(b) 19.8(b) 0.2(b)(d)

Ratios:
Operating expenses to average net assets (%) .......... 1.04 1.00 1.00 1.00 1.00(e)
Operating expenses to average net
assets before expense limitation (%) ............... N/A 1.07 1.25 1.68 2.00(e)
Net income to average net assets (%) ................. 4.35 4.48 4.97 5.51 7.40(e)
Portfolio turnover (%) ................................ 86 128 57 85 47(e)
Net assets at end of period
(in thousands) ($) .................................. 418,901 489,449 161,727 47,694 34,277

(a) Net of reimbursement which amounted to ............ N/A $ 0.01 $ 0.02 $ 0.07 $ 0.04
(b) The total return would have been lower had certain expenses not been reduced during the period.
(c) Commencement of operations.
(d) Not computed on an annualized basis.
(e) Computed on an annualized basis.
</TABLE>

<PAGE>

CONTACT INFORMATION

CGM REALTY FUND
c/o The CGM Funds
P.O. Box 449
Boston, MA 02117

SHAREHOLDER SERVICING AGENT
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

INVESTMENT MANAGER
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

More information about this Fund is available free by calling 800-345-4048,
including the following:

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund and is incorporated
into this prospectus by reference (i.e. is legally considered part of it).

For additional information about:
o Account procedures/status o Prospectuses
o Redemptions o SAI
o Exchanges o Annual/Quarterly Reports
o New account procedures o Performance
Call CGM Shareholder Call CGM Marketing
Services at 800-343-5678 Department at 800-345-4048

RFP99 SEC File No. 811-82
<PAGE>

PROSPECTUS & APPLICATION o MAY 1, 1999

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

A No-Load Fund

[logo] The Fund's primary objective is to provide high current income exempt
from federal income tax. The Fund's secondary objective is capital
appreciation.

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

A No-Load Fund

[logo] The 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.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.

<PAGE>

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

CGM AMERICAN TAX FREE FUND SUMMARY

Investment Objective-------------------------------------------- 1
Summary of Principal Investment Strategies --------------------- 1
Summary of Principal Risks-------------------------------------- 2
CGM FIXED INCOME FUND SUMMARY
Investment Objective ------------------------------------------- 2
Summary of Principal Investment Strategies --------------------- 2
Summary of Principal Risks ------------------------------------- 3
PAST PERFORMANCE of CGM American Tax Free Fund ------------------ 4
PAST PERFORMANCE of CGM Fixed Income Fund ----------------------- 5
EXPENSES of CGM American Tax Free Fund -------------------------- 6
EXPENSES of CGM Fixed Income Fund ------------------------------- 7
ADDITIONAL FUND INFORMATION ------------------------------------ 8
PRINCIPAL RISKS ------------------------------------------------- 10
MANAGEMENT------------------------------------------------------- 11
HOW TO PURCHASE SHARES ------------------------------------------ 12
SHAREHOLDER SERVICES -------------------------------------------- 13
HOW TO SELL SHARES ---------------------------------------------- 14
TELEPHONE TRANSACTIONS ------------------------------------------ 17
DIVIDENDS, CAPITAL GAINS AND TAXES ------------------------------ 17
PRICING OF SHARES ----------------------------------------------- 19
YEAR 2000 ------------------------------------------------------- 20
FINANCIAL HIGHLIGHTS -------------------------------------------- 21

CONTACT INFORMATION-------------------------------------- Back Cover

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

[logo] FUND SUMMARIES

CGM AMERICAN TAX FREE FUND

INVESTMENT OBJECTIVE

The Fund's primary objective is to provide high current income exempt from
federal income tax. The Fund's secondary objective is capital appreciation. The
Fund may not be an appropriate investment for retirement plans and similar
accounts.

SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to achieve its objectives by investing primarily in investment
grade debt securities that are exempt from federal income tax. Under normal
circumstances the Fund invests 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.

The Fund may invest in debt obligations issued by states, the District of
Columbia, territories or possessions of the United States or their political
subdivisions, agencies or instrumentalities. The Fund may also invest in
securities issued by multistate agencies or authorities.

There is no limitation on the dollar-weighted average maturity of the Fund's
portfolio and the maturity may be shortened or lengthened depending upon the
investment manager's outlook for interest rates.

The investment manager may change the Fund's mix of investments based on
long-term changes in interest rates. Generally, if interest rates are expected
to increase, the investment manager will shorten the Fund's maturity and add
more defensive, income-producing securities to the Fund's portfolio. Conversely,
if interest rates are expected to decrease, the investment manager will
generally lengthen the Fund's maturity and add more discount securities to the
Fund's portfolio. The investment manager decides which particular debt
securities to buy based primarily on their yield relative to their credit
quality and duration. The duration of a security is the number of years required
to receive one half the discounted present value of future payments, both
principal and interest, from the security.

The Fund may invest up to 25% of its total assets in debt or fixed-income
securities of a quality below investment grade, including securities commonly
referred to as "junk bonds". The Fund may purchase these securities when the
investment manager views the issuer's credit as stable or improving, and the
difference in the yield offered by investment grade and below investment grade
securities is large enough to compensate for the increased risks associated with
investing in lower rated securities.

SUMMARY OF PRINCIPAL RISKS

Like all mutual funds, you may lose money if you invest in the Fund. The Fund
invests in debt and fixed-income securities and is, therefore, subject to CREDIT
RISK and to INTEREST RATE 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 risk. Interest rate risk
is the risk that the market value of debt and fixed-income securities will fall
when market interest rates increase. Longer term obligations are usually more
sensitive to interest rate changes than shorter term obligations.

Increases in interest rates may lead to a slower than expected rate of principal
PREPAYMENTS, effectively lengthening the maturity of the affected securities.
Conversely, declines in interest rates may lead to an accelerated rate of
principal prepayments. The Fund may not be able to reinvest that principal at
attractive rates.

Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.

CGM FIXED INCOME FUND

INVESTMENT OBJECTIVE

The 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.

SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES

The Fund seeks to achieve its objectives by investing primarily in investment
grade debt securities and preferred stocks that the investment manager believes
to be undervalued. The Fund's flexible investment policy allows it to invest in
fixed-income securities and variable-rate securities with varying maturities and
varying qualities ranging from the highest quality to non-investment grade.

The Fund may invest in securities of both government and non-government issuers,
as well as multi-national institutions. The Fund may invest up to 20% of its net
assets in foreign debt securities and preferred stock issued by foreign
entities.

The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade, including securities commonly referred to
as "junk bonds".

The investment manager decides which particular debt securities to buy based
primarily on their yield relative to their credit quality and duration. The
investment manager views preferred stocks as defensive, income producing
vehicles and tends to buy them at a discount and sell them when they trade above
par value or when higher yields are available on securities of comparable
quality.

SUMMARY OF PRINCIPAL RISKS

Like all mutual funds, you may lose money if you invest in the Fund. The Fund
invests in debt and fixed-income securities and is, therefore, subject to CREDIT
RISK and to INTEREST RATE 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 risk. Interest rate risk
is the risk that the market value of debt and fixed-income securities will fall
when interest rates increase. Longer term obligations are usually more sensitive
to interest rate changes than shorter term obligations.

Investments in LOWER QUALITY SECURITIES such as JUNK BONDS are subject to
special risks, including higher credit risk, higher economic and market
sensitivity, and low liquidity.

FOREIGN SECURITIES carry risks in addition to those of U.S. securities,
including the risk of currency fluctuations, higher volatility and less
liquidity. Foreign securities are also subject to additional risks of possible
adverse political and economic developments.

The Fund may be required to distribute any accrued interest received on ZERO
COUPON, DEFERRED INTEREST AND PAYMENT-IN-KIND SECURITIES it invests in annually
and may have to sell securities, possibly at a disadvantageous time, in order to
obtain the cash to do so. In addition, because these securities may not pay
interest at regular intervals, their market prices may be very sensitive to
interest rate changes and they may also be subject to increased credit risk.

The value of the CONVERTIBLE SECURITIES the Fund may invest in may fall due to a
fall in prices of stocks or periods of below-average performance in the stock
market. In addition, like other debt securities, convertible securities are also
subject to interest rate risk and the credit risk of their issuers.

<PAGE>

[logo] PAST PERFORMANCE

CGM AMERICAN TAX FREE FUND

The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.

The bar chart shows how the Fund's performance has varied from year to year. The
table compares the Fund's performance over time for the periods indicated to
that of the Lehman Municipal Bond Index, a widely recognized unmanaged index of
municipal bonds.

Both the bar chart and the table assume rein-vestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how the
Fund will perform in the future.

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

1994 -8.2%
1995 18.0%
1996 2.9%
1997 9.0%
1998 6.5%

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

During the five-year period shown in the bar chart, the highest quarterly return
was 6.2% (for the quarter ended 3/31/95) and the lowest quarterly return was
- -8.9% (for the quarter ended 3/31/94).

AVERAGE ANNUAL TOTAL RETURN
(as of 12/31/98)

Since Inception
1 Year 5 Years (11/10/93)
- --------------------------------------------------------------------------------
Fund 6.5% 5.3% 5.7%
Lehman Municipal Bond Index 6.5% 6.2% 6.1%

<PAGE>

[logo] PAST PERFORMANCE

CGM FIXED INCOME FUND

The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.

The bar chart shows how the Fund's performance has varied from year to year. The
table compares the Fund's performance over time for the periods indicated to
that of the Merrill Lynch Master Bond Index, a widely recognized unmanaged index
of bonds.

Both the bar chart and the table assume rein-vestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how the
Fund will perform in the future.

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

1993 18.9%
1994 -8.0%
1995 27.3%
1996 15.4%
1997 3.7%
1998 -1.2%

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

During the six-year period shown in the bar chart, the highest quarterly return
was 9.9% (for the quarter ended 6/30/95) and the lowest quarterly return was
- -5.4% (for the quarter ended 9/30/98).

AVERAGE ANNUAL TOTAL RETURN
(as of 12/31/98)

Since Inception
1 Year 5 Years (3/17/92)
- --------------------------------------------------------------------------------
Fund -1.2% 6.7% 9.0%
Merrill Lynch Master Bond Index 8.9% 7.3% 8.3%

<PAGE>

[logo] EXPENSES

CGM AMERICAN TAX FREE FUND

The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

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

Schedule of Fees

Shareholder Transaction Expenses (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases ----------------- None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ------ None
Redemption Fees* ------------------------------------------------- None
Exchange Fees ---------------------------------------------------- None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)

Management Fees -------------------------------------------------- 0.60%
Distribution (12b-1) Fees ---------------------------------------- None
Other Expenses --------------------------------------------------- 1.09%
Total Fund Operating Expenses ------------------------------------ 1.69%**

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

** The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and to bear all of the expenses
associated with operating the Fund. As a result, the actual total fund
operating expenses for the year ended December 31, 1998 were 0%. These fee
waivers and reimbursements may be reduced or terminated at any time.

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

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

o you invest $10,000 in the Fund for the time periods indicated;

o you redeem your shares at the end of each period;

o your investment has a 5% return each year (the assumption of a 5% return is
required by the SEC and is not a prediction of the Fund's future
performance); and

o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.

Although your actual costs may be higher or lower, under these assumptions your
costs would be:

Number of years 1 3 5 10
----- ----- ----- -------
Cost $ 172 $ 533 $ 918 $1,998

<PAGE>

EXPENSES

CGM FIXED INCOME FUND

The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

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

SCHEDULE OF FEES

Shareholder Transaction Expenses (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases ---------------- None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ----- None
Redemption Fees*------------------------------------------------- None
Exchange Fees --------------------------------------------------- None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)

Management Fees ------------------------------------------------ 0.65%
Distribution (12b-1) Fees -------------------------------------- None
Other Expenses-------------------------------------------------- 0.61%
Total Fund Operating Expenses ---------------------------------- 1.26%**

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

** The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and, if necessary, to bear certain
expenses associated with operating the Fund, to the extent necessary to
limit the Fund's total operating expenses to an annual rate of 0.85% of the
Fund's average net assets. These fee waivers and reimbursements may be
reduced or terminated at any time.

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

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

o you invest $10,000 in the Fund for the time periods indicated;

o you redeem your shares at the end of each period;

o your investment has a 5% return each year (the assumption of a 5% return is
required by the SEC and is not a prediction of the Fund's future
performance); and

o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.

Although your actual costs may be higher or lower, under these assumptions your
costs would be:

Number of years 1 3 5 10
----- ----- ----- -------
Cost $ 128 $ 400 $ 692 $ 1,523
<PAGE>

[logo] ADDITIONAL FUND INFORMATION

Each Fund's objective and principal investment strategies, and the main risks of
investing in each Fund, are summarized at the beginning of this prospectus. More
information on investment strategies and investments appears in this section.
These are the strategies that, in the opinion of each Fund's investment manager,
are most likely to be important in trying to achieve the Fund's investment
objectives. There can, of course, be no assurance that any Fund will achieve its
investment objectives. Each Fund's objectives may be changed without shareholder
approval.

Each Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information ("SAI"). Of course, each Fund's investment manager may decide, as a
matter of investment strategy, not to use the investments and investment
techniques described below and in the SAI at any particular time.

Each Fund may also depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. When doing so, each Fund may hold a substantial portion of
its assets in cash or high quality fixed-income securities and may not be
pursuing its investment objective.

Although neither Fund purchases securities with the intention of engaging in
short-term trading, each Fund frequently sells securities to respond to changes
in market, industry, or individual company conditions or outlook, although the
Fund may only have held those securities for a short period. Frequent trading
involves higher securities transaction costs which may adversely affect the
Fund's performance. To the extent that this policy results in the realization of
gains on investments, the Fund will make distributions to its shareholders.
These distributions will generally be subject to taxes.

CGM AMERICAN TAX FREE FUND

The Fund invests at least 75% of its assets in securities rated at the time of
purchase Baa, MIG-2, Prime-2 or higher by Moody's Investors Service, Inc., or
BBB, SP-2, A-2 or better by Standard & Poor's Corporation, 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
these 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.

The Fund's investments may include put bonds, floating and variable rate
securities and municipal lease obligations, each of which is described in the
SAI.

There is no limitation on the dollar-weighted average maturity of the Fund's
portfolio and the maturity may be shortened or lengthened depend-ing upon the
investment manager's long-term outlook for interest rates. As a result, your
investment in the Fund may be subject to the increased volatility associated
with longer term bonds. On the other hand, if the investment manager decides to
shorten the average maturity of the Fund's portfolio, your investment may not
earn as much income as might be available from longer term bonds. Generally, if
interest rates are expected to increase, the investment manager will shorten the
Fund's maturity, and if interest rates are expected to decrease, the investment
manager will lengthen the Fund's maturity.

In an effort to enhance return, the Fund intends to take advantage of pricing
inefficiencies between individual issues or groups of securities that may occur
as a result of temporary dislocations in the market, misconceptions of risk, or
cyclical or secular changes in the market causing undervaluation.

The 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 those
nongovernmental users, and the 25% limitation applies to those 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, the District of Columbia, territories or
United States possessions or any of their political subdivisions.

MANAGEMENT STYLE. The investment manager decides which particular debt
securities to buy based primarily on their yield relative to their credit
quality and duration.

CGM FIXED INCOME FUND

The Fund generally seeks to achieve its objectives by investing in debt
securities and preferred stocks that the investment manager believes to be
undervalued.

The Fund invests primarily in investment grade debt securities, which are rated
at the time of purchase at least Baa by Moody's Investors Service, Inc. or BBB
by Standard and Poor's Corporation, in preferred stocks rated at least 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.

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. There is no limitation on the dollar-weighted average
maturity of the Fund's portfolio and the maturity may be shortened or lengthened
depending upon the investment manager's outlook for interest rates. As a result,
your investment in the Fund may be subject to the increased volatility
associated with longer term bonds. On the other hand, if the investment manager
decides to shorten the average maturity of the Fund's portfolio, your investment
may not earn as much income as might be available from longer term bonds.

Securities in which the Fund may invest include bonds, debentures, notes,
equipment trust certifi-cates, asset-backed securities, mortgage-backed
securities (including interest-only and principal-only securities), preferred
stocks and money market instruments such as commercial paper, Treasury bills,
time deposits, bankers' acceptances and repurchase agreements.

In some cases interest payments on Fund securities may be paid out as additional
securities (commonly referred to as "payment-in-kind securities"), or deferred
to a future date not to exceed maturity (commonly referred to as "zero coupon
securities").

The Fund may invest in securities that may be converted into stock or other
equity interests. The Fund may also invest in deferred interest securities and
securities purchased on a "when-issued" basis. These securities are described in
the SAI.

The Fund may invest up to 35% of its assets in debt or fixed-income securities
of a quality below investment grade (i.e. securities rated lower than Baa or baa
by Moody's or lower than BBB by S&P, or their equivalent as determined by the
investment manager), including up to 10% of its total assets in debt or
fixed-income securities rated at the time of investment Caa or caa or lower by
Moody's or CCC or lower by S&P, or their equivalent as determined by the
investment manager. These securities are commonly referred to as "junk bonds".
Investing in junk bonds is an aggressive approach to income investing.

MANAGEMENT STYLE. The investment manager decides which particular debt
securities to buy based primarily on their yield relative to their credit
quality and duration. Preferred stocks are viewed as defensive, income producing
vehicles. The investment manager tends to buy preferred stocks at a discount and
sell them when they trade above par value or when higher yields are available on
securities of comparable quality.

[logo] PRINCIPAL RISKS

Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Some of these risks are described here. More
information about risks appears in the SAI. Remember that you may receive little
or no return on your investment in a Fund. You may lose money if you invest in a
Fund.

INTEREST RATE RISK. Interest rate risk is the risk that the market value of debt
and fixed-income securities will fall when market interest rates increase. In
general, the prices of debt or fixed-income securities rise when interest rates
fall, and fall when interest rates rise. Longer term obligations are usually
more sensitive to interest rate changes than shorter term obligations. A change
in interest rates could cause a Fund's share price to go up or down. Generally,
the longer the average maturity of the bonds in a Fund, the more the Fund's
share price will rise or fall in response to interest rate changes.

CREDIT RISK. Credit risk is the possibility that an issuer will fail to make
timely payments of interest or principal. Some issuers may not make payments on
debt securities held by a Fund, causing a loss. Or, an issuer may suffer adverse
changes in its financial condition that could lower the credit quality of a
security, leading to greater volatility in the price of the security and in
shares of a Fund. A change in the quality rating of a bond or other security can
also affect the security's liquidity and make it more difficult for a Fund to
sell. The lower quality debt securities in which each Fund may invest are more
susceptible to these problems than higher quality obligations. Legislative
changes affecting the taxing and spending authority of a municipality may affect
the ability of the municipality to make payments of principal and interest on
its obligations.

PREPAYMENT RISK. The issuers of debt securities held by a Fund may be able to
prepay principal due on the securities, particularly during periods of declining
interest rates. The Fund may not be able to reinvest that principal at
attractive rates, reducing income to the Fund. On the other hand, rising
interest rates may cause prepayments to occur at slower than expected rates.
This effectively lengthens the maturities of the affected securities, making
them more sensitive to interest rate changes and the Fund's share price more
volatile.

Mortgage-backed securities are particularly susceptible to prepayment risk and
their prices may be very volatile. The price of interest-only securities, which
are the interest only component of stripped mortgage-backed securities, goes
down when interest rates decline and principal payments accelerate, causing a
reduction in the interest payment stream. The price of principal-only securities
goes down when interest rates are rising and prepayments are slower, causing the
maturity of the security to lengthen.

ZERO COUPON, DEFERRED INTEREST AND 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 of this accrued interest annually and may
have to sell securities in order to obtain the cash to do so. Thus, 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 addition, because these securities may
not pay interest at regular intervals, their market prices may be very sensitive
to interest rate changes and they may also be subject to increased credit risk.

SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible securities, which
are securities that may be converted into stock or other equity interests, are
subject to the market risk of stocks, and, like other debt securities, are also
subject to interest rate risk and the credit risk of their issuers.

FOREIGN SECURITIES. CGM Fixed Income Fund may invest a portion of its assets in
foreign securities. Investing in foreign securities involves risks in addition
to those of investing in U.S. securities, including risks relating to political,
social and economic developments abroad, risks relating to currency fluctuation
and restrictions, and risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.

[logo] MANAGEMENT

THE INVESTMENT MANAGER

Each Fund's investment manager is Capital Growth Management Limited Partnership
("CGM"), One International Place, Boston, Massachusetts, 02110. CGM, an
investment advisory firm founded in 1990, manages the Funds' daily investment
and business affairs subject to the policies established by the Funds' Board of
Trustees. CGM manages nine mutual fund portfolios and advisory accounts for
other clients.

In 1998, CGM American Tax Free Fund paid 0% of its average annual net assets in
management fees to CGM, after waivers and reimbursements, and CGM Fixed Income
Fund paid 0.24% of its average annual net assets in management fees to CGM,
after waivers and reimbursements.

THE PORTFOLIO MANAGERS

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

CGM Fixed Income Fund is co-managed by G. Kenneth Heebner and Janice H. Saul. In
1990, 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. In addition to the Fund, he currently manages CGM Mutual Fund, CGM
Capital Development Fund, CGM Realty Fund and CGM Focus Fund.

[logo] HOW TO PURCHASE SHARES

The Funds sell their shares directly to investors without any sales load.

NEW ACCOUNTS

You may make a purchase of a Fund's shares in a new regular account or
retirement plan account by submitting a completed application form and check,
made payable to CGM American Tax Free Fund or CGM Fixed Income Fund (as
applicable), 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 accounts (see "Shareholder Services -- Retirement Plans") and
accounts set up under the Uniform Gifts to Minors Act or the Uniform Transfers
to Minors Act.

CGM American Tax Free Fund is not an appropriate investment for individual
retirement accounts ("IRAs") or similar accounts.

EXISTING ACCOUNTS

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

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

PAYMENT BY CHECK

If you pay for Fund shares by check, your 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 not payable to CGM American Tax
Free Fund or CGM Fixed Income Fund) are generally not accepted and checks drawn
on credit card accounts are not accepted.

PAYMENT BY WIRE

You may also make subsequent investments 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 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.

ADDITIONAL INFORMATION

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 Fund 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 Funds' system for
recording investments eliminates the problems of handling and safekeeping
certificates.

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

Each Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.

[logo] SHAREHOLDER SERVICES

Each Fund offers the following shareholder services as more fully described in
the SAI. Explanations and forms are available from the Funds.

EXCHANGE PRIVILEGE

You may exchange your shares of either Fund for shares of CGM American Tax Free
Fund or CGM Fixed Income Fund (as applicable), CGM Mutual Fund, CGM Realty Fund
and CGM Focus Fund. You may also exchange your shares for shares of money market
funds distributed by New England Funds, L.P.

Additionally, you may exchange shares of either Fund for shares of CGM Capital
Development Fund, but only if you were a shareholder of CGM Capital Development
Fund 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 SAI.

All exchanges are free of 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" on page 17. Exchange requests cannot be revoked once they have
been received in good order. 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.

You 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
you can make to four exchanges per account (or two round trips) per calendar
year. Monthly automatic exchanges from money market funds distributed by New
England Funds, L.P. to the Funds are not subject to this restriction. Each Fund
also reserves the right to prohibit exchanges during the first 15 days following
an investment in the Fund.

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

The Funds may terminate or change the terms of the exchange privilege.

SYSTEMATIC WITHDRAWAL PLAN ("SWP")

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 a Fund as "undeliverable" or remain uncashed for more than six
months, the plan will be cancelled. Undeliverable or uncashed checks will be
cancelled and the amounts will be reinvested in the same Fund at the per share
net asset value determined as of the date of cancellation of the checks. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks. The Funds may terminate or modify the SWP at any time.
Additional information about this Plan is set forth in the SAI.

AUTOMATIC INVESTMENT PLAN ("AIP")

You may terminate your participation in the AIP by sending written notice to CGM
Shareholder Services or by calling 800-343-5678 more than 14 days prior to the
next scheduled debit date. The Funds may terminate your participation in the AIP
immediately in the event that any item is unpaid by your financial institution.
The Funds may termi-nate or modify the AIP at any time. Additional information
about this Plan is set forth in the SAI.

RETIREMENT PLANS

CGM American Tax Free Fund is not an appropriate investment for: Traditional and
Roth IRA accounts, SEP-IRA accounts, 403(b)(7) custodial accounts, or Money
Purchase Pension and Profit Sharing plans.

CGM Fixed Income Fund's shares may be pur-chased by tax-deferred retirement
plans. CGM makes available retirement plan forms and plan documents for
Traditional and Roth IRAs, SEP-IRAs, 403(b)(7) custodial accounts, and Money
Purchase Pension and Profit Sharing plans ("CGM Retirement Plans").

CONFIRMATION STATEMENTS

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, semi-annual 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 Fund at
800-345-4048.

[logo] HOW TO SELL SHARES

You can sell (redeem) all or part of your shares in either Fund in three
different ways:

o by sending a written request for a check or wire representing the redemption
proceeds,

o except for CGM Retirement Plans, by making a telephone request for redemption
proceeds to be wired to a bank account that you have predesignated.

WRITTEN REDEMPTION REQUESTS

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.

TELEPHONE REDEMPTION REQUESTS

If you elect to redeem shares by telephone, call CGM Shareholder Services
directly at 800-343-5678. See "Telephone Transactions" on page 17. 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 Funds
automatically unless this option is declined in the application or otherwise in
writing. You may select the telephone redemption wire service when you fill out
your initial applica-tion or you may select it later by completing the Service
Options Form (with a signature guarantee), available from the Funds 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. 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 Funds cannot accept your request and a
new one will be necessary.

REDEMPTION PROCEEDS

If you purchased your Fund shares by check (or through an automatic investment
plan) and elect to redeem shares within 15 days of the purchase, you may
experience delays in receiving redemption proceeds. A Fund will generally
postpone sending your redemption proceeds from an investment until the Fund can
verify that your check (or automatic investment plan 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, the checks will be cancelled and the proceeds
will be reinvested in the same Fund at the per share net asset value determined
as of the date of cancellation of the checks. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.

POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT

Each Fund may postpone payment of redemption proceeds for up to seven days.
Neither Fund may postpone payment for more than seven days or suspend the right
of redemption, except: if you purchased your Fund shares by check (or through an
automatic investment plan) and redeem shares within 15 days of the purchase as
described in the preceding section, when the New York Stock 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.

REDEMPTION IN KIND

The Funds will normally redeem shares for cash; however, each Fund reserves the
right to pay the redemption price wholly in kind or partly in kind and partly in
cash if the Board of Trustees determines it to be advisable in the interests 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.

MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION

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 or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.

[logo] TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

o telephone exchanges;

o telephone redemptions by wire; and

o 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.

You must select the telephone exchange privilege and/or telephone redemption by
wire privilege when you fill out your initial application or you may select
either option later by completing the Service Options Form (with a signature
guarantee) available from the Funds or CGM Shareholder Services. The telephone
redemptions by check privilege is available automatically unless you decline
this option in the application or otherwise 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.

During periods of unusual market activity, severe weather or other abnormal
circumstances, it may be difficult for you to reach a representative of the
Funds or CGM Shareholder Services by telephone. In this case, please consider
sending written instructions.

[logo] DIVIDENDS, CAPITAL GAINS AND TAXES

DIVIDENDS AND CAPITAL GAINS

Each Fund declares and pays out monthly dividends consisting of substantially
all of its net investment income. Any capital gains distributions are normally
made annually in December but may be made more frequently as deemed advisable by
the Board of Trustees. Certain restrictions may apply to participants in CGM
Retirement Plans.

You may elect to receive income dividends or capital gains distributions, or
both, in additional shares of the respective Fund or in cash. However, if you
elect to receive capital gains in cash, your income dividends must also be
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 same Fund at the per share net asset value determined
as of the date of payment of the distribution. In addition, following the
six-month period, any undeliverable or uncashed checks will be cancelled and the
amounts will be reinvested in the same Fund at the per share net asset value
determined as of the date of cancellation of the checks. No interest will accrue
on amounts represented by uncashed distribution or redemption checks.

TAXES

TAXATION OF DISTRIBUTIONS. Dividends paid by a Fund from net taxable investment
income (including dividends and interest) and net short-term capital gains will
be taxable to you 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 to
you as long-term capital gains, regardless of how long you have owned your
shares in the applicable 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 your tax basis
in your shares, and then, to the extent the distribution exceeds such basis, as
a taxable gain from the sale of your shares. Taxable dividends and distributions
are taxable to you 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 your gross income for
federal income tax purposes. If you receive Social Security benefits you should
be aware that exempt interest dividends received from the Fund are includ-able
in your "modified adjusted gross income" for purposes of determining the amount
of your Social Security benefit, if any, that is required to be included in your
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. You should consult your own tax advisers about the
status of dividends and distributions of CGM American Tax Free Fund in your own
state and locality.

If you receive an exempt-interest dividend with respect to any share and redeem
or exchange the 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 you receive a distribution taxable as a
long-term capital gain with respect to any share and redeem or exchange the
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.

A distribution will be treated as paid by the Funds and received by you on
December 31 of the current calendar year if it is declared by the Funds 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 are subject to taxes, even if their effect is to reduce the per
share net asset value below a shareholder's cost. Each Fund will notify you
annually as to the tax status of dividend and capital gains distributions paid
by the Fund.

AMT. 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. You should
consult your own tax adviser regarding the potential applicability of AMT to
you.

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

DISPOSITION OF SHARES. 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 how long you held your shares.

BACKUP WITHHOLDING. 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 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.

GENERAL INFORMATION. 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. In limited circumstances,
your actual cost basis may differ from your CGM account cost basis. 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 Funds generally will receive these cost basis statements but
only for accounts opened after January 1, 1991. Some restrictions apply; for
more information, please call 800-343-5678. 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, local and foreign
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, which is
derived from such obligations.

The tax discussion set forth above is included for general information only. You
should consult your own tax adviser concerning the tax consequences of an
investment in the Funds.

[logo] 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 New York Stock Exchange (normally 4 p.m. Eastern time) 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 SAI.

Trading may take place in foreign securities held by CGM Fixed Income Fund on
days when the Fund is not open for business. As a result, the Fund's net asset
value may change on days on which it is not possible to purchase or sell shares
of the Fund.

[logo] YEAR 2000

Like other mutual funds and other organizations around the world, a Fund could
be adversely affected if the computer systems used by the Fund or its service
providers do not properly process and calculate date-related information from
and after January 1, 2000. This is commonly known as the "Y2K Problem." Failure
to successfully address the Y2K Problem could result in interruptions to and
other material adverse effects on the Funds' business and operations, such as
problems calculating net asset value and difficulties in implementing the Funds'
purchase and redemption procedures. CGM has taken steps that it believes are
reasonably designed to address any potential Y2K Problem for computer programs
used by the Funds or CGM. Each of the Funds' and CGM's service providers are
taking steps that they believe are reasonably designed to address the Y2K
Problem with respect to computer systems that they use. At this time, however,
there can be no assurance that these steps being taken by third party service
providers will be sufficient to avoid any adverse impact to the Funds. In
addition, there can be no assurances that the Y2K Problem will not have an
adverse effect on the issuers whose securities are held by the Funds or on the
market or the economy in general.

<PAGE>

FINANCIAL HIGHLIGHTS

The following Financial Highlights tables are intended to help you understand
each Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in the Funds (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Funds' financial
statements, is included in each Fund's Annual Report, which may be obtained
from a Fund free of charge.

<TABLE>
<CAPTION>
CGM AMERICAN TAX FREE FUND YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:
Net asset value at beginning of period ................ $ 9.70 $ 9.46 $ 9.77 $ 8.83 $10.25
------ ------ ------ ------ ------
Net investment income (a) ............................. 0.55 0.58 0.58 0.61 0.58
Dividends from net investment income .................. (0.55) (0.58) (0.58) (0.61) (0.58)
Net realized and unrealized gain (loss) on investments 0.07 0.24 (0.31) 0.94 (1.42)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value ............ 0.07 0.24 (0.31) 0.94 (1.42)
------ ------ ------ ------ ------
Net asset value at end of period ...................... $ 9.77 $ 9.70 $ 9.46 $ 9.77 $ 8.83
====== ====== ====== ====== ======
Total Return (%)(b) ................................... 6.5 9.0 2.9 18.0 -8.2

Ratios:
Operating expenses to average net assets (%) .......... 0 0 0 0 0
Operating expenses to average net assets before waiver (%) 1.69 2.04 2.14 2.59 2.42
Net investment income to average net assets (%) ....... 5.63 6.11 6.10 6.50 6.39
Portfolio turnover (%) ................................ 37 140 107 125 169
Net assets at end of period (in thousands) ($) ........ 17,706 14,443 12,430 11,855 10,150

(a) Net of fees waived and reimbursed which amounted to $ 0.16 $ 0.19 $ 0.20 $ 0.24 $ 0.22

(b) The total return would have been lower had the total fees and expenses not been waived or reimbursed during the period.
</TABLE>

<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
CGM FIXED INCOME FUND YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:

Net asset value at beginning of period ................ $11.24 $11.60 $11.41 $ 9.57 $11.17
------ ------ ------ ------ ------
Net investment income (a) ............................. 0.83 0.78 0.77 0.70 0.73
Dividends from net investment income .................. (0.83) (0.78) (0.77) (0.70) (0.73)
Net realized and unrealized gain (loss) on investments (0.96) (0.36) 0.95 1.84 (1.60)
Distribution from net realized gain ................... -- -- (0.76) -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value ............ (0.96) (0.36) 0.19 1.84 (1.60)
------ ------ ------ ------ ------
Net asset value at end of period ...................... $10.28 $11.24 $11.60 $11.41 $ 9.57
====== ====== ====== ====== ======
Total Return (%)(b) ................................... -1.2 3.7 15.4 27.3 -8.0

Ratios:
Operating expenses to average net assets (%) .......... 0.85 0.85 0.85 0.85 0.85
Operating expenses to average net assets
before expense limitation (%) ....................... 1.26 1.26 1.26 1.53 1.46
Net investment income to average net assets (%) ....... 7.56 6.81 6.53 6.46 7.00
Portfolio turnover (%) ................................ 52 147 149 148 129
Net assets at end of period (in thousands) ($) ........ 34,314 43,932 40,646 31,793 28,672

(a) Net of reimbursement which amounted to ........... $ 0.05 $ 0.05 $ 0.05 $ 0.07 $ 0.06
(b) The total return would have been lower had certain expenses not been reimbursed during the period.
</TABLE>

<PAGE>
CONTACT INFORMATION

CGM AMERICAN TAX FREE FUND
CGM FIXED INCOME FUND
c/o The CGM Funds
P.O. Box 449
Boston, MA 02117

SHAREHOLDER SERVICING AGENT
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

INVESTMENT MANAGER
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

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

More information about these Funds is available free by calling 800-345-4048,
including the following:

ANNUAL/QUARTERLY REPORTS
Additional information about each Fund's investments is available in the Fund's
annual and quarterly reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected each Fund's performance during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds and is incorporated
into this prospectus by reference (i.e. is legally considered part of it).

- --------------------------------------------------------------------------------
Information about the Funds (including the SAI) is also available from the
Securities and Exchange Commission. You can find it on the SEC's Internet site
at http://www.sec.gov. You can receive copies of Fund information by sending
your request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. Information can also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

AFP99 SEC File No. 811-82
<PAGE>

PROSPECTUS & APPLICATION O MAY 1, 1999

CGM
FOCUS FUND

A No-Load Fund

[Graphic Omitted] The Fund's investment objective
is long-term growth
of capital.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FUND SUMMARY ................................................. 1
Investment Objective ........................................ 1
Summary of Principal Investment Strategies .................. 1
Summary of Principal Risks .................................. 2
PAST PERFORMANCE ............................................. 2
EXPENSES ..................................................... 3
ADDITIONAL FUND INFORMATION .................................. 4
Principal Investment Strategies ............................. 4
Principal Risks ............................................. 5
MANAGEMENT ................................................... 6
HOW TO PURCHASE SHARES ....................................... 6
SHAREHOLDER SERVICES ......................................... 7
HOW TO sell SHARES ........................................... 9
TELEPHONE TRANSACTIONS ....................................... 11
DIVIDENDS, CAPITAL GAINS AND TAXES ........................... 12
PRICING OF SHARES ............................................ 13
YEAR 2000 .................................................... 14
FINANCIAL HIGHLIGHTS ......................................... 15
CONTACT INFORMATION .......................................... Back Cover
- --------------------------------------------------------------------------------

[Logo] FUND SUMMARY

INVESTMENT OBJECTIVE

The Fund's investment objective is long-term growth of capital.

SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES

The Fund is non-diversified and intends to pursue its objective by concentrating
its investments in the equity securities of a smaller number of companies than
more diversified mutual funds. The Fund typically invests in 15 to 35 companies
at a time. The Fund is flexibly managed, with the ability to invest in different
industry sectors and in foreign issuers. The Fund may invest in companies
regardless of the size of their market capitalization, but primarily invests in
companies with market capitalizations of at least $30 million. The investment
manager invests both in companies that are attractively valued and that have the
potential for growth.

Should the investment outlook of the investment manager so warrant, the Fund may
use a variety of investment techniques designed to capitalize on declines in the
market prices of equity securities or declines in market indexes. For example,
the Fund may establish short positions in specific securities or stock indexes
through short sales. The Fund may engage in short sales when the investment
manager anticipates a decline in the market price of a security.

The Fund may borrow for the purpose of purchasing portfolio securities
and other instruments.

In making an investment decision, the investment manager analyzes:

o the overall economic factors that may affect a potential investment, and

o certain industries and companies, evaluating the fundamentals of each on a
case-by-case basis and focusing on companies that it determines are
attractively valued.

The investment manager will sell a security if it determines that:

o its investment expectations are not being met,

o better opportunities are identified, or

o its price objective has been attained.

SUMMARY OF PRINCIPAL RISKS

Like all mutual funds, you may lose money if you invest in the Fund. As a
NON-DIVERSIFIED mutual fund, the Fund is able to take larger positions in a
smaller number of companies than a more diversified fund. Therefore, when the
value of one of the Fund's holdings changes, this is likely to have a greater
effect on the Fund's overall performance than on the performance of a more
diversified fund.

The Fund's investments are subject to the MARKET RISKS inherent in all
securities. This means that you may lose money on your investment due to a fall
in prices of stocks or periods of below-average performance in the stock market.

The Fund's use of SHORT SALES involves additional investment risks and
transaction costs. While short sales can be used to further the Fund's
investment objective, under certain market conditions they can increase the
volatility of the Fund and may lower the Fund's return or result in losses,
which potentially may be unlimited.

The Fund's BORROWING may increase the Fund's volatility, and interest and other
borrowing costs may exceed the gain on securities purchased with borrowed funds.
The Fund 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.

Investments in SMALL AND MEDIUM-SIZED COMPANIES involve greater risk than is
customarily associated with more established companies because these stocks may
be more volatile and have returns that vary significantly from the overall
market.

Because the Fund may also invest in debt and fixed-income securities, it is
subject to CREDIT RISK (the risk that the obligor will default in the payment of
principal and/or interest) and to interest rate risk (the risk that the market
value of the securities will decline as a result of increases in market rates of
interest).

[Logo] PAST PERFORMANCE

The bar chart and table below show the Fund's annual returns and its long-term
performance, and provide some indication of the risks of investing in the Fund.

The bar chart shows the Fund's first calendar year of performance. The table
compares the Fund's performance over time for the periods indicated to that of
the Standard and Poor's 500 Composite Index, a widely recognized unmanaged index
of common stock prices.

Both the bar chart and the table assume reinvestment of dividends and
distributions. The Fund's past performance does not necessarily indicate how the
Fund will perform in the future.

- --------------------------------------------------------------------------------
TOTAL RETURN (as if 12/31)

1998 3.5%
- --------------------------------------------------------------------------------
During the one-year period shown in the bar chart, the highest quarterly return
was 23.7% (for the quarter ended 12/31/98) and the lowest quarterly return was
- -27.2% (for the quarter ended 9/30/98).

AVERAGE ANNUAL TOTAL RETURN
(as of 12/31/98)

Since Inception
1 Year (9/3/97)
- ---------------------------------------------------
Fund 3.5% -2.2%
S&P 500 Index 28.6% 25.3%

[Logo] EXPENSES

The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.

- --------------------------------------------------------------------------------
SCHEDULE OF FEES

Shareholder Transaction Expenses (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases .................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends .. None
Redemption Fees* ............................................. None
Exchange Fees ................................................ None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
(as a percentage of average net assets, based on expenses for year ended
12/31/98)

Management Fees ................................................... 1.00%
Distribution (12b-1) Fees .................................... None
Other Expenses ............................................... 0.40%
----
Total Fund Operating Expenses ................................ 1.40%**
----

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

** The Fund's investment manager has voluntarily agreed, until December 31,
1999, to waive its management fees and, if necessary, to bear certain
expenses associated with operating the Fund, to the extent necessary to limit
the Fund's total operating expenses to an annual rate of 1.20% of the Fund's
average net assets, exclusive of any dividend expenses incurred on short
sales. These fee waivers and reimbursements may be reduced or terminated at
any time.
- --------------------------------------------------------------------------------

EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that:

o you invest $10,000 in the Fund for the time periods indicated;

o you redeem your shares at the end of each period;

o your investment has a 5% return each year (the assumption of a 5% return
is required by the SEC and is not a prediction of the Fund's future
performance); and

o the Fund's operating expenses remain the same, before taking into
consideration any fee waivers or reimbursements.

Although your actual costs may be higher or lower, under these assumptions your
costs would be:

Number of years 1 3 5 10
---- ---- ---- ------
Cost $143 $443 $766 $1,680
<PAGE>

[Logo] ADDITIONAL FUND
INFORMATION

The Fund's objective and principal investment strategies, and the main risks of
investing in the Fund, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. These are the strategies that, in the opinion of the Fund's investment
manager, are most likely to be important in trying to achieve the Fund's
investment objective. There can, of course, be no assurance that the Fund will
achieve its investment objective. The Fund's objective may be changed without
shareholder approval.

PRINCIPAL INVESTMENT STRATEGIES
The Fund is non-diversified and intends to pursue its objective by concentrating
its investments in the equity securities of a smaller number of companies than
more diversified mutual funds. The Fund is flexibly managed, with the ability to
invest in different industry sectors and in foreign issuers. The Fund may invest
in companies regardless of the size of their market capitalization.

Should the investment outlook of the investment manager so warrant, the Fund may
use a variety of investment techniques designed to capitalize on declines in the
prices of equity securities of one or more companies or declines in market
indexes. For example, the Fund may establish short positions in specific
securities or stock indexes through short sales or investments in a variety of
derivative instruments, including options, futures contracts and options on
futures. The Fund may also establish long positions in specific securities or
stock indexes through options, futures contracts and options on futures.

The Fund may borrow for the purpose of purchasing portfolio securities and other
instruments. This involves special risks.

MANAGEMENT STYLE. Rather than following a particular investment style, the
Fund's investment manager employs a flexible approach and seeks to take
advantage of opportunities as they arise. In making an investment decision, the
Fund's investment manager will generally employ the following method:

o It uses a top-down approach, meaning that it first analyzes the overall
economic factors that may affect a potential investment.

o The investment manager will sell a security if it determines that its
investment expectations are not being met, if better opportunities are
identified, or if its price objective has been attained.

PORTFOLIO TURNOVER. The Fund's objective is long-term growth of capital. The
Fund will, however, sell any particular security and reinvest proceeds when it
is deemed prudent by the Fund's investment manager, regardless of the length of
the holding period. Frequent trading involves higher securities transaction
costs which may adversely affect the Fund's performance. To the extent that this
policy results in the realization of gains on investments, the Fund will make
distributions to its shareholders. These distributions will generally be subject
to taxes.

The Fund's portfolio turnover rate may exceed 300%. The Fund's investments in
short sales and options and futures contracts that mature in less than one year
are excluded for purposes of computing the Fund's portfolio turnover.

PRINCIPAL RISKS

MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of the Fund's shares will change daily as the
value of its underlying securities change. This means that your Fund shares may
be worth more or less when you sell them than when you bought them.
Historically, equity securities have been more volatile than debt or
fixed-income securities.

LACK OF DIVERSIFICATION. The Fund generally takes larger positions in a smaller
number of companies than a more diversified fund. Therefore, when the value of
one of the Fund's holdings changes, this is likely to have a greater effect on
the Fund's overall performance than on the performance of a more diversified
fund.

SMALL AND MEDIUM CAPITALIZATION COMPANIES. The securities of small and medium
capitalization companies may have more risks than those of larger, more seasoned
companies. They may be particularly susceptible to market downturns because of
limited product lines, markets, distribution channels or financial and
management resources. Also, there may be less publicly available information
about small and medium cap companies. Investments in small and medium cap
companies may be in anticipation of future products or services to be provided
by the companies. If those products or services are delayed, the prices of the
securities of the compa-nies may drop. Sometimes, the prices of the securities
of small and medium cap companies rise and fall based on investor perception
rather than economics. Securities of small and medium cap companies may be
thinly traded, making their disposition more difficult. For all these reasons,
the prices of the securities of small and medium cap companies may be more
volatile, causing the Fund's share price to be volatile. Funds that invest a
higher percentage of their assets in small and medium cap stocks are generally
more volatile than funds investing a higher percentage of their assets in
larger, more established companies.

SHORT SALES. The Fund's use of short sales involves additional investment risks
and transaction costs. While short sales can be used to further the Fund's
investment objective, under certain market conditions, they can increase the
volatility of the Fund and decrease the liquidity of the Fund. If the Fund uses
short sales at inappropriate times or judges market conditions incorrectly, such
investments may lower the Fund's return or result in a loss.

The Fund's potential loss from an uncovered short position in an equity security
or stock index resulting from a short sale or the sale of a futures contract is
unlimited. The Fund also could experience losses if these investment techniques
were poorly correlated with its other investments, or if the Fund were unable to
liquidate its position because of an illiquid secondary market.

BORROWING. The Fund may borrow money in order to increase its holdings of
portfolio securities. Borrowing will exaggerate the effect of any increase or
decrease in the market price of securi-ties in the Fund's portfolio on the
Fund's net asset value and, therefore, may increase the volatility of the Fund.
Money borrowed will be subject to interest and other costs. These costs may
exceed the gain on securities purchased with borrowed funds.

FOREIGN ISSUERS. The Fund may invest a portion of its assets in foreign issuers.
Investing in foreign issuers involves risks in addition to those of investing in
U.S. securities, including risks relating to political, social and economic
developments abroad and risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.

DEBT AND FIXED-INCOME SECURITIES. While the Fund expects to invest primarily in
equity securities, the Fund may also invest in debt and fixed-income securities.
Debt and fixed-income securities are subject to credit risk (the risk that the
obligor will default in the payment of principal and/or interest) and to
interest rate risk (the risk that the market value of the securities will change
as a result of changes in market rates of interest). These securities are also
subject to the risk that interest rate changes may affect prepayment rates and
their effective maturity.

[Logo] MANAGEMENT

THE INVESTMENT MANAGER

In 1998, the Fund paid 0.80% of its average annual net assets in management fees
to CGM, after waivers and reimbursements.

THE PORTFOLIO MANAGER

G. Kenneth Heebner has been the portfolio man-ager of the Fund since its
inception in 1997. In 1990, 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. In addition to the Fund, he currently
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Realty Fund, and,
with Janice H. Saul, co-manages CGM Fixed Income Fund.

[Logo] HOW TO PURCHASE SHARES

The Fund sells its shares directly to investors without any sales load.

NEW ACCOUNTS

You may make a purchase of Fund shares in a new regular account or retirement
plan account by submitting a completed application form and check, made payable
to CGM Focus Fund, to:

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

EXISTING ACCOUNTS

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

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

PAYMENT BY CHECK

If you pay for Fund shares by check, your check should be in U.S. dollars and
made payable to CGM Focus Fund. Third party checks (i.e. checks not payable to
CGM Focus Fund) are generally not accepted and checks drawn on credit card
accounts are not accepted.

PAYMENT BY WIRE

You may also make subsequent investments 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 Focus Fund, Shareholder Name,
Shareholder Account Number." Your bank may charge you a fee for transmitting
funds by wire.

ADDITIONAL INFORMATION

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 Fund or
CGM Shareholder Services for details.

The Fund may reject any purchase order and may suspend, change or withdraw the
offering of its shares.

[Logo] SHAREHOLDER SERVICES

The Fund offers the following shareholder services as more fully described in
the Fund's SAI. Explanations and forms are available from the Fund.

EXCHANGE PRIVILEGE

You may exchange your shares of CGM Focus Fund for shares of CGM Mutual Fund,
CGM Fixed Income Fund, CGM American Tax Free Fund and CGM Realty Fund. You may
also exchange your shares for shares of money market funds distributed by New
England Funds, L.P.

Additionally, you may exchange shares of CGM Focus Fund for shares of CGM
Capital Development Fund, but only if you were a shareholder of CGM Capital
Development Fund 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 SAI.

All exchanges are free of 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" on page 11. Exchange requests cannot be revoked once they have
been received in good order. 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.

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

The Fund may terminate or change the terms of the exchange privilege.

SYSTEMATIC WITHDRAWAL PLAN ("SWP")

AUTOMATIC INVESTMENT PLAN ("AIP")

RETIREMENT PLANS

The Fund's shares may be purchased by tax-deferred retirement plans. CGM makes
available retirement plan forms and plan documents for Traditional and Roth
IRAs, SEP-IRAs, 403(b)(7) Custodial Accounts, and Money Purchase Pension and
Profit Sharing Plans (Retirement Plans").

CONFIRMATION STATEMENTS

SHAREHOLDER REPORTS

[Logo] HOW TO SELL SHARES

You can sell (redeem) all or part of your shares in the Fund in three different
ways:

o by sending a written request for a check or wire representing the redemption
proceeds,

o except for CGM Retirement Plans, 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

o except for CGM Retirement Plans, by making a telephone request for
redemption proceeds to be wired to a bank account that you have
predesignated.

WRITTEN REDEMPTION REQUESTS

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

TELEPHONE REDEMPTION REQUESTS

If you elect to redeem shares by telephone, call
CGM Shareholder Services directly at
800-343-5678. See "Telephone Transactions" on the next page. 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 otherwise 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 Service
Options Form (with a signature guarantee), available from the Fund or CGM
Shareholder Services.

REDEMPTION PROCEEDS

POSTPONEMENT OF REDEMPTION PROCEEDS OR SUSPENSION OF REDEMPTION RIGHT

REDEMPTION IN KIND

MINIMUM ACCOUNT BALANCE AND AUTOMATIC REDEMPTION

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
mini-mum does not apply to CGM Retirement Plans or accounts set up under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.

{Logo] TELEPHONE TRANSACTIONS

You may initiate three types of transactions by telephone:

o telephone exchanges;

o telephone redemptions by wire; and

o 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 redemptions by check privilege is available automatically unless
you decline this option in the application or otherwise in writing. The
telephone redemption privileges are not available for Traditional or Roth IRAs,
SEP-IRAs, 403(b)(7) Custodial Accounts or for Money Purchase Pension and Profit
Sharing accounts under a CGM Retirement Plan for which State Street Bank is the
custodian or trustee.

[Logo] DIVIDENDS, CAPITAL GAINS AND TAXES

DIVIDENDS AND CAPITAL GAINS

Any income dividends and capital gains distributions are normally made annually
in December but may be made more frequently as deemed advisable by the Board of
Trustees. Certain restrictions may apply to participants in CGM Retirement
Plans.

You may elect to receive income dividends or capital gains distributions,
or both, in additional shares of the Fund or in cash. However, if you elect to
receive capital gains in cash, your income dividends must also be received in
cash. Certain restrictions may apply to participants in CGM Retirement Plans.

TAXES

The tax discussion set forth here is included for general information only. You
should consult your own tax adviser concerning the tax consequences of an
investment in the Fund.

[Logo] PRICING OF SHARES

[Logo] YEAR 2000

FINANCIAL HIGHLIGHTS

The following Financial Highlights table is intended to help you understand
the Fund's financial performance since its inception. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been examined by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which may be obtained
from the Fund free of charge.

CGM FOCUS FUND
- --------------------------------------------------------------------------------

FOR THE PERIOD
SEPTEMBER 3, 1997(a)
YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------- -----------------
For a share of the Fund outstanding
throughout the period:
Net asset value at beginning of period $ 9.38 $10.00
------ ------
Net investment loss(b)(c) ............. (0.07) (0.02)
Net realized and unrealized gain (loss)
on investments ...................... 0.40(d) (0.60)
------ ------
Net increase (decrease) in net asset
value ............................... 0.33 (0.62)
------ ------
Net asset value at end of period ...... $ 9.71 $ 9.38
====== ======
Total Return (%)(e) ................... 3.5 -6.20(f)
Ratios:
Operating expenses to average net
assets (%) .......................... 1.20 1.20(g)
Operating expenses to average net
assets before expense limitation (%) 1.40 1.63(g)
Net loss to average net assets (%) .... -0.65 -0.83(g)
Portfolio turnover (%) ................ 340 330(g)
Net assets at end of period (in
thousands) ($) ...................... 110,324 98,786

(a) Commencement of operations.
(b) Net of reimbursement which
amounted to ....................... $ 0.02 $ 0.01
(c) Per share net investment loss does not reflect the period's reclassification
of permanent differences between book and tax basis net investment loss.
(d) The amount shown for a share outstanding does not correspond with the
aggregate net gain/(loss) on investments for the period ended December 31,
1998, due to the timing of purchases and redemptions of fund shares in
relation to fluctuating market values of the investments of the Fund.
(e) The total return would have been lower had certain expenses not been reduced
during the period.
(f) Not computed on an annualized basis.
(g) Computed on an annualized basis.

<PAGE>

CONTACT INFORMATION

CGM FOCUS FUND
c/o The CGM Funds
P.O. Box 449
Boston, MA 02117

SHAREHOLDER SERVICING AGENT
CGM Shareholder Services
c/o Boston Financial Data Services, Inc.
P.O. Box 8511
Boston, MA 02266

INVESTMENT MANAGER
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

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

More information about this Fund is available free by calling 800-345-4048,
including the following:

ANNUAL/QUARTERLY REPORTS

Additional information about the Fund's investments is available in the Fund's
annual and quarterly reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund and is incorporated
into this prospectus by reference (i.e. is legally considered part of it).

For additional information about:

o Account procedures/status o Prospectuses
o Redemptions o SAI
o Exchanges o Annual/Quarterly Reports
o New account procedures o Performance

Call CGM Shareholder Call CGM Marketing
Services at 800-343-5678 Department at 800-345-4048
- --------------------------------------------------------------------------------

FFP99 SEC File No. 811-82
<PAGE>

CGM MUTUAL FUND

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1999

This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM Mutual Fund.
This Statement is not a prospectus and should be read in conjunction with the
CGM Mutual Fund Prospectus dated May 1, 1999 (the "Prospectus"). Certain
information which is included in the Prospectus is incorporated by reference
into this Statement. A copy of the Prospectus may be obtained by writing to: CGM
Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449, Boston,
Massachusetts 02117, or by calling 800-345-4048.

Certain financial information which is included in the Fund's Annual Report to
shareholders dated December 31, 1998 is incorporated by reference into this
Statement. A copy of the Annual Report accompanies this Statement.

MSAI99
<PAGE>

TABLE OF CONTENTS

Page

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

ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS....................... 1

FUNDAMENTAL INVESTMENT RESTRICTIONS......................................... 5

PORTFOLIO TURNOVER.......................................................... 6

MANAGEMENT OF THE FUND...................................................... 7

INVESTMENT ADVISORY AND OTHER SERVICES...................................... 9
Advisory Agreement................................................. 9
Custodial Arrangements............................................. 10
Independent Accountants............................................ 11
Other Arrangements................................................. 11

PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 11

DESCRIPTION OF THE TRUST.................................................... 12
Shareholder Rights................................................. 13
Shareholder and Trustee Liability.................................. 14

ADVERTISING AND PERFORMANCE
INFORMATION................................................................. 15
Calculation of Total Return........................................ 15
Performance Comparisons............................................ 16
Price-to-Earnings Ratio Comparisons................................ 17

NET ASSET VALUE AND PUBLIC OFFERING PRICE................................... 18

HOW TO PURCHASE SHARES...................................................... 19

SHAREHOLDER SERVICES........................................................ 19
Open Accounts...................................................... 19
Systematic Withdrawal Plans ("SWP")................................ 19
Exchange Privilege................................................. 20
Automatic Investment Plans ("AIP")................................. 21
Retirement Plans................................................... 22
Address Changes.................................................... 22

REDEMPTIONS................................................................. 22
Redeeming by Telephone............................................. 23
Check Sent to the Record Address................................... 23
Proceeds Wired to a Predesignated Bank............................. 24
All Redemptions.................................................... 24

INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS................ 25

FINANCIAL STATEMENTS........................................................ 28

APPENDIX A--RATINGS......................................................... A-1

<PAGE>

INTRODUCTION

CGM Mutual Fund (the "Fund") is registered with the Securities and Exchange
Commission ("SEC") as a diversified open-end management investment company, and
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.

Descriptions in the Prospectus and in this Statement of a particular investment
practice or technique in which the Fund may engage or a financial instrument
which the Fund may purchase are meant to describe the spectrum of investments
that CGM, in its discretion, might, but is not required to, use in managing the
Fund's portfolio assets. CGM may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of the Fund but, to the extent employed, could from time to time have
a material impact on the Fund's performance.

ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS

THE FOLLOWING SUPPLEMENTS THE DISCUSSION IN THE PROSPECTUS OF THE VARIOUS
INVESTMENT STRATEGIES AND TECHNIQUES THAT MAY BE EMPLOYED BY THE FUND AND
CERTAIN ASSOCIATED RISKS. SEE APPENDIX A FOR A DESCRIPTION OF CREDIT RATINGS.

NON-INVESTMENT GRADE 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 debt or 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. High
yield securities are subject to the following risks, in addition to those
described in the Prospectus:

o 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.

o 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 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.

o 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.

o 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.

REPURCHASE AGREEMENTS. 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 Investment
Company Act of 1940, as amended (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.

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 under the Securities Act of 1933, as amended, 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. 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.

FOREIGN SECURITIES. The Fund may invest in securities 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. In
making foreign investments, the Fund will also give appropriate consideration to
the following factors, among others:

o In addition to the risks associated with investing in foreign issuers, as
described in the Prospectus, because some foreign securities the Fund may
acquire are purchased with and payable in currency 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. The Fund also may be
affected by the conversion of the currency of several European countries
to the "Euro" currency.

o 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.

o 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. The 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.

o Some foreign securities may be subject to transfer taxes levied by foreign
governments, and the income received by the 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.

DEPOSITORY RECEIPTS. The Fund may invest in securities of non-U.S. issuers
through investments in depository receipts. American Depository Receipts
("ADRs") and other forms of depository receipts for securities of non-U.S.
issuers provide an alternative method for the Fund to make non-U.S. investments.
These securities are not usually denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities.

ADRs may be issued pursuant to sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
form of depository receipts. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depository receipts.

TEMPORARY DEFENSIVE POSITIONS. The Fund may depart from its principal investment
strategies by taking temporary defensive positions in response to adverse
market, economic or political conditions. When doing so, the Fund may hold a
substantial portion of its assets in cash or investment grade fixed-income
securities and may not be pursuing its investment objective.

FUNDAMENTAL INVESTMENT RESTRICTIONS

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; or

(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 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 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.

PORTFOLIO TURNOVER

Although the Fund's investment 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. Frequent trading involves higher securities
transaction costs which may adversely affect the Fund's performance. To the
extent that this policy results in the realization of gains on investments, the
Fund will make distributions to its shareholders, which may accelerate
shareholders' tax liabilities.

The Fund's portfolio turnover rate 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

The Fund's Board of Trustees (the "Board") is responsible for the overall
management of the Fund, including general supervision and review of the Fund's
investment activities. The Board, in turn, elects the officers who are
responsible for administering the Fund's day-to-day operations.

The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.

PETER O. BROWN (Age 58) -- 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.

G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis-Sayles and
Company, Incorporated ("Loomis-Sayles").

ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis-Sayles.

ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis-Sayles.

LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.

JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management Company;
formerly Institutional Managing Partner, Loomis-Sayles.

J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.

KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President,
Boston Financial Data Services, Inc.

LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis-Sayles.

MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The New
England.

MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis-Sayles.

FRANK N. STRAUSS (Age 37) -- Treasurer
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 61) -- Vice President
Employee -- Director of Marketing, CGM; formerly Director of Marketing,
Loomis-Sayles.

* Trustee deemed to be an "interested person" of the Fund, as defined by 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 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 or 222 Berkeley Street, Boston,
Massachusetts 02116.

As of April 5, 1999, the trustees and officers 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. Trustees and officers 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, 1998:

- ---------------------------------------------------------------------------------------------------------------
Pension or Compensation
Retirement from the Trusts
Aggregate Benefits accrued Estimated Annual and Fund Complex
Compensation as part of Fund Benefits Upon Paid to Trustees
Name of Trustee from Trust Expenses Retirement (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter O. Brown $28,398 None None $37,000
- ---------------------------------------------------------------------------------------------------------------
Nicholas J. Grant (b) $33,898 None None $44,000
- ---------------------------------------------------------------------------------------------------------------
G. Kenneth Heebner None None None None
- ---------------------------------------------------------------------------------------------------------------
Robert L. Kemp None None None None
- ---------------------------------------------------------------------------------------------------------------
Robert B. Kittredge $28,398 None None $37,000
- ---------------------------------------------------------------------------------------------------------------
Laurens MacLure $28,398 None None $37,000
- ---------------------------------------------------------------------------------------------------------------
James Van Dyke Quereau, Jr. $28,398 None None $37,000
- ---------------------------------------------------------------------------------------------------------------
J. Baur Whittlesey $28,398 None None $37,000
- ---------------------------------------------------------------------------------------------------------------

(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
</TABLE>

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

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, 1996, 1997 and 1998, the advisory fee paid to CGM in respect of
services rendered to the Fund amounted to $8,033,863, $10,642,444 and
$8,746,758, 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, CGM Realty Fund and CGM Focus 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 PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers 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 PricewaterhouseCoopers 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 1996, 1997 and 1998 fiscal years, CGM was
reimbursed in the amounts of $83,000, $85,000 and $84,000, 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 1998, brokerage transactions of the Fund aggregating $4,542,662,071 were
allocated to brokers providing research services and $5,809,430 in commissions
were paid on these transactions. During 1996, 1997 and 1998 the Fund paid total
brokerage fees of approximately $4,313,317, $7,291,272 and $6,491,280,
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 Trust, 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

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)
on 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 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.

On March 31, 1999, there were 32,609,196.521 shares of the Fund outstanding. On
that date, State Street Bank, acting as trustee for various retirement plans and
individual retirement accounts, owned 8,511,980.209 -- about 26.1% 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.

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.

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, 1998, the Fund's
average annual total return was 8.2%, 10.2% and 13.8%, respectively. For the
one, five, and ten year periods ended December 31, 1998, the total return on a
hypothetical $1,000 investment in the Fund on an aggregate basis was 8.2%, 62.5%
and 263.8%, respectively.

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

PERFORMANCE COMPARISONS

Total return may be used to compare the performance of the Fund against certain
widely acknowledged standards or indexes 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 11,332 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 7,976 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, programs and articles about the Fund regarding performance,
rankings and other characteristics of the Fund and information about persons
responsible for its portfolio management may appear on television and in
national publications and major metropolitan newspapers including, but not
limited to, CNBC, PBC, CNN-fn, 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 media 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. The Fund may also include in its advertising and sales
literature information concerning the experience of Mr. Heebner, the Fund's
portfolio manager, in managing other mutual funds and private accounts,
including ranking and rating information about such funds.

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, 1998 was 31.2 as calculated by
Morningstar. Morningstar calculates the P/E ratios of 5,123 U.S. diversified
equity funds.

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 currently expected to be closed on the
following holidays: Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, New Year's Day, Martin Luther King, Jr. 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.

HOW TO PURCHASE SHARES

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

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 Service Options 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 Service Options 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, CGM Focus 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 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 CGM, and counsel
to CGM Capital Development Fund and CGM. 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 or Service Options Form to CGM
Shareholder Services. 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

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, Traditional and Roth IRAs and
403(b)(7) custodial accounts established under retirement plans sponsored by
CGM. These plans may be funded with shares of the Fund.

For participants under age 59 1/2, generally, 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.

If a statement or check sent to a shareholder is returned three times, mailings
to the shareholder may be discontinued until the shareholder contacts CGM
Shareholder Services with correct address information.

REDEMPTIONS

The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Sell 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, as amended (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, as amended (the "1934 Act"); credit unions (as
defined in ss. 19(b)(1)(A) of the Federal Reserve Act, as amended [12 U.S.C. ss.
461(b)]); national securities exchanges, registered securities associations and
clearing agencies, as those terms are defined under the 1934 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 Traditional or
Roth 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 Service Options Form
(with a signature guarantee) available from the Trust or CGM Shareholder
Services. 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
Service Options Form with a signature guarantee. Whenever the Service Options
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 or wired 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-term 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 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 a Service
Options 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 canceled 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 elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets.

As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December with a record date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.

Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction if
the recipient otherwise qualifies for that deduction with respect to its holding
of Fund shares. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax and may result in certain basis
adjustments. 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 dividends are taxable as long-term capital gains for
federal income tax purposes, 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 from the sale of such shares. Dividends and
distributions are taxable to shareholders in the same manner whether received in
cash or reinvested in additional shares of the Fund.

Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of a distribution may thus pay
the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.

Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.

Investments by the Fund in zero coupon securities will result in income to the
Fund equal to a portion of the excess of the face value of the securities over
their issue price (the "original issue discount") each year that the securities
are held, even though the Fund receives no cash interest payments. This income
is included in determining the amount of income which the Fund must distribute
to maintain its status as a regulated investment company and to avoid the
payment of federal income tax and the 4% excise tax. In addition, if the Fund
invests in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations.

Gains derived by the Fund from the disposition of any market discount bonds
(i.e., bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by the Fund will be taxed as ordinary
income to the extent of the accrued market discount on the bonds, unless the
Fund elects to include the market discount in income as it accrues.

Income received by the Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries.

A shareholder may be subject to backup withholding at the rate of 31% of any
taxable distributions unless such shareholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies that the
shareholder is not subject to backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide the Fund with his correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability so long as a
return is timely filed.

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.

Investors should consult their tax advisors regarding the application of the
above-described general federal taxation rules to their own circumstances and
the state, local, or foreign tax consequences to them of any investment in the
Fund.

FINANCIAL STATEMENTS

The financial statements and Report of Independent Accountants for the year
ended December 31, 1998, included in the Fund's Annual Report to Shareholders
for the year ended December 31, 1998, are incorporated herein by reference.

<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 `Caa.' 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. A `C' also will be assigned to a preferred stock issue in
arrears on dividends or sinking fund payments, but that is currently paying.

Plus (+) or Minus (-): The ratings from AA 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.

<PAGE>

CGM REALTY FUND

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1999

This Statement of Additional Information (the "Statement" or "SAI") provides
further information concerning the activities and operations of CGM Realty Fund.
This Statement is not a prospectus and should be read in conjunction with the
CGM Realty Fund Prospectus dated May 1, 1999 (the "Prospectus"). Certain
information which is included in the Prospectus is incorporated by reference
into this Statement. A copy of the Prospectus may be obtained without charge
from CGM Trust, c/o The CGM Funds Investor Services Division, P.O. Box 449,
Boston, Massachusetts 02117, or by calling 800-345-4048.

RSAI99
<PAGE>

TABLE OF CONTENTS

Page

INTRODUCTION...................................................... 1
ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS............. 1

FUNDAMENTAL INVESTMENT RESTRICTIONS............................... 7
PORTFOLIO TURNOVER................................................ 8
MANAGEMENT OF THE FUND............................................ 9
INVESTMENT ADVISORY AND OTHER SERVICES............................ 11
Advisory Agreement............................................. 11
Custodial Arrangements......................................... 12
Independent Accountants........................................ 13
Other Arrangements............................................. 13
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................. 13
DESCRIPTION OF THE TRUST.......................................... 14
Shareholder Rights............................................. 15
Shareholder and Trustee Liability.............................. 16
ADVERTISING AND PERFORMANCE INFORMATION........................... 17
Calculation of Total Return.................................... 17
Calculation of Yield........................................... 18
Performance Comparisons........................................ 18
NET ASSET VALUE AND PUBLIC OFFERING PRICE......................... 20
HOW TO PURCHASE SHARES............................................ 21
SHAREHOLDER SERVICES.............................................. 21
Open Accounts.................................................. 21
Systematic Withdrawal Plans ("SWP")............................ 22
Exchange Privilege............................................. 23
Automatic Investment Plans ("AIP")............................. 23
Retirement Plans............................................... 24
Address Changes................................................ 24
REDEMPTIONS....................................................... 25
Redeeming by Telephone......................................... 25
Check Sent to the Record Address............................... 26
Proceeds Wired to a Predesignated Bank......................... 26
All Redemptions................................................ 26
INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS...... 28
FINANCIAL STATEMENTS.............................................. 31

APPENDIX A -- RATINGS............................................. A-1

<PAGE>

INTRODUCTION

CGM Realty Fund (the "Fund") is registered with the Securities and Exchange
Commission ("SEC") as a diversified open-end management investment company and
is organized as a separate series of shares of CGM Trust (the "Trust"). The
Trust was established as a Massachusetts business trust 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.

ADDITIONAL INFORMATION REGARDING STRATEGIES AND RISKS

REAL ESTATE COMPANIES. 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.

NON-INVESTMENT GRADE SECURITIES. The Fund may invest up to 25% 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). The Fund may not invest in securities rated lower than Caa or caa by
Moody's or CCC by S&P. 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. High yield securities are subject to the following
risks, in addition to those described in the Prospectus:

REPURCHASE AGREEMENTS. 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 Investment Company
Act of 1940, as amended (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.

REVERSE REPURCHASE AGREEMENTS. 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.

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. 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. The possibility of prepayment may cause mortgage-backed
securities to experience significantly greater price and yield volatility than
traditional debt securities. 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.

FINITE-LIFE REITS. 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
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.

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 under the Securities Act of 1933, as amended, 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. 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.

FUTURES, OPTIONS, ETC. 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 concerning such
activities.

FUNDAMENTAL INVESTMENT RESTRICTIONS

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; or

(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.

PORTFOLIO TURNOVER

The Fund's investment 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 will, however, sell any particular security and
reinvest proceeds when it is deemed prudent by the Fund's Investment Manager,
regardless of the length of the holding period. Frequent trading involves higher
securities transaction costs which may adversely affect the Fund's performance.
To the extent that this policy results in the realization of gains on
investments, the Fund will make distributions to its shareholders, which may
accelerate shareholders' tax liabilities.

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

The Fund's Board of Trustees (the "Board") is responsible for the overall
management of the Funds, including general supervision and review of the Fund's
investment activities. The Board, in turn, elects the officers who are
responsible for administering the Fund's day-to-day operations.

The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.

G. KENNETH HEEBNER (Age 58)* -- Trustee and Vice President
Employee, CGM; formerly Vice President and Director, Loomis-Sayles and
Company, Incorporated ("Loomis-Sayles").

ROBERT L. KEMP (Age 66)* -- Trustee and President
Employee, CGM; formerly President and Director, Loomis-Sayles.

ROBERT B. KITTREDGE (Age 78) -- Trustee
21 Sturdivant Street, Cumberland Foreside, ME; Retired; formerly Vice
President, General Counsel and Director, Loomis-Sayles.

LAURENS MACLURE (Age 73) -- Trustee
183 Sohier Street, Cohasset, MA; Retired; formerly President and Chief
Executive Officer, New England Deaconess Hospital.

JAMES VAN DYKE QUEREAU, JR. (Age 50) -- Trustee
59 Annewood Lane, Wayne, PA; Managing Partner, Stratton Management Company;
formerly Institutional Managing Partner, Loomis-Sayles.

J. BAUR WHITTLESEY (Age 52) -- Trustee 1521 Locust Street, Philadelphia, PA;
Attorney.

KATHLEEN S. HAUGHTON (Age 38) -- Vice President
Employee -- Investor Services Division, CGM; formerly Vice President, Boston
Financial Data Services, Inc.

LESLIE A. LAKE (Age 54) -- Vice President and Secretary
Employee -- Office Administrator, CGM; formerly Office Administrator,
Capital Growth Management Division of Loomis-Sayles.

MARTHA I. MAGUIRE (Age 43) -- Vice President
Employee -- Funds Marketing, CGM; formerly marketing communications
consultant (self-employed); formerly Sales Promotion Consultant, The New
England.

MARY L. STONE (Age 54) -- Assistant Vice President
Employee -- Coordinator, Mutual Fund Recordkeeping, CGM; formerly
Coordinator, Mutual Fund Recordkeeping, Loomis-Sayles.

W. DUGAL THOMAS (Age 61) -- Vice President
Employee -- Director of Marketing, CGM; formerly Director of Marketing,
Loomis-Sayles.

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

Each of the Trust'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 or 222 Berkeley Street, Boston,
Massachusetts 02116.

As of April 5, 1999, the trustees and officers of the Fund owned beneficially
1.807% of the outstanding shares of the Fund.

The Trust pays no compensation to its officers or to the trustees listed above
who are interested persons of the Trust. Trustees and officers 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, 1998:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Pension or
Retirement
Benefits Estimated
Aggregate accrued as Annual Compensation
Name of Trustee Compensation part of Fund Benefits Upon from the Trusts and Fund
from Trust Expenses Retirement Complex Paid to Trustees (a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter O. Brown $28,398 None None $37,000
- ----------------------------------------------------------------------------------------------------------------------
Nicholas J. Grant (b) $33,898 None None $44,000
- ----------------------------------------------------------------------------------------------------------------------
G. Kenneth Heebner None None None None
- ----------------------------------------------------------------------------------------------------------------------
Robert L. Kemp None None None None
- ----------------------------------------------------------------------------------------------------------------------
Robert B. Kittredge $28,398 None None $37,000
- ----------------------------------------------------------------------------------------------------------------------
Laurens MacLure $28,398 None None $37,000
- ----------------------------------------------------------------------------------------------------------------------
James Van Dyke Quereau, Jr. $28,398 None None $37,000
- ----------------------------------------------------------------------------------------------------------------------
J. Baur Whittlesey $28,398 None None $37,000
- ----------------------------------------------------------------------------------------------------------------------

(a) The Fund Complex is comprised of two Trusts with a total of six funds.
(b) Nicholas Grant retired as of February 4, 1999.
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

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. For the period May 13, 1994 (commencement of operations) through
December 31, 1997, CGM 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 1.0% of the
Fund's average net assets. For the fiscal years ended December 31, 1996 and
1997, the investment advisory fees that would have been payable to CGM in
respect of services rendered to the Fund amounted to $717,641 and $2,906,862,
respectively. As a result of such limitation, the Fund actually paid advisory
fees of $508,519 and $2,664,741, respectively. For the fiscal year ended
December 31, 1998, the Fund paid advisory fees of $4,238,774.

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 Focus
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.

Certain officers and trustees of the Trust 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

INDEPENDENT ACCOUNTANTS

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. For services rendered to the Fund for fiscal years 1996, 1997
and 1998, CGM was reimbursed $18,000, $24,000 and $36,000, respectively, by the
Fund for such expenses.

PORTFOLIO TRANSACTIONS AND BROKERAGE

DESCRIPTION OF THE TRUST

SHAREHOLDER RIGHTS

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)
on 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.

On March 31, 1999, there were 32,236,691.649 shares of the Fund outstanding. On
that date, State Street Bank, acting as trustee for various retirement plans and
individual retirement accounts, owned 3,920,932.141 shares -- about 12.16% 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.

SHAREHOLDER AND TRUSTEE LIABILITY

ADVERTISING AND PERFORMANCE INFORMATION

CALCULATION OF TOTAL RETURN

(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, 1998, and for the period from
inception (May 13, 1994) through December 31, 1998, the average annual total
return of the Fund was -21.2% and 12.5%, respectively. If CGM had not agreed to
the fee limitations and expense provisions described above, the Fund's total
return from inception through December 31, 1998 would have been lower.

In computing performance information for the Fund, no adjustment is 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).

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 Fund's 30-day yield as
of December 31, 1998, was 6.82%.

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, programs and 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 on television and in
national publications and major metropolitan newspapers including, but not
limited to, CNBC, PBC, CNN-fn, 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 media 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. The Fund may also include in its advertising and sales
literature information concerning the experience of Mr. Heebner, the Fund's
portfolio manager, in managing other mutual funds and private accounts,
including ranking and rating information about such funds.

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."

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.

HOW TO PURCHASE SHARES

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

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 Service Options 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, CGM Focus 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 CGM and counsel to CGM Capital Development Fund and CGM. 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 or Service Options Form to CGM
Shareholder Services. 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 Sell 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,
as amended (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,
as amended (the "1934 Act"); credit unions (as defined in ss. 19(b)(1)(A) of the
Federal Reserve Act, as amended [12 U.S.C. ss. 461(b)]); national securities
exchanges, registered securities associations and clearing agencies, as those
terms are defined under the 1934 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

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 or wired 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.

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
a Service Options 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.

Dividends paid by the Fund from net investment income (including dividends and
interest) and net short-term capital gains will be taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction if
the recipient otherwise qualifies for that deduction with respect to its holding
of Fund shares. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax and may result in certain basis
adjustments. Distributions that the Fund receives from a REIT, and dividends
paid by the Fund from such distributions, will not qualify for this deduction.
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 dividends are taxable as long-term capital gains for federal income tax
purposes, 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
from the sale of such shares. Dividends and distributions are taxable to
shareholders in the same manner whether received in cash or reinvested in
additional shares of the Fund.

Gains derived by the Fund from the disposition of any market discount bonds
(i.e. bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by the Fund will be taxed as ordinary
income to the extent of the accrued market discount on the bonds, unless the
Fund elects to include the market discount in income as it accrues.

Income received by the Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries.

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, 1998, included in the
Fund's Annual Report to shareholders for the year ended December 31, 1998, are
incorporated herein by reference.