FIDELITY
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
FUND
ANNUAL REPORT
JULY 31, 1996
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 14 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 18 Notes to the financial statements.
REPORT OF INDEPENDENT 21 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 22
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE
PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
To reduce expenses and demonstrate respect for our environment, we have
initiated a project through which we will begin eliminating duplicate
copies of most financial reports and prospectuses to most households, even
if they have more than one account in the fund. If additional copies of
financial reports, prospectuses or historical account information are
needed, please call 1-800-544-6666.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although stocks have managed to post solid returns through the first seven
months of 1996, signs of strength in the economy have led to inflation
fears, causing some uncertainty in both the stock and bond markets so far
this year. In 1995, both stock and bond markets posted strong results,
while the year before, stocks posted below-average returns and bonds had
one of the worst years in history.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving
for a college education, enables you to weather these ups and downs in a
long-term fund, which has higher potential returns. An intermediate-length
fund could be appropriate if your investment horizon is two to four years,
and a short-term bond fund could be the right choice if you need your money
in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value). You can also look at the fund's
income to measure performance.
__CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Mortgage Securities 6.72% 45.56% 122.02%
Salomon Brothers Mortgage Index 5.99% 44.38% 136.00%
U.S. Mortgage Funds Average 5.00% 36.23% 104.90%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one, five, or 10 years. For example, if
you invested $1,000 in a fund that had a 5% return over the past year, the
value of your investment would be $1,050. You can compare the fund's
returns to the performance of the Salomon Brothers Mortgage Index - a
market capitalization weighted index of 15- and 30-year securities backed
by mortgage pools of the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC), and FNMA and FHLMC balloon mortgages with fixed-rate
coupons. To measure how the fund's performance stacked up against its
peers, you can compare it to the U.S. mortgage funds average, which
reflects the performance of 60 mutual funds with similar objectives tracked
by Lipper Analytical Services, Inc. over the past 12 months. Both
benchmarks reflect reinvestment of dividends and capital gains, if any, but
do not reflect any sales charges, brokerage commisions, or other costs of
investing.
__AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Mortgage Securities 6.72% 7.80% 8.30%
Salomon Brothers Mortgage Index 5.99% 7.62% 8.97%
U.S. Mortgage Funds Average 5.00% 6.36% 7.42%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
__$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19960731 19960814 110948 S00000000000001
Mortgage Securities SB Mortgage
00040 SB005
1986/07/31 10000.00 10000.00
1986/08/31 10172.75 10197.03
1986/09/30 10171.62 10211.93
1986/10/31 10304.78 10351.34
1986/11/30 10457.01 10565.29
1986/12/31 10492.02 10595.51
1987/01/31 10616.73 10751.44
1987/02/28 10688.53 10850.16
1987/03/31 10672.73 10834.04
1987/04/30 10385.24 10514.93
1987/05/31 10360.72 10481.49
1987/06/30 10519.63 10658.77
1987/07/31 10535.33 10699.06
1987/08/31 10501.61 10650.71
1987/09/30 10236.51 10405.74
1987/10/31 10539.85 10747.01
1987/11/30 10640.36 10898.51
1987/12/31 10774.99 11025.42
1988/01/31 11137.35 11453.32
1988/02/29 11257.45 11590.72
1988/03/31 11190.73 11504.90
1988/04/30 11121.48 11433.18
1988/05/31 11075.22 11408.20
1988/06/30 11296.87 11695.07
1988/07/31 11270.03 11659.21
1988/08/31 11284.34 11683.79
1988/09/30 11511.29 11961.80
1988/10/31 11727.03 12234.18
1988/11/30 11571.97 12058.50
1988/12/31 11498.76 11996.05
1989/01/31 11707.40 12221.68
1989/02/28 11645.41 12129.01
1989/03/31 11668.42 12132.24
1989/04/30 11883.81 12346.19
1989/05/31 12165.07 12751.52
1989/06/30 12459.48 13075.87
1989/07/31 12682.57 13386.12
1989/08/31 12548.61 13188.69
1989/09/30 12603.39 13280.55
1989/10/31 12853.37 13590.80
1989/11/30 12977.23 13737.86
1989/12/31 13066.68 13814.42
1990/01/31 12946.30 13714.49
1990/02/28 13032.54 13770.10
1990/03/31 13042.78 13826.10
1990/04/30 12929.96 13697.57
1990/05/31 13305.87 14114.19
1990/06/30 13498.76 14347.48
1990/07/31 13694.93 14591.24
1990/08/31 13658.71 14471.17
1990/09/30 13731.63 14588.42
1990/10/31 13872.29 14741.53
1990/11/30 14175.84 15070.31
1990/12/31 14420.37 15318.91
1991/01/31 14570.00 15542.53
1991/02/28 14663.28 15641.24
1991/03/31 14761.91 15755.27
1991/04/30 14921.71 15919.66
1991/05/31 14999.28 16057.46
1991/06/30 15036.79 16074.78
1991/07/31 15252.77 16346.35
1991/08/31 15544.25 16646.12
1991/09/30 15786.92 16966.03
1991/10/31 15973.53 17228.33
1991/11/30 16071.18 17346.39
1991/12/31 16383.38 17716.27
1992/01/31 16304.56 17536.16
1992/02/29 16466.80 17700.95
1992/03/31 16353.00 17622.79
1992/04/30 16506.31 17783.96
1992/05/31 16778.76 18113.94
1992/06/30 16956.53 18335.15
1992/07/31 16927.43 18481.41
1992/08/31 17036.92 18730.41
1992/09/30 17143.88 18875.46
1992/10/31 16973.40 18716.71
1992/11/30 17055.44 18794.07
1992/12/31 17276.77 19022.93
1993/01/31 17434.39 19284.82
1993/02/28 17583.71 19462.91
1993/03/31 17698.54 19579.35
1993/04/30 17822.10 19711.51
1993/05/31 17874.86 19801.76
1993/06/30 18092.92 19994.36
1993/07/31 18192.38 20077.36
1993/08/31 18226.25 20159.96
1993/09/30 18266.06 20177.28
1993/10/31 18298.56 20244.97
1993/11/30 18260.31 20209.11
1993/12/31 18436.55 20361.01
1994/01/31 18606.34 20565.70
1994/02/28 18508.22 20437.17
1994/03/31 18298.47 19933.12
1994/04/30 18218.31 19807.41
1994/05/31 18373.40 19874.29
1994/06/30 18467.44 19825.13
1994/07/31 18762.65 20211.93
1994/08/31 18846.72 20253.43
1994/09/30 18642.44 19982.27
1994/10/31 18680.30 19977.03
1994/11/30 18661.66 19905.31
1994/12/31 18794.52 20070.11
1995/01/31 19149.85 20519.36
1995/02/28 19578.56 21042.35
1995/03/31 19661.65 21128.17
1995/04/30 19971.63 21411.42
1995/05/31 20600.02 22105.24
1995/06/30 20757.17 22222.49
1995/07/31 20804.32 22266.81
1995/08/31 21061.03 22471.09
1995/09/30 21278.74 22672.15
1995/10/31 21515.45 22880.86
1995/11/30 21753.67 23149.20
1995/12/31 21993.33 23435.67
1996/01/31 22173.39 23615.38
1996/02/29 22032.10 23428.02
1996/03/31 21952.18 23348.64
1996/04/30 21906.42 23240.66
1996/05/31 21821.60 23210.44
1996/06/30 22122.75 23506.59
1996/07/31 22201.74 23600.06
IMATRL PRASUN SHR__CHT 19960731 19960814 110953 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Mortgage Securities Fund on July 31, 1986. As the chart shows,
by July 31, 1996, the value of the investment would have grown to $22,202 -
a 122.02% increase on the initial investment. For comparison, look at how
the Salomon Brothers Mortgage Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $23,600 - a 136.00% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally move in
the opposite direction of
interest rates. In turn, the
share price, return, and yield of
a fund that invests in bonds
will vary. That means if you
sell your shares during a
market downturn, you might lose
money. But if you can ride out
the market's ups and downs,
you may have a gain.
(checkmark)
__TOTAL RETURN COMPONENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1996 1995 1994 1993 1992
Dividend return 6.81% 7.46% 5.52% 6.73% 7.64%
Capital appreciation return -0.09% 3.42% -2.39% 0.74% 3.34%
Total return 6.72% 10.88% 3.13% 7.47% 10.98%
</TABLE>
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by
the fund. A capital appreciation return reflects both the amount paid by
the fund to shareholders as capital gain distributions and changes in the
fund's share price. Both returns assume the dividends or gains are
reinvested.
__DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1996 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 5.86(cents) 35.11(cents) 72.39(cents)
Annualized dividend rate 6.42% 6.50% 6.63%
30-day annualized yield 6.67% - -
DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $10.74 over
the past month, $10.84 over the past six months and $10.92 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Bond markets stabilized in June
and July after
stronger-than-expected
economic statistics rattled them
for much of 1996. This downdraft
was a contrast to 1995, when the
bond market posted steadily
rising returns in anticipation of
interest-rate decreases. To
illustrate, the Lehman Brothers
Aggregate Bond Index - a broad
measure of U.S. taxable bonds -
returned 18.47% in 1995 while
posting a -0.94% return
year-to-date in 1996. For the 12
months ended July 31, 1996, the
Lehman Brothers Aggregate
Bond Index returned 5.54%.
Even though in January the
Federal Reserve Board lowered
its target for the federal funds rate
- - the rate banks charge each
other on overnight loans - from
5.50% to 5.25%, the move largely
was taken into account by the
bond market. Surprisingly robust
employment reports in March
reversed market sentiment,
causing the yield on the 30-year
Treasury bond to rise to over 7%
- - a level not seen in over a year.
By June, however, soothing
comments from Federal Reserve
Board Chairman Alan Greenspan
helped ease the market's fears of
Fed interest-rate increases, and
the 30-year yield dropped back
below 7%. Although
investment-grade
mortgage-backed securities
participated in the overall
downturn in bond prices, they
have performed well in 1996
relative to other investment-grade
securities, as prepayment fears
eased in the face of a rising
mortgage rate environment. To
illustrate, the Salomon Brothers
Mortgage Index returned 5.99%
during the period.
An interview with Kevin Grant, Portfolio Manager of Fidelity Mortgage
Securities Fund
Q. WHAT HAS THE FUND'S PERFORMANCE BEEN LIKE OVER THE PAST YEAR, KEVIN?
A. The fund has done well when compared to its competitors and the mortgage
market as a whole. The fund's total return for the 12 months ended July 31,
1996, was 6.72%. To compare, the U.S. mortgage funds average tracked by
Lipper Analytical Services returned 5.00%, and the Salomon Brothers
Mortgage Index gained 5.99% for the same period.
Q. WHAT HELPED THE FUND'S PERFORMANCE?
A. The fund's total return was helped over the past year by the good
performance of its investments in Fannie Mae - Federal National Mortgage
Association - and Freddie Mac - Federal Home Loan Mortgage Corporation -
balloon mortgages, and its holdings of commercial mortgage-backed
securities. The balloon mortgages are constructed like a normal 30-year
mortgage, but the homeowner receives a lower interest rate by agreeing to
pay the outstanding balance on the balloon date, usually at the end of a
five- or seven- year term. I started to buy balloon mortgages last fall.
Typically, banks buy up all the available balloon mortgages; normally they
are less risky than other mortgages because their maturities are much
shorter than normal mortgages. Last year, however, banks became so focused
on making commercial loans that they didn't buy these securities. Balloon
mortgages cheapened, and I began to buy them. Through much of this year,
balloon mortgages performed well relative to 30-year mortgages. I now find
balloons to be fairly valued, so I've lightened up on them.
Q. WHAT ABOUT THE COMMERCIAL MORTGAGE-BACKED SECURITIES?
A. For quite some time I invested in below-investment-grade securities from
the commercial mortgage-backed market. My strategy - which is a reflection
of my value-oriented style - was to buy these bonds when they were very
cheap and offered high yields, and hold them until they increased in value
or their credit ratings were upgraded. This strategy worked out well. Not
only did the bonds rise in price, but they also provided the advantage of
supplying high income while I was waiting for them to be upgraded or for
the market to appreciate their value.
Q. KEVIN, WE UNDERSTAND THERE HAVE BEEN SOME INVESTMENT POLICY CHANGES IN
THE FUND . . .
A. As of June 24, 1996, the fund may invest up to 5% of its assets - down
from 35% - in below-investment-grade securities. I don't intend to seek out
the lower-quality, below-investment-grade bonds. Instead, this change helps
me maintain a degree of flexibility under unusual circumstances. Further,
Fidelity now uses two additional agencies to determine the credit quality
of the fund's bonds. Ratings from Duff & Phelps Rating Co. and Fitch
Investors Service, L.P., may be used along with those from Moody's
Investors Service and Standard & Poor's that had been used previously.
Q. HAVE YOU TARGETED ANY PARTICULAR SECURITIES OVER THE PAST SIX MONTHS?
A. I have, and one particular area was 15-year Fannie Maes selling at deep
discounts. Fifteen-year discount mortgages have very little prepayment
risk, and have about the same price risk as 30-year current-coupon
mortgage-backed securities that have higher prepayment risk. Although I may
be sacrificing some yield by choosing the 15-years over the 30-year
mortgages, I found the 30-year issues to be overvalued. When interest rates
change some day in the future, we should have better price performance from
the 15-year discounts than from 30-year mortgages.
Q. WHAT'S YOUR OUTLOOK?
A. The past few months generally have been characterized by relatively low
volatility in the bond markets, and that could be a window on what we'll
see over the next six months. New mortgages currently are being offered at
around 8%, but the average coupon in the mortgage market is about 7.5%, so
there is very little prepayment risk, and mortgages are selling at a
discount. There doesn't appear to be any excessive speculation in the
market, and no sectors appear to be abnormally cheap or expensive. An
increase in volatility could create opportunities for value-oriented
investment strategies, but it could be that we've entered a stretch
characterized by relative stability.
FUND FACTS
GOAL: high current income
by investing in mortgage
securities of all kinds
START DATE: December 31,
1984
SIZE: as of July 31, 1996,
more than $488 million
MANAGER: Kevin Grant,
since 1993; manager, Fidelity
Ginnie Mae Fund and Spartan
Ginnie Mae Fund, since 1995;
Fidelity Advisor Intermediate
Bond Fund, since 1995;
Fidelity Advisor World Limited
Term Bond Fund, since 1995;
joined Fidelity in 1993
(checkmark)
KEVIN GRANT ON PREPAYMENT
RISK AND DURATION:
"Currently, prepayment risk is
minimal for mortgages
because mortgage-backed
securities are selling at a
discount. The average
interest rate paid by
mortgage holders at the end
of the period was about 7.5%.
Historically, homeowners wait
until new mortgages are
offered at least 1% less than
what they're paying before
they consider refinancing. New
mortgages currently are being
offered at about 8%, so
interest rates would have to
decline by about 1.5% - a
significant move - before
prepayment became an issue
again.
"At the same time, the
duration - or price sensitivity
to changes in interest rates-
of the market and the fund
has extended since the
beginning of the year. When
interest rates increase as they
have in 1996, the market
assumes slower and slower
prepayments. That means the
expected maturity - and
duration - of the mortgage
market has increased. Since
it is impossible to predict the
direction of interest rates, I
don't time the market. Instead,
I match the duration of the
mortgage market as
represented by the fund's
benchmark index. Following
my value-oriented investment
discipline, I choose those
securities that I find to be
cheap relative to other
mortgages. By doing so, the
fund benefits from relative
price appreciation when the
market starts to favor the
bonds I've chosen for the
fund."
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1996
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
0 - 5.99% 20.5 7.9
6 - 6.99% 26.7 29.6
7 - 7.99% 16.4 18.6
8 - 8.99% 17.9 11.1
9 - 9.99% 4.9 5.1
10 - 10.99% 5.6 6.7
11% and over 3.6 4.2
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1996
6 MONTHS AGO
Years 6.8 4.2
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1996
6 MONTHS AGO
Years 4.2 2.9
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. EFFECTIVE
JUNE, 1996, THE MODEL USED TO CALCULATE DURATIONS MAY HAVE BEEN SLIGHTLY
MODIFIED IN ORDER TO FURTHER REFINE THIS INFORMATION. THESE CHANGES IN
METHODOLOGY MAY PRODUCE ADJUSTMENTS IN HISTORICAL DURATION FIGURES.
ASSET ALLOCATION
AS OF JULY 31, 1996 AS OF JANUARY 31, 1996
Mortgage-backed
securities * 90.9%
CMOs and other
mortgage related
securities 4.7%
Short-term
investments 4.4%
GNMA SECURITIES 24.8%
Mortgage-backed
securities ** 72.1%
CMOs and other
mortgage related
securities 11.1%
Short-term
investments 16.8%
GNMA SECURITIES 30.9%
Row: 1, Col: 1, Value: 4.4
Row: 1, Col: 2, Value: 4.7
Row: 1, Col: 3, Value: 45.9
Row: 1, Col: 4, Value: 45.0
Row: 1, Col: 1, Value: 16.8
Row: 1, Col: 2, Value: 11.1
Row: 1, Col: 3, Value: 32.1
Row: 1, Col: 4, Value: 40.0
*
**
INVESTMENTS JULY 31, 1996
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 90.9%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 17.4%
5%, 7/1/02 to 7/1/10 $ 5,537,631 $ 5,036,252
6 1/2%, 1/1/24 to 7/1/24 4,710,894 4,431,208
7%, 11/1/96 to 7/1/01 3,746,907 3,756,224
8%, 10/1/07 to 7/1/26 24,339,896 24,503,558
8 1/2%, 7/1/09 to 5/1/26 20,255,909 20,771,620
9%, 9/1/08 to 3/1/25 12,496,794 13,092,587
10%, 1/1/09 to 5/1/19 3,084,711 3,327,712
10 1/2%, 8/1/10 to 12/1/20 3,482,236 3,755,128
11 1/2%, 4/1/12 179,729 200,583
11 3/4%, 6/1/11 71,431 80,424
12 1/4%, 6/1/14 to 7/1/15 331,326 378,228
12 1/2%, 5/1/12 to 4/1/15 1,598,982 1,844,096
12 3/4%, 6/1/05 to 3/1/15 367,389 417,589
13%, 1/1/11 to 6/1/15 2,385,854 2,801,076
84,396,285
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 48.7%
5 1/2%, 12/1/02 to 5/1/26 100,852,942 93,269,388
6%, 4/1/00 to 2/1/26 46,792,027 43,481,763
6 1/2%, 9/1/10 to 5/1/26 82,197,476 77,034,445
7%, 2/1/24 140,111 136,005
7 1/2%, 3/1/22 to 12/1/22 3,647,993 3,615,694
8%, 1/1/07 to 7/1/08 208,051 213,318
8 1/4%, 1/1/13 177,239 182,175
8 1/2%, 11/1/03 to 11/1/18 2,665,482 2,747,832
8 3/4%, 11/1/08 to 7/1/09 343,534 354,681
9%, 1/1/08 to 2/1/13 1,414,819 1,474,138
9 1/2%, 11/1/09 to 8/1/22 6,076,725 6,502,995
11%, 12/1/02 to 8/1/10 3,501,390 3,827,019
12 1/4%, 5/1/13 to 6/1/16 908,522 1,027,611
12 1/2%, 2/1/13 to 8/1/15 919,173 1,060,315
12 3/4%, 6/1/13 to 7/1/15 610,266 698,646
13 1/2%, 9/1/13 to 12/1/14 259,816 307,799
14%, 5/1/12 to 11/1/14 140,800 168,160
236,101,984
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 24.8%
6 1/2%, 3/15/26 to 5/15/26 $ 4,926,833 $ 4,572,096
7%, 10/15/22 to 5/15/26 16,819,992 16,116,722
7 1/2%, 4/15/22 to 4/15/26 50,280,800 49,495,094
8%, 4/15/02 to 6/15/26 29,264,214 29,586,114
8 1/2%, 7/15/16 to 6/15/18 2,215,522 2,296,015
9%, 9/15/16 to 4/15/18 284,356 298,530
9 1/2%, 9/15/17 to 7/15/22 369,629 396,957
10%, 1/15/18 to 9/15/25 14,998,527 16,319,953
10 1/2%, 11/15/97 to 6/15/04. 505,455 534,519
11%, 12/15/09 to 10/15/15 411,048 456,806
11 1/2%, 10/15/10 to 7/15/18 116,621 131,104
13%, 10/15/13 137,589 161,924
13 1/2%, 7/15/11 to 10/15/14 110,907 131,944
120,497,778
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $446,991,802) 440,996,047
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation
sequential pay Series 1353 Class A, 5 1/2%,
11/15/04 (Cost $188,733) 202,564 199,082
COMMERCIAL MORTGAGE SECURITIES - 3.9%
CS First Boston Mortgage Securities Corp. commercial
Series 1994-M1 Class E, 12.60%, 2/15/02 (b) 4,000,000 3,990,000
Resolution Trust Corp. commercial Series 1994-C2 Class E,
8%, 4/25/25 6,550,501 6,155,424
SML, Inc. commercial Series 1994-C1 Class C,
9.20%, 9/18/99 (a) 3,280,000 2,181,200
Structured Asset Securities Corp. commercial Series:
1992-M1 Class C, 7.05% 11/25/02 3,192,522 2,525,085
1995-C1 Class D, 7 3/8%, 9/25/24 4,000,000 3,695,000
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $16,776,372) 18,546,709
COMPLEX MORTGAGE SECURITIES - 0.8%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.8%
Federal National Mortgage Association (c):
Trust 47, 10%, 10/25/18 $ 5,758,692 $ 1,846,381
Trust 49, 10%, 2/25/19 3,588,175 1,150,459
SML, Inc. commercial Series
1994-C1 Class S, 0.81% 9/18/99 (c) 51,554,000 966,638
TOTAL COMPLEX MORTGAGE SECURITIES
(Cost $3,456,691) 3,963,478
REPURCHASE AGREEMENTS - 4.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.65%, dated
7/31/96 due 8/1/96 $ 21,324,346 21,321,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $488,734,598) $ 485,026,316
LEGEND
1. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
SML, Inc.
commercial Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $2,132,820
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $3,990,000 or 0.8% of net
assets.
3. Security represents right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
INCOME TAX INFORMATION
At July 31, 1996, the aggregate cost of investment securities for income
tax purposes was $488,861,348. Net unrealized depreciation aggregated
$3,835,032, of which $5,477,247 related to appreciated investment
securities and $9,312,279 related to depreciated investment securities.
The fund hereby designates approximately $1,471,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1996
ASSETS
Investment in securities, at value (including repurchase $ 485,026,316
agreements of $21,321,000) (cost $488,734,598) -
See accompanying schedule
Cash 707
Receivable for investments sold 1,186,492
Interest receivable 2,967,262
TOTAL ASSETS 489,180,777
LIABILITIES
Payable for fund shares redeemed 171,933
Distributions payable 546,316
Accrued management fee 179,672
Other payables and accrued expenses 120,549
TOTAL LIABILITIES 1,018,470
NET ASSETS $ 488,162,307
Net Assets consist of:
Paid in capital $ 484,972,165
Undistributed net investment income 922,675
Accumulated undistributed net realized gain (loss) 5,975,749
on investments
Net unrealized appreciation (depreciation) on (3,708,282)
investments
NET ASSETS, for 45,302,679 shares outstanding $ 488,162,307
NET ASSET VALUE, offering price and redemption price $10.78
per share ($488,162,307 (divided by) 45,302,679 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1996
INVESTMENT INCOME $ 35,191,806
Interest
EXPENSES
Management fee $ 2,104,873
Transfer agent fees 968,241
Accounting fees and expenses 189,021
Non-interested trustees' compensation 1,957
Custodian fees and expenses 90,645
Registration fees 35,573
Audit 63,685
Legal 4,134
Miscellaneous 4,921
Total expenses before reductions 3,463,050
Expense reductions (34,295) 3,428,755
NET INVESTMENT INCOME 31,763,051
REALIZED AND UNREALIZED GAIN (LOSS) 8,694,701
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on:
Investment securities (11,224,995)
Delayed delivery commitments (26,250) (11,251,245)
NET GAIN (LOSS) (2,556,544)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 29,206,507
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1996 1995
INCREASE (DECREASE) IN NET ASSETS
Operations $ 31,763,051 $ 27,686,914
Net investment income
Net realized gain (loss) 8,694,701 5,690,972
Change in net unrealized appreciation (depreciation) (11,251,245) 6,171,751
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 29,206,507 39,549,637
FROM OPERATIONS
Distributions to shareholders (31,178,449) (26,269,823)
From net investment income
From net realized gain (4,055,960) -
In excess of net realized gain - (1,718,507)
TOTAL DISTRIBUTIONS (35,234,409) (27,988,330)
Share transactions 268,954,246 166,536,217
Net proceeds from sales of shares
Reinvestment of distributions 28,910,230 23,325,421
Cost of shares redeemed (219,915,312) (150,982,650)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 77,949,164 38,878,988
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS 71,921,262 50,440,295
NET ASSETS
Beginning of period 416,241,045 365,800,750
End of period (including undistributed net investment $ 488,162,307 $ 416,241,045
income of $922,675 and $576,574, respectively)
OTHER INFORMATION
Shares
Sold 24,584,693 15,766,198
Issued in reinvestment of distributions 2,644,498 2,208,784
Redeemed (20,139,279) (14,322,055)
Net increase (decrease) 7,089,912 3,652,927
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1996 1995 1994 A 1993 1992
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.890 $ 10.580 $ 10.910 $ 10.830 $ 10.480
of period
Income from Investment .729 .772 .570 .788 .808
Operations
Net investment income
Net realized and (.015) .325 (.242) (.007) .313
unrealized gain (loss)
Total from investment .714 1.097 .328 .781 1.121
operations
Less Distributions
From net investment income (.724) (.737) (.588) (.701) (.771)
From net realized gain (.100) - (.040) - -
In excess of net realized gain - (.050) (.030) - -
Total distributions (.824) (.787) (.658) (.701) (.771)
Net asset value, end of period $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
TOTAL RETURN C 6.72% 10.88% 3.13% 7.47% 10.98%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of $ 488,162 $ 416,241 $ 365,801 $ 419,467 $ 441,115
period (000 omitted)
Ratio of expenses to .74% .77% .79% .76% .80%
average net assets
Ratio of expenses to average net .73% .77% .79% .76% .80%
assets after expense B
reductions
Ratio of net investment income 6.75% 7.37% 6.73% 7.18% 7.57%
to average net assets
Portfolio turnover rate 221% 329% 563% 278% 146%
</TABLE>
A EFFECTIVE AUGUST 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
B FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Mortgage Securities Fund (the fund) (formerly Fidelity Mortgage
Securities Portfolio) is a fund of Fidelity Income Fund (the trust) and is
authorized to issue an unlimited number of shares. The trust is registered
under the Investment Company Act of 1940, as amended (the 1940 Act), as an
open-end management investment company organized as a Massachusetts
business trust. The financial statements have been prepared in conformity
with generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting policies of
the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities (including restricted securities) for
which market quotations are not readily available are valued at their fair
value as determined in good faith under consistently applied procedures
under the general supervision of the Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities and losses deferred due to wash sales.
The fund also utilized earnings and profits distributed to shareholders on
redemption of shares as a part of the dividends paid deduction for income
tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
realized gain (loss) on investments may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributed in the following
year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements that
mature in 60 days or less from the date of purchase for U.S. Treasury or
Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. Losses
may arise due to changes in the market value of the underlying securities
or if the counterparty does not perform under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $2,181,200 or
0.4% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $1,027,839,234 and $996,513,555, respectively, of which U.S.
government and government agency obligations aggregated $1,019,600,667 and
$984,455,100, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .1100% to .3700% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .45% of
average net assets.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services. FMR or FDC has informed the fund that
payments made to third parties under the Plan amounted to $6,456 for the
period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the fund's transfer, dividend disbursing and shareholder servicing agent.
FSC receives account fees and asset-based fees that vary according to
account size and type of account. FSC pays for typesetting, printing and
mailing of all shareholder reports, except proxy statements. For the
period, the transfer agent fees were equivalent to an annual rate of .21%
of average net assets.
ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is
based on the level of average net assets for the month plus out-of-pocket
expenses.
5. EXPENSE REDUCTIONS.
The fund has entered into arrangements with its custodian and transfer
agent whereby interest earned on uninvested cash balances was used to
offset a portion of the fund's expenses. During the period, the fund's
custodian and transfer agent fees were reduced by $24,208 and $10,087,
respectively, under these arrangements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Mortgage Securities Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Mortgage Securities Fund (a fund of Fidelity Income Fund) at July
31, 1996, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fidelity Mortgage
Securities Fund's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits
of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at July 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 6, 1996
DISTRIBUTIONS
The Board of Trustees of Fidelity Mortgage Securities Fund voted to pay on
September 9, 1996, to shareholders of record at the opening of business on
September 6, 1996, a distribution of $.11 per share derived from capital
gains realized from sales of portfolio securities.
A total of .14% of the dividends distributed during the fiscal year was
derived from interest on U.S. Government securities which is generally
exempt from state income tax.
The fund will notify shareholders in January 1997 of the applicable
percentage for use in preparing 1996 income tax returns.
TO CALL FIDELITY
FOR FUND INFORMATION AND QUOTES
The Fidelity Telephone Connection offers you special automated telephone
services for quotes and balances. The services are easy to use,
confidential and quick. All you need is a Touch Tone telephone.
YOUR PERSONAL IDENTIFICATION NUMBER
(PIN)
The first time you call one of our automated telephone services, we'll ask
you
to set up your Personal Identification
Number (PIN). The PIN assures that
only you have automated telephone
access to your account information.
Please have your Customer Number
(T-account #) handy when you call -
you'll need it to establish your PIN. If
you would ever like to change your PIN, just choose the "Change your
Personal
Identification Number" option when
you call. If you forget your PIN, please
call a Fidelity representative at 1-800-
544-6666 for assistance.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios(registered trademark).
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Kevin Grant, Vice President
Fred L. Henning, Jr., Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Spartan Ginnie Mae
(registered trademark)
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Short-Intermediate
Government
Spartan Short-Term Bond
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
FIDELITY
(REGISTERED TRADEMARK)
GINNIE MAE
FUND
ANNUAL REPORT
JULY 31, 1996
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 13 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 17 Notes to the financial statements.
REPORT OF INDEPENDENT 20 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 21
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE
PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
To reduce expenses and demonstrate respect for our environment, we have
initiated a project through which we will begin eliminating duplicate
copies of most financial reports and prospectuses to most households, even
if they have more than one account in the fund. If additional copies of
financial reports, prospectuses or historical account information are
needed, please call 1-800-544-6666.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although stocks have managed to post solid returns through the first seven
months of 1996, signs of strength in the economy have led to inflation
fears, causing some uncertainty in both the stock and bond markets so far
this year. In 1995, both stock and bond markets posted strong results,
while the year before, stocks posted below-average returns and bonds had
one of the worst years in history.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving
for a college education, enables you to weather these ups and downs in a
long-term fund, which has higher potential returns. An intermediate-length
fund could be appropriate if your investment horizon is two to four years,
and a short-term bond fund could be the right choice if you need your money
in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value). You can also look at the fund's
income to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Ginnie Mae Fund 5.55% 39.73% 112.87%
Salomon Brothers GNMA Index 6.17% 45.10% 136.66%
GNMA Funds Average 4.94% 39.52% 110.86%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one, five, or 10 years. For example, if
you invested $1,000 in a fund that had a 5% return over the past year, the
value of your investment would be $1,050. You can compare the fund's
returns to the performance of the Salomon Brothers GNMA Index - a market
capitalization weighted index of 15- and 30-year fixed-rate securities
backed by mortgage pools of the Government National Mortgage Association
(GNMA). To measure how the fund's performance stacked up against its peers,
you can compare it to the GNMA funds average, which reflects the
performance of 52 mutual funds with similar objectives tracked by Lipper
Analytical Services, Inc. over the past 12 months. Both benchmarks reflect
reinvestment of dividends and capital gains, if any, but do not reflect any
sales charges, brokerage commissions, or other costs of investing.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Ginnie Mae Fund 5.55% 6.92% 7.85%
Salomon Brothers GNMA Index 6.17% 7.73% 9.00%
GNMA Funds Average 4.94% 6.88% 7.73%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19960731 19960814 105450 S00000000000001
Ginnie Mae SB GNMA
00015 SB019
1986/07/31 10000.00 10000.00
1986/08/31 10222.66 10184.44
1986/09/30 10198.03 10202.92
1986/10/31 10354.17 10333.96
1986/11/30 10548.20 10526.62
1986/12/31 10580.13 10578.38
1987/01/31 10720.52 10712.70
1987/02/28 10807.71 10819.50
1987/03/31 10769.63 10819.09
1987/04/30 10403.74 10488.42
1987/05/31 10347.11 10452.68
1987/06/30 10502.07 10635.47
1987/07/31 10506.00 10659.71
1987/08/31 10439.52 10598.92
1987/09/30 10145.26 10329.44
1987/10/31 10483.35 10674.50
1987/11/30 10566.19 10829.36
1987/12/31 10702.46 10953.83
1988/01/31 11065.39 11403.22
1988/02/29 11172.45 11538.78
1988/03/31 11149.84 11435.67
1988/04/30 11052.14 11351.87
1988/05/31 11012.23 11340.78
1988/06/30 11247.86 11636.54
1988/07/31 11208.25 11590.95
1988/08/31 11224.18 11602.86
1988/09/30 11448.04 11889.99
1988/10/31 11648.14 12167.68
1988/11/30 11529.93 11989.81
1988/12/31 11469.22 11924.91
1989/01/31 11651.67 12143.44
1989/02/28 11591.31 12049.79
1989/03/31 11604.96 12054.30
1989/04/30 11831.48 12271.20
1989/05/31 12132.50 12688.14
1989/06/30 12458.51 13047.57
1989/07/31 12665.35 13341.28
1989/08/31 12545.98 13147.80
1989/09/30 12575.70 13230.78
1989/10/31 12844.29 13539.27
1989/11/30 12967.94 13695.78
1989/12/31 13057.39 13782.86
1990/01/31 12914.32 13660.86
1990/02/28 12989.34 13713.03
1990/03/31 13014.79 13770.13
1990/04/30 12868.47 13614.44
1990/05/31 13279.41 14054.39
1990/06/30 13466.03 14288.12
1990/07/31 13680.16 14538.70
1990/08/31 13645.10 14393.69
1990/09/30 13729.69 14512.82
1990/10/31 13881.53 14673.02
1990/11/30 14193.73 15034.51
1990/12/31 14428.46 15285.49
1991/01/31 14610.11 15500.74
1991/02/28 14669.08 15592.34
1991/03/31 14771.31 15713.11
1991/04/30 14880.73 15877.83
1991/05/31 14993.69 16003.12
1991/06/30 15011.78 16037.63
1991/07/31 15234.34 16309.56
1991/08/31 15506.01 16605.32
1991/09/30 15734.65 16915.05
1991/10/31 15948.79 17169.73
1991/11/30 16034.34 17281.47
1991/12/31 16385.99 17714.02
1992/01/31 16250.08 17516.02
1992/02/29 16423.76 17677.46
1992/03/31 16327.07 17615.43
1992/04/30 16466.67 17767.42
1992/05/31 16739.85 18079.61
1992/06/30 16927.22 18327.31
1992/07/31 17009.37 18466.15
1992/08/31 17197.46 18722.07
1992/09/30 17321.10 18871.18
1992/10/31 17181.09 18740.96
1992/11/30 17269.14 18842.84
1992/12/31 17483.78 19060.14
1993/01/31 17714.55 19325.91
1993/02/28 17871.98 19495.56
1993/03/31 17969.83 19622.91
1993/04/30 18031.33 19723.14
1993/05/31 18134.75 19832.81
1993/06/30 18312.45 20033.68
1993/07/31 18408.65 20114.61
1993/08/31 18454.44 20154.04
1993/09/30 18455.49 20167.60
1993/10/31 18518.58 20213.19
1993/11/30 18411.67 20184.44
1993/12/31 18552.44 20337.66
1994/01/31 18761.23 20513.06
1994/02/28 18584.62 20414.89
1994/03/31 18117.93 19897.72
1994/04/30 17973.02 19779.00
1994/05/31 17989.05 19844.31
1994/06/30 17928.23 19804.06
1994/07/31 18292.11 20170.06
1994/08/31 18337.67 20191.01
1994/09/30 18082.49 19949.88
1994/10/31 18059.28 19928.52
1994/11/30 18001.07 19858.28
1994/12/31 18182.08 20069.01
1995/01/31 18565.86 20497.04
1995/02/28 19043.38 21043.79
1995/03/31 19137.62 21130.05
1995/04/30 19396.96 21422.53
1995/05/31 19993.17 22088.40
1995/06/30 20108.85 22231.76
1995/07/31 20168.04 22290.91
1995/08/31 20356.23 22490.14
1995/09/30 20557.28 22705.80
1995/10/31 20724.32 22899.28
1995/11/30 20952.96 23168.75
1995/12/31 21201.17 23463.28
1996/01/31 21333.55 23642.38
1996/02/29 21173.23 23478.48
1996/03/31 21128.98 23425.48
1996/04/30 21061.47 23317.86
1996/05/31 20975.18 23279.25
1996/06/30 21209.83 23570.90
1996/07/31 21287.01 23665.79
IMATRL PRASUN SHR__CHT 19960731 19960814 105455 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was invested
in Fidelity Ginnie Mae Fund on July 31, 1986. As the chart shows, by July
31, 1996, the value of the investment would have grown to $21,287 - a
112.87% increase on the initial investment. For comparison, look at how the
Salomon Brothers GNMA Index did over the same period. With dividends and
capital gains, if any, reinvested the same $10,000 investment would have
grown to $23,666 - a 136.66% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally move in
the opposite direction of
interest rates. In turn, the
share price, return, and yield
of a fund that invests in
bonds will vary. That means if
you sell your shares during a
market downturn, you might
lose money. But if you can ride
out the market's ups and
downs, you may have a gain.
(checkmark)
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,
1996 1995 1994 1993 1992
Dividend return 6.58% 7.35% 5.24% 6.42% 7.80%
Capital appreciation return -1.03% 2.91% -5.87% 1.81% 3.85%
Total return 5.55% 10.26% -0.63% 8.23% 11.65%
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation return reflects both the amount paid by
the fund to shareholders as capital gain distributions and changes in the
fund's share price. Both returns assume the dividends or gains are
reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1996 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 5.84(cents) 34.38(cents) 69.07(cents)
Annualized dividend rate 6.55% 6.50% 6.46%
30-day annualized yield 6.92% - -
DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $10.49 over
the past month, $10.61 over the past six months and $10.69 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Bond markets stabilized in June
and July after
stronger-than-expected
economic statistics rattled them
for much of 1996. This downdraft
was a contrast to 1995, when the
bond market posted steadily
rising returns in anticipation of
interest-rate decreases. To
illustrate, the Lehman Brothers
Aggregate Bond Index - a broad
measure of U.S. taxable bonds -
returned 18.5% in 1995 while
posting a -0.94% return
year-to-date in 1996. For the 12
months ended July 31, 1996, the
Lehman Brothers Aggregate
Bond Index returned 5.54%.
Even though in January the
Federal Reserve Board lowered
its target for the federal funds rate
- - the rate banks charge each
other on overnight loans - from
5.50% to 5.25%, the move largely
was taken into account by the
bond market. Surprisingly robust
employment reports in March
reversed market sentiment,
causing the yield on the 30-year
Treasury bond to rise to over 7%
- - a level not seen in over a year.
By June, however, soothing
comments from Federal Reserve
Board Chairman Alan Greenspan
helped ease the market's fears of
Fed interest-rate increases, and
the 30-year yield dropped back
below 7%. Although
investment-grade
mortgage-backed securities
participated in the overall
downturn in bond prices, they
have performed well in 1996
relative to other investment-grade
securities, as prepayment fears
eased in the face of a rising
mortgage rate environment. To
illustrate, the Salomon Brothers
Mortgage Index returned 5.99%
during the period.
An interview with Kevin Grant, Portfolio Manager of Fidelity
Ginnie Mae Fund
Q. HOW HAS THE FUND PERFORMED, KEVIN?
A. For the 12 months ended July 31, 1996, the fund had a total return of
5.55%. That beat the 4.94% return of the GNMA funds average tracked by
Lipper Analytical Services over the same period. The Salomon Brothers GNMA
Index returned 6.17% over the past 12 months.
Q. WHAT HELPED THE FUND PERFORM BETTER THAN THE LIPPER AVERAGE?
A. I believe many competitors had positioned their portfolios to be more
sensitive to interest-rate changes than I had. When interest rates rose -
and bond prices fell - in the first part of 1996, their funds were more
adversely affected. I believe other managers had structured their funds
fairly aggressively because market sentiment reflected a belief that the
Federal Reserve Board was going to continue the trend of interest-rate
reductions it had pursued through much of last year. Beginning in February,
however, statistics came out indicating the economy was much stronger than
expected. Market sentiment shifted rapidly, turning to an expectation that
the Fed would increase short-term rates. As a result, interest rates went
up, and those funds that were positioned aggressively to benefit from
interest-rate declines suffered. For my part, I kept the fund's duration -
or interest-rate sensitivity - neutral, as I tend to do. That is, I don't
structure the fund in anticipation of interest-rate moves. Instead, I seek
to match the interest-rate risk profile of the Ginnie Mae market by keeping
the fund's duration in line with that of the Salomon Brothers GNMA Index.
Q. HAVE YOU TARGETED ANY PARTICULAR TYPES OF GINNIE MAE SECURITIES OVER THE
PAST SIX MONTHS?
A. I have, and one particular area was 15-year Ginnie Maes selling at deep
discounts. Fifteen-year discount mortgages have very little prepayment
risk, and have about the same price risk as 30-year current-coupon
mortgage-backed securities that have higher prepayment risk. Although I may
be sacrificing some yield by choosing the 15-year over the 30-year
mortgages, I found the 30-year issues to be overvalued. When the
interest-rate environment changes, 15-year discounts should be poised for
better price performance than 30-year mortgages.
Q. KEVIN, WE UNDERSTAND THERE WERE SOME INVESTMENT POLICY CHANGES IN THE
FUND . . .
A. As of June 24, 1996, the fund has limited its investments to mortgage
securities issued by the Government National Mortgage Association (Ginnie
Maes), other U.S. government securities and U.S. government-related
securities, such as futures contracts, repurchase agreements for U.S.
government securities and custodial receipts. Previously, the fund could
invest up to 35% in non-U.S. government securities; however, the fund was
not affected by this change because only Ginnie Maes and other U.S.
government and related securities have been included in the portfolio for
some time now.
Q. WHAT'S YOUR OUTLOOK?
A. The past few months have been characterized by relatively low volatility
in the bond markets in general, and that could be a window to what we'll
see over the next six months. New mortgages currently are being offered at
around 8%, but the average coupon in the mortgage market is about 7.5%, so
there is very little prepayment risk, and mortgages are selling at a
discount. There doesn't appear to be any excessive speculation in the
market, and no sectors appear to be unusally cheap or expensive. An
increase in volatility could create opportunities for value-oriented
investment strategies, but it could be that we've entered a long stretch
characterized by less volatility.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT
AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY
TIME BASED ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide high current
income by investing mainly
in mortgage securities issued
by the Government National
Mortgage Association
(Ginnie Mae)
START DATE: November 8, 1985
SIZE: as of July 31, 1996,
more than $789 million
MANAGER: Kevin Grant,
since 1995; manager, Spartan
Ginnie Mae Fund, since 1995;
Fidelity Mortgage Securities
Fund, since 1993; Fidelity
Advisor Intermediate Bond
Fund, since 1995; Fidelity
Advisor World Limited Term
Bond Fund, since 1995;
joined Fidelity in 1993
(checkmark)
KEVIN GRANT ON PREPAYMENT
RISK AND DURATION:
"Currently, prepayment risk is
not an issue for mortgages
because mortgage-backed
securities are selling at a
discount. The average
interest rate paid by mortgage
holders at the end of the period
was about 7.5%. Historically,
homeowners wait until new
mortgages are offered at least
1% less than what they're
paying before they consider
refinancing. New mortgages
currently are being offered at
about 8%, so interest rates
would have to decline by
about 1.5% - a significant
move - before prepayment
became an issue again.
"At the same time, the
duration - or price sensitivity
to changes in interest rates-
of the market and the fund
has extended since the
beginning of the year. When
interest rates increase as they
have in 1996, the market
assumes slower and slower
prepayments. That means the
expected maturity - and
duration - of the mortgage
market have increased. Since it
is impossible to predict the
direction of interest rates, I
don't time the market. Instead, I
attempt to match the duration
of the mortgage market as
represented by the fund's
benchmark index. Following
my value-oriented investment
discipline, I choose those
securities that I find to be
cheap relative to other
mortgages. By doing so, the
fund benefits from relative
price appreciation when the
market starts to favor the
bonds I've chosen for the
fund."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1996
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
5 - 5.99% 0.1 0.5
6 - 6.99% 27.1 21.2
7 - 7.99% 29.0 29.5
8 - 8.99% 24.7 26.1
9 - 9.99% 11.4 11.0
10 - 10.99% 3.2 3.2
11% and over 2.3 1.8
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1996
6 MONTHS AGO
Years 7.2 5.1
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1996
6 MONTHS AGO
Years 4.4 2.6
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. EFFECTIVE
JUNE, 1996, THE MODEL USED TO CALCULATE DURATIONS MAY HAVE BEEN SLIGHTLY
MODIFIED IN ORDER TO FURTHER REFINE THIS INFORMATION. THESE CHANGES IN
METHODOLOGY MAY PRODUCE ADJUSTMENTS IN HISTORICAL DURATION FIGURES.
ASSET ALLOCATION
AS OF JULY 31, 1996 AS OF JANUARY 31, 1996
Row: 1, Col: 1, Value: 3.2
Row: 1, Col: 2, Value: 1.9
Row: 1, Col: 3, Value: 45.0
Row: 1, Col: 4, Value: 48.9
Row: 1, Col: 1, Value: 6.7
Row: 1, Col: 2, Value: 2.0
Row: 1, Col: 3, Value: 46.3
Row: 1, Col: 4, Value: 45.0
Mortgage-backed
securities * 96.9%
Collateralized
mortgage
obligations
(CMOs) 0.9%
Short-term
investments 2.2%
GNMA SECURITIES 81.9%
Mortgage-backed
securities ** 92.3%
Collateralized
mortgage
obligations
(CMOs) 1.0%
Short-term
investments 6.7%
GNMA SECURITIES 75.3%
*
**
INVESTMENTS JULY 31, 1996
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 96.9%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 6.6%
5 1/2%, 7/1/02 $ 700,002 $ 658,652
6 1/2%, 7/1/23 to 7/1/24 18,535,420 17,435,703
8 1/2%, 2/1/04 to 5/1/17 1,410,111 1,449,397
9%, 6/1/10 to 7/1/18 5,107,280 5,324,739
10%, 10/1/04 to 12/1/19 9,158,263 9,877,533
10 1/4%, 2/1/09 to 11/1/16 4,688,812 5,041,750
10 1/2%, 5/1/10 to 12/1/20 7,493,214 8,209,026
11 1/4%, 2/1/10 to 5/1/11 589,075 648,024
11 1/2%, 2/1/12 to 11/1/17 1,282,448 1,419,778
11 3/4%, 11/1/11 196,228 218,816
12%, 6/1/15 to 11/1/15 517,031 591,514
12 1/2%, 11/1/12 to 9/1/13 1,018,991 1,175,692
52,050,624
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 8.4%
6 1/2%, 1/1/24 to 2/1/26 65,661,222 61,287,102
8 1/2%, 6/1/08 to 4/1/16 1,549,206 1,600,073
9%, 12/1/97 to 10/1/11 364,628 380,367
10 1/4%, 12/1/15 to 10/1/18 926,891 1,005,899
11 1/2%, 1/1/01 to 10/1/15 747,565 834,123
12 1/2%, 10/1/15 368,810 425,858
14%, 11/1/12 23,860 28,175
65,561,597
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 81.9%
6%, 7/15/08 to 4/15/26 89,235,552 84,877,815
6 1/2%, 9/15/23 to 4/15/26 53,066,264 49,307,880
7%, 10/15/07 to 5/15/26 97,169,659 93,791,712
7 1/2%, 5/15/17 to 4/15/26 128,727,912 126,963,469
8%, 7/15/01 to 6/15/26 107,733,636 109,034,539
8 1/2%, 2/15/05 to 5/15/26 78,807,831 81,529,758
9%, 12/15/04 to 6/15/26 37,043,788 38,823,439
9 1/2%, 5/15/01 to 11/15/22 41,642,149 44,765,409
10%, 10/15/00 to 12/15/18 405,709 434,457
10 1/2%, 2/15/98 to 1/15/16 827,430 881,886
11%, 6/15/10 to 12/15/15 1,209,156 1,344,686
11 1/4%, 7/15/13 to 1/15/16 664,716 742,997
11 1/2%, 3/15/10 to 4/15/19 4,919,788 5,538,198
11 3/4%, 1/15/16 55,434 63,784
12%, 5/15/99 to 9/15/15 2,093,158 2,380,546
12 1/4%, 3/15/14 80,260 93,154
12 1/2%, 5/15/10 to 6/15/10 70,491 81,916
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
13%, 1/15/11 to 5/15/15 $ 1,155,813 $ 1,359,679
13 1/2%, 5/15/10 to 1/15/15 474,053 561,414
642,576,738
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $751,447,043) 760,188,959
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.9%
U.S. GOVERNMENT AGENCY - 0.9%
U.S. Dept. Veterans Affairs Vendee Mortgage
Trust sequential pay Series 1992-1 Class 2-B,
7 3/4%, 9/15/10 (Cost $6,959,517) 6,805,334 6,869,100
REPURCHASE AGREEMENTS - 2.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.65%, dated
7/31/96 due 8/1/96 $ 17,220,702 17,218,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $775,624,560) $ 784,276,059
INCOME TAX INFORMATION
At July 31, 1996, the aggregate cost of investment securities for income
tax purposes was $789,668,097. Net unrealized depre- ciation aggregated
$5,392,038, of which $7,672,407 related to appreciated invest- ment
securities and $13,064,445 related to depreciated investment securities.
At July 31, 1996, the fund had a capital loss carryforward of approximately
$28,357,000 of which $23,602,000 and $4,755,000 will expire on July 31,
2003 and 2004, respectively.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1996
ASSETS
Investment in securities, at value (including repurchase $ 784,276,059
agreements of $17,218,000) (cost $775,624,560) -
See accompanying schedule
Cash 5,498,577
Receivable for investments sold 6,264,399
Interest receivable 4,970,430
TOTAL ASSETS 801,009,465
LIABILITIES
Payable for investments purchased $ 9,917,469
Distributions payable 604,023
Accrued management fee 289,368
Other payables and accrued expenses 264,113
TOTAL LIABILITIES 11,074,973
NET ASSETS $ 789,934,492
Net Assets consist of:
Paid in capital $ 823,901,904
Distributions in excess of net investment income (213,819)
Accumulated undistributed net realized gain (loss) (42,405,092)
on investments
Net unrealized appreciation (depreciation) on 8,651,499
investments
NET ASSETS, for 74,990,542 shares outstanding $ 789,934,492
NET ASSET VALUE, offering price and redemption price per $10.53
share ($789,934,492 (divided by) 74,990,542 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1996
INVESTMENT INCOME $ 58,860,057
Interest
EXPENSES
Management fee $ 3,534,359
Transfer agent fees 1,932,168
Accounting fees and expenses 259,518
Non-interested trustees' compensation 3,316
Custodian fees and expenses 178,928
Registration fees 38,257
Audit 48,555
Legal 7,291
Miscellaneous 9,549
Total expenses before reductions 6,011,941
Expense reductions (57,697) 5,954,244
NET INVESTMENT INCOME 52,905,813
REALIZED AND UNREALIZED GAIN (LOSS) 5,534,152
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on (15,528,733)
investment securities
NET GAIN (LOSS) (9,994,581)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 42,911,232
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1996 1995
INCREASE (DECREASE) IN NET ASSETS
Operations $ 52,905,813 $ 53,393,526
Net investment income
Net realized gain (loss) 5,534,152 (15,722,380)
Change in net unrealized appreciation (depreciation) (15,528,733) 33,458,218
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 42,911,232 71,129,364
FROM OPERATIONS
Distributions to shareholders (51,089,342) (51,095,198)
From net investment income
In excess of net realized gain - (1,475,920)
TOTAL DISTRIBUTIONS (51,089,342) (52,571,118)
Share transactions 204,264,563 128,526,825
Net proceeds from sales of shares
Reinvestment of distributions 43,439,959 44,565,784
Cost of shares redeemed (217,015,199) (192,992,227)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 30,689,323 (19,899,618)
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS 22,511,213 (1,341,372)
NET ASSETS
Beginning of period 767,423,279 768,764,651
End of period (including distributions in excess $ 789,934,492 $ 767,423,279
of net investment income of $213,819 and
$5,254, respectively)
OTHER INFORMATION
Shares
Sold 19,100,352 12,436,702
Issued in reinvestment of distributions 4,060,954 4,326,883
Redeemed (20,311,579) (18,849,263)
Net increase (decrease) 2,849,727 (2,085,678)
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1996 1995 1994 A 1993 1992
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.640 $ 10.360 $ 11.260 $ 11.060 $ 10.650
of period
Income from Investment .688 .721 .582 .800 .833
Operations
Net investment income
Net realized and (.107) .292 (.650) .083 .373
unrealized gain (loss)
Total from investment .581 1.013 (.068) .883 1.206
operations
Less Distributions
From net investment (.691) (.713) (.582) (.683) (.796)
income
From net realized gain - - (.190) - -
In excess of net - (.020) (.060) - -
realized gain
Total distributions (.691) (.733) (.832) (.683) (.796)
Net asset value, $ 10.530 $ 10.640 $ 10.360 $ 11.260 $ 11.060
end of period
TOTAL RETURN C 5.55% 10.26% (.63)% 8.23% 11.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 789,934 $ 767,423 $ 768,765 $ 975,565 $ 914,187
(000 omitted)
Ratio of expenses to .76% .75% .82% .80% .80%
average net assets
Ratio of expenses to .75% B .75% .82% .80% .80%
average net assets after
expense reductions
Ratio of net investment 6.69% 7.24% 7.03% 7.26% 7.73%
income to average net
assets
Portfolio turnover rate 107% 210% 303% 259% 114%
</TABLE>
A EFFECTIVE AUGUST 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
B FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Ginnie Mae Fund (the fund) (formerly Fidelity Ginnie Mae
Portfolio) is a fund of Fidelity Income Fund (the trust) and is authorized
to issue an unlimited number of shares. The trust is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an open-end
management investment company organized as a Massachusetts business trust.
The financial statements have been prepared in conformity with generally
accepted accounting principles which permit management to make certain
estimates and assumptions at the date of the financial statements. The
following summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. Losses
may arise due to changes in the market value of the underlying securities
or if the counterparty does not perform under the contract.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $850,704,453 and $834,623,422, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .1100% to .3700% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .45% of
average net assets.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR,
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
may use their resources to pay administrative and promotional expenses
related to the sale of the fund's shares. Subject to the approval of the
Board of Trustees, the Plan also authorizes payments to third parties that
assist in the sale of the fund's shares or render shareholder support
services. No payments were made to third parties under the Plan during the
period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the fund's transfer, dividend disbursing and shareholder servicing agent.
FSC receives account fees and asset-based fees that vary according to
account size and type of account. FSC pays for typesetting, printing and
mailing of all shareholder reports, except proxy statements. For the
period, the transfer agent fees were equivalent to an annual rate of .24%
of average net assets.
ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is
based on the level of average net assets for the month plus out-of-pocket
expenses.
5. EXPENSE REDUCTIONS.
The fund has entered into arrangements with its custodian and transfer
agent whereby interest earned on uninvested cash balances was used to
offset a portion of the fund's expenses. During the period, the fund's
custodian and transfer agent fees were reduced by $22,618 and $35,079,
respectively, under these arrangements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Fidelity
Ginnie Mae Fund (formerly Fidelity Ginnie Mae Portfolio):
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Ginnie Mae Fund (formerly Fidelity Ginnie Mae Portfolio), a fund
of Fidelity Income Fund at July 31, 1996, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for the periods indicated in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fidelity Ginnie Mae Fund's (formerly Fidelity Ginnie Mae Portfolio)
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at July 31, 1996 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 6, 1996
DISTRIBUTIONS
A total of .01% of the dividends distributed during the fiscal year was
derived from interest on U.S. Government securities which is generally
exempt from state income tax.
The fund will notify shareholders in January 1997 of the applicable
percentage for use in preparing 1996 income tax returns.
TO CALL FIDELITY
FOR FUND INFORMATION AND QUOTES
The Fidelity Telephone Connection offers you special automated telephone
services for quotes and balances. The services are easy to use,
confidential and quick. All you need is a Touch Tone telephone.
YOUR PERSONAL IDENTIFICATION NUMBER
(PIN)
The first time you call one of our automated telephone services, we'll ask
you
to set up your Personal Identification
Number (PIN). The PIN assures that
only you have automated telephone
access to your account information.
Please have your Customer Number
(T-account #) handy when you call -
you'll need it to establish your PIN. If
you would ever like to change your PIN, just choose the "Change your
Personal
Identification Number" option when
you call. If you forget your PIN, please
call a Fidelity representative at 1-800-
544-6666 for assistance.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios(registered trademark).
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
TO WRITE FIDELITY
If more than one address is listed, please locate the address that is
closest to you. We'll give your correspondence immediate attention and send
you written confirmation upon completion of your request.
(LETTER_GRAPHIC)MAKING CHANGES
TO YOUR ACCOUNT
(such as changing name, address, bank, etc.)
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0002
(LETTER_GRAPHIC)FOR NON-RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
OVERNIGHT EXPRESS
Fidelity Investments
100 Crosby Parkway - KP2C
Covington, KY 41015-4399
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6I
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 193
Boston, MA 02210-0193
(LETTER_GRAPHIC)FOR RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6R
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
U.K. Inc., London, England
Fidelity Management & Research
Far East Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Kevin Grant, Vice President
Fred L. Henning Jr., Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Short-Intermediate
Government
Spartan Short-Term Bond
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
SPARTAN(REGISTERED TRADEMARK)
(REGISTERED TRADEMARK)
LIMITED MATURITY GOVERNMENT
FUND
ANNUAL REPORT
JULY 31, 1996
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 18 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 22 Notes to the financial statements.
REPORT OF INDEPENDENT 25 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 26
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE
PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
To reduce expenses and demonstrate respect for our environment, we have
initiated a project through which we will begin eliminating duplicate
copies of most financial reports and prospectuses to most households, even
if they have more than one account in the fund. If additional copies of
financial reports, prospectuses or historical account information are
needed, please call 1-800-544-6666.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although stocks have managed to post solid returns through the first seven
months of 1996, signs of strength in the economy have led to inflation
fears, causing some uncertainty in both the stock and bond markets so far
this year. In 1995, both stock and bond markets posted strong results,
while the year before, stocks posted below-average returns and bonds had
one of the worst years in history.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving
for a college education, enables you to weather these ups and downs in a
long-term fund, which has higher potential returns. An intermediate-length
fund could be appropriate if your investment horizon is two to four years,
and a short-term bond fund could be the right choice if you need your money
in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value), and the effect of the $5 account
closeout fee on an average sized account. If Fidelity had not reimbursed
certain fund expenses, the fund's total returns would have been lower. You
can also look at the fund's income to measure performance.
CUMULATIVE TOTAL RETURNS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Spartan Limited Maturity Government 5.48% 34.75% 77.64%
Salomon Brothers Treasury/Agency 1-10 Year Index 5.16% 41.57% 89.97%
Short-Intermediate U.S. 4.68% 36.16% n/a
Government Funds Average
</TABLE>
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on May 2, 1988. For example, if you invested $1,000 in a fund that
had a 5% return over the past year, the value of your investment would be
$1,050. You can compare the fund's returns to the performance of the
Salomon Brothers Treasury/Agency 1-10 Year Index - a market capitalization
weighted index of U.S. Treasury and U.S. government agency securities with
fixed-rate coupons and maturities between one and 10 years. To measure how
the fund's performance stacked up against its peers, you can compare it to
the short-intermediate U.S. government funds average, which reflects the
performance of 88 mutual funds with similar objectives tracked by Lipper
Analytical Services, Inc. over the past 12 months. Both benchmarks reflect
reinvestment of dividends and capital gains, if any, but do not reflect any
sales charges, brokerage commissions, or other costs of investing.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1996 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Spartan Limited Maturity Government 5.48% 6.15% 7.21%
Salomon Brothers Treasury/Agency 1-10 Year 5.16% 7.20% 8.08%
Index
Short-Intermediate U.S. 4.68% 6.36% n/a
Government Funds Average
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960731 19960815 085140 S00000000000001
Spartan Ltd Mat Govt. SB Treas/Agency 1-10year
00452 SB026
1988/05/02 10000.00 10000.00
1988/05/31 9990.13 9965.51
1988/06/30 10079.97 10118.81
1988/07/31 10083.32 10092.37
1988/08/31 10105.76 10103.48
1988/09/30 10214.30 10273.66
1988/10/31 10313.76 10415.85
1988/11/30 10309.73 10330.77
1988/12/31 10348.70 10337.28
1989/01/31 10431.71 10445.36
1989/02/28 10435.74 10404.35
1989/03/31 10489.27 10453.80
1989/04/30 10627.69 10637.38
1989/05/31 10777.41 10860.83
1989/06/30 10969.63 11141.39
1989/07/31 11106.16 11365.99
1989/08/31 11039.00 11210.00
1989/09/30 11095.21 11267.49
1989/10/31 11271.08 11501.67
1989/11/30 11362.10 11614.73
1989/12/31 11420.05 11646.16
1990/01/31 11405.95 11577.17
1990/02/28 11469.04 11611.28
1990/03/31 11495.98 11633.51
1990/04/30 11512.96 11599.79
1990/05/31 11685.71 11840.48
1990/06/30 11797.40 11997.62
1990/07/31 11937.68 12170.86
1990/08/31 11986.24 12120.27
1990/09/30 12082.11 12238.32
1990/10/31 12207.30 12406.96
1990/11/30 12350.35 12589.02
1990/12/31 12463.07 12767.24
1991/01/31 12602.08 12896.40
1991/02/28 12700.34 12958.49
1991/03/31 12805.04 13037.45
1991/04/30 12915.28 13179.26
1991/05/31 12982.04 13249.40
1991/06/30 13033.49 13267.03
1991/07/31 13182.71 13418.80
1991/08/31 13346.60 13662.18
1991/09/30 13482.12 13901.73
1991/10/31 13650.65 14048.91
1991/11/30 13700.23 14217.93
1991/12/31 13947.54 14565.56
1992/01/31 13879.87 14425.66
1992/02/29 13962.10 14472.81
1992/03/31 13945.35 14413.02
1992/04/30 14048.93 14551.38
1992/05/31 14189.32 14756.43
1992/06/30 14298.97 14971.06
1992/07/31 14340.23 15252.77
1992/08/31 14512.80 15421.79
1992/09/30 14612.81 15632.59
1992/10/31 14552.83 15441.72
1992/11/30 14620.19 15375.03
1992/12/31 14751.52 15576.64
1993/01/31 14878.13 15876.74
1993/02/28 15041.48 16099.42
1993/03/31 15120.74 16156.91
1993/04/30 15218.58 16293.36
1993/05/31 15268.81 16242.00
1993/06/30 15428.96 16480.01
1993/07/31 15481.41 16512.97
1993/08/31 15597.26 16758.27
1993/09/30 15650.84 16832.24
1993/10/31 15686.61 16858.30
1993/11/30 15582.61 16777.43
1993/12/31 15698.38 16851.40
1994/01/31 15861.79 17018.13
1994/02/28 15712.86 16791.61
1994/03/31 15511.05 16540.19
1994/04/30 15435.64 16436.32
1994/05/31 15419.66 16453.18
1994/06/30 15414.24 16459.70
1994/07/31 15570.05 16665.52
1994/08/31 15615.97 16714.19
1994/09/30 15582.15 16578.13
1994/10/31 15600.45 16581.58
1994/11/30 15564.56 16501.48
1994/12/31 15549.34 16561.65
1995/01/31 15784.29 16841.82
1995/02/28 16013.53 17156.49
1995/03/31 16089.74 17250.01
1995/04/30 16279.76 17445.86
1995/05/31 16701.40 17937.22
1995/06/30 16803.11 18052.20
1995/07/31 16839.90 18065.23
1995/08/31 16981.68 18208.96
1995/09/30 17105.89 18322.79
1995/10/31 17337.35 18526.31
1995/11/30 17533.23 18758.96
1995/12/31 17715.52 18940.25
1996/01/31 17866.14 19102.37
1996/02/29 17693.11 18913.04
1996/03/31 17594.61 18818.75
1996/04/30 17544.80 18748.61
1996/05/31 17534.84 18752.83
1996/06/30 17703.75 18940.63
1996/07/31 17764.83 18996.59
IMATRL PRASUN SHR__CHT 19960731 19960815 085144 R00000000000102
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Spartan Limited Maturity Government Fund on May 2, 1988. As the
chart shows, by July 31, 1996, the value of the investment would have grown
to $17,765 - a 77.65% increase on the initial investment. This assumes you
still own the fund on July 31, 1996, and therefore does not include the
effect of the $5 account closeout fee on an average sized account. For
comparison, look at how the Salomon Brothers Treasury/Agency 1-10 Year
Index did over the same period. With dividends reinvested, the same $10,000
investment would have grown to $18,997 - an 89.97% increase.
UNDERSTANDING
PERFORMANCE
How a fund did yesterday is
no guarantee of how it will do
tomorrow. Bond prices, for
example, generally move in
the opposite direction of
interest rates. In turn, the
share price, return, and yield
of a fund that invests in
bonds will vary. That means if
you sell your shares during a
market downturn, you might
lose money. But if you can ride
out the market's ups and
downs, you may have a gain.
(checkmark)
TOTAL RETURN COMPONENTS
YEARS ENDED JULY 31,
1996 1995 1994 1993 1992
Dividend return 6.61% 6.60% 5.22% 6.18% 6.98%
Capital appreciation return -1.13 1.55% -4.66% 1.77% 1.79%
%
Total return 5.48% 8.15% 0.56% 7.95% 8.77%
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation return reflects both the amount paid by
the fund to shareholders as capital gain distributions and changes in the
fund's share price. Both returns assume the dividends or gains are
reinvested. Capital appreciation and total returns include the effect of
the $5 account closeout fee on an average sized account.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1996 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 5.34(cents) 32.09(cents) 63.76(cents)
Annualized dividend rate 6.53% 6.61% 6.50%
30-day annualized yield 6.36% - -
DIVIDENDS per share show the income paid by the fund for a set period. If
you annualize this number, based on an average share price of $9.63 over
the past month, $9.73 over the past six months and $9.81 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all funds based on the
yields of the bonds in the fund, averaged over the past 30 days. This
figure shows you the yield characteristics of the fund's investments at the
end of the period. It also helps you compare funds from different companies
on an equal basis.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Bond markets stabilized in June
and July after
stronger-than-expected economic
statistics rattled them for much of
1996. This downdraft was a
contrast to 1995, when the bond
market posted steadily rising
returns in anticipation of
interest-rate decreases. To
illustrate, the Lehman Brothers
Aggregate Bond Index - a broad
measure of U.S. taxable bonds -
returned 18.5% in 1995 while
posting a -0.94% return
year-to-date in 1996. For the 12
months ended July 31, 1996, the
Lehman Brothers Aggregate Bond
Index returned 5.54%. Even
though in January the Federal
Reserve Board lowered its target
for the federal funds rate - the rate
banks charge each other on
overnight loans - from 5.50% to
5.25%, the move largely was
taken into account by the bond
market. Surprisingly robust
employment reports in March
reversed market sentiment,
causing the yield on the 30-year
Treasury bond to rise to over 7%
- - a level not seen in over a year.
By June, however, soothing
comments from Federal Reserve
Board Chairman Alan Greenspan
helped ease the market's fears of
Fed interest-rate increases, and
the 30-year yield dropped back
below 7%. Although
investment-grade
mortgage-backed securities
participated in the overall
downturn in bond prices, they
have performed well in 1996
relative to other investment-grade
securities, as prepayment fears
eased in the face of a rising
mortgage rate environment. To
illustrate, the Salomon Brothers
Mortgage Index returned 5.99%
during the period.
An interview with Curt Hollingsworth, Portfolio Manager of Spartan Limited
Maturity Government Fund
Q. CURT, HOW DID THE FUND PERFORM?
A. Overall, I'm pleased with the fund's performance. For the 12-month
period ended July 31, 1996, the fund posted a total return of 5.48%. This
compares favorably to both the short-intermediate U.S. government funds
average, monitored by Lipper Analytical Services, which had a total return
of 4.68% and the Salomon Brothers Treasury/Agency 1-10 Year Index, which
returned 5.16% over the same timeframe.
Q. WHAT FACTORS HELPED THE FUND OUTPERFORM BOTH ITS INDEX AND PEER GROUP
DURING THE PERIOD?
A. I would list three strategy-related factors in order of their impact on
performance: management of the fund's sector weightings, individual bond
selection and the implementation of "yield curve" strategies. The fund's
index is composed of 90% U.S. Treasuries and 10% federal agencies. Relative
to the index, I chose to overweight the fund in agencies and
mortgage-related securities during the period, and this proved beneficial.
Security selection also played a big part as I focused on buying the most
attractive individual bonds in the Treasury, agency, and mortgage sectors.
Finally, yield curve strategies involved comparing the yields of bonds with
similar quality, but different maturities.
Q. WHAT MADE AGENCIES ATTRACTIVE TO OWN?
A. The agency bonds we own today are typically non-callable - that is, the
issuer does not have the option of redeeming the bond prior to maturity.
Thus, the fund won't be faced with having to turn around and reinvest this
cash in what may be an unfavorable interest-rate environment. Agencies are
also directly or indirectly backed by the U.S. government. Because they are
of the highest credit quality, agencies allow me to try to outperform my
peers without taking on added credit risk. The strong agency performance we
witnessed during the period can be attributed to the fact that agencies
offered higher yields than comparable Treasuries.
Q. AND MORTGAGE-BACKED ISSUES?
A. The positive performance in this area is not as easy to decipher.
Despite the volatile interest-rate environment, a couple of factors jelled
to turn the fund's mortgage holdings into positive performers. One was a
barbelling strategy with regard to coupon rates. My strategy was to
simultaneously own mortgage bonds with very low coupons and very high
coupons, both of which are less likely to be subject to prepayment
uncertainty. By owning a broad range of coupon rates, I gave myself a
better chance to control the fund's exposure to prepayment risk. Secondly,
I'd say individual security selection helped as I sought to buy mortgage
securities that I felt had good prepayment characteristics.
Q. WHICH INDIVIDUAL SECURITIES OR SECTORS HAD A POSITIVE IMPACT ON THE
FUND'S PERFORMANCE? WAS THERE ANYTHING THAT HELD THE FUND BACK?
A. Agency issues known as "amortizing notes" turned in a solid performance
and added to the fund's return. These notes make regular principal
payments, are non-callable and are indirectly backed by the full faith and
credit of the U.S. government. These securities not only served to reduce
the portfolio's call risk relative to the index, but they also offered more
attractive yields - typically 30 to 40 basis points higher - than
comparable Treasuries. The fund also realized good performance from its
holdings in Agency for International Development/Israel bonds - loans made
to Israel by the U.S. government. On the downside, it's difficult to
pinpoint any individual holdings as being detriments. There were some
tactical disappointments, however, as I didn't add as much value to
performance through yield curve strategies as I would have liked, and I
didn't take advantage of some opportunities in the discount mortgage
sector.
Q. WHAT'S YOUR OUTLOOK?
A. I don't think it will be quite as rosy as this past period has been.
While the fund was able to take advantage of opportunities in the agency
sector over the past year, I think the supply of attractive issues will
continue to dwindle. With the interest-rate volatility we've seen over the
period, it wouldn't surprise me if a more stable rate environment appeared
on the horizon.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: high current income
with preservation of capital
by investing mainly in U.S.
government and agency
securities while maintaining
an average maturity of 10
years or less
START DATE: May 2, 1988
SIZE: as of July 31, 1996,
more than $739 million
MANAGER: Curt
Hollingsworth, since 1988;
manager, Spartan
Short-Intermediate
Government Fund, since
1992; Fidelity
Short-Intermediate
Government Fund, since
1991; joined Fidelity in 1983
(checkmark)
CURT HOLLINGSWORTH EXPLAINS
THE CONCEPT OF TOTAL RETURN:
"We commonly refer to a
fund's total return, as in `the
fund had a total return of
5.48% for the period.' I think
it's important to clear up any
misconceptions investors
may have when they hear this
term. Total return is simply the
"total" amount of return to the
fund's shareholders, and
reflects a sum of income and
changes in share price. Over
the long term, interest income
is the primary source of return
for a bond fund. Over the
shorter term, though,
changes in a bond fund's
share price can assume a
more significant role.
Fortunately, total return is
easy to explain using a
"dollars in, dollars out"
example. If someone invested
$100 in this fund a year ago
and all dividends and capital
gains were reinvested, the
investment would be worth
$105.48 today. That is what is
meant by the fund having a
one-year total return of
5.48%."
The fund will limit its
investments to U.S.
government securities and
U.S. government-related
securities, such as futures,
repurchase agreements for
U.S. government securities
and custodial receipts.
Previously, the fund could
invest up to 35% in non-U.S.
government securities;
however, only U.S.
government and U.S.
government-related securities
have been included in the
portfolio for some time now.
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1996
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
under 5% 7.4 14.1
5 - 5.99% 6.5 4.2
6 - 6.99% 17.4 9.5
7 - 7.99% 10.0 9.0
8 - 8.99% 24.4 13.2
9 - 9.99% 13.3 14.5
10 - 10.99% 5.5 5.6
11 - 11.99% 4.7 17.1
12 - 12.99% 5.5 8.3
13% and over 2.0 2.0
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1996
6 MONTHS AGO
Years 4.9 5.3
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1996
6 MONTHS AGO
Years 3.1 3.1
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE. EFFECTIVE
JUNE,1996, THE MODEL USED TO CALCULATE DURATIONS MAY HAVE BEEN SLIGHTLY
MODIFIED IN ORDER TO FURTHER REFINE THIS INFORMATION. THESE CHANGES IN
METHODOLOGY MAY PRODUCE ADJUSTMENTS IN HISTORICAL DURATION FIGURES.
ASSET ALLOCATION
AS OF JULY 31, 1996 AS OF JANUARY 31, 1996
Mortgage-backed
securities 29.5%
U.S. government
and government
agency obligations 66.8%
Collateralized
mortgage obligations
(CMOs) 0.4%
Short-term
investments 3.3%
Mortgage-backed
securities 25.4%
U.S. government
and government
agency obligations 71.0%
Collateralized
mortgage obligations
(CMOs) 1.1%
Short-term
investments 2.5%
Row: 1, Col: 1, Value: 3.3
Row: 1, Col: 2, Value: 1.4
Row: 1, Col: 3, Value: 66.8
Row: 1, Col: 4, Value: 28.5
Row: 1, Col: 1, Value: 2.5
Row: 1, Col: 2, Value: 1.5
Row: 1, Col: 3, Value: 71.0
Row: 1, Col: 4, Value: 25.0
INVESTMENTS JULY 31, 1996
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 66.8%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 19.0%
8 3/4%, 10/15/97 $ 33,350,000 $ 34,392,188
6 1/8%, 3/31/98 9,330,000 9,327,108
9 1/4%, 8/15/98 20,790,000 21,965,882
8 7/8%, 11/15/98 6,800,000 7,167,608
8 7/8%, 2/15/99 22,883,000 24,216,621
9 1/8%, 5/15/99 17,602,000 18,812,138
7 7/8%, 11/15/99 2,860,000 2,977,975
7 3/4%, 12/31/99 3,525,000 3,662,687
6 7/8%, 3/31/00 10,316,000 10,441,752
12 3/4%, 11/15/10 2,000,000 2,794,060
13 7/8%, 5/15/11 1,880,000 2,801,783
TOTAL U.S. TREASURY OBLIGATIONS 138,559,802
U.S. GOVERNMENT AGENCY OBLIGATIONS - 47.8%
Farm Credit System Financial Assistance Corporation:
9 3/8%, 7/21/03 4,500,000 5,103,990
9.45%, 11/21/03 callable 1,000,000 1,055,780
Federal Agricultural Mortgage Corporation:
6.92%, 2/10/01 1,400,000 1,409,184
7.04%, 8/10/05 1,000,000 991,090
Federal Farm Credit Bank:
6.09%, 4/3/00 1,650,000 1,620,020
6.56%, 8/5/02 1,590,000 1,567,136
6.32%, 9/9/02 2,160,000 2,103,920
6.20%, 9/23/02 2,180,000 2,112,224
6.40%, 10/3/02 1,690,000 1,649,863
6.45%, 3/20/03 6,300,000 6,143,508
6.45%, 3/27/03 1,350,000 1,316,466
6.44%, 4/9/03 3,440,000 3,352,934
6.87%, 6/6/03 620,000 618,258
Federal Home Loan Bank:
8.85%, 6/21/00 2,090,000 2,243,155
6.17%, 10/17/01 2,000,000 1,944,060
6.20%, 7/17/02 2,240,000 2,168,947
6.37%, 6/30/03 1,060,000 1,027,204
5.75%, 11/10/03 550,000 511,291
5.77%, 2/3/04 3,240,000 3,007,627
9.50%, 2/25/04 220,000 252,690
6.75%, 4/5/04 870,000 857,359
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Federal Home Loan Bank: - continued
7.36%, 7/1/04 $ 3,720,000 $ 3,800,203
7.87%, 10/20/04 1,280,000 1,344,794
8.09%, 12/28/04 3,220,000 3,434,323
7.59%, 3/10/05 1,940,000 2,010,015
6.45%, 6/08/05 6,000,000 5,772,180
6.34%, 6/13/05 3,500,000 3,338,685
Federal Home Loan Mortgage Corporation:
6.55%, 1/4/00 3,595,000 3,588,241
6.55%, 10/2/02 1,680,000 1,655,128
6.22%, 3/24/03 1,800,000 1,734,462
7.25%, 4/28/04 12,000,000 12,189,360
8%, 1/26/05 970,000 1,028,355
8.115%, 1/31/05 7,350,000 7,839,216
Federal National Mortgage Association:
8.90%, 6/12/00 4,690,000 5,043,954
7.65%, 3/10/05 1,840,000 1,915,035
6.33%, 8/11/00 2,960,000 2,919,652
7.49%, 3/02/05 5,480,000 5,634,974
7.35%, 3/28/05 2,290,000 2,335,800
6.82%, 8/23/05 5,875,000 5,770,366
Government Trust Certificates:
(assets of Trust guaranteed by U.S. Government
through Defense Security Assistance Agency):
Class 1-C 9 1/4%, 11/15/01 3,406,000 3,624,563
Class T-2 9 5/8%, 5/15/02 6,902,000 7,363,951
Class 2-E 9.40%, 5/15/02 7,810,000 8,343,111
(assets of Trust guaranteed by U.S. Government
through Export-Import Bank):
Series 1992-A 7.02%, 9/1/04 3,089,750 3,120,614
Series 1993-A 4.86%, 4/1/98 780,000 772,083
Series 1994-F 8.187%, 12/15/04 31,996,687 33,355,331
Series 1994-B 7 1/2%, 1/26/06 961,650 984,486
Series 1994-A 7.39%, 6/26/06 2,066,667 2,100,868
Guaranteed Export Trust Certificates:
(assets of Trust guaranteed by U.S. Government
through Export-Import Bank):
Series 1993-C 5.20%, 10/15/04 1,801,067 1,696,380
Series 1993-D 5.23%, 5/15/05 1,325,106 1,245,393
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Guaranteed Export Trust Certificates:
(assets of Trust guaranteed by U.S. Government
through Export-Import Bank) - continued
Series 1994-C 6.61%, 9/15/99 $ 427,110 $ 428,586
Series 1994-A 7.12%, 4/15/06 1,759,091 1,766,787
Series 1996-A 6.55%, 6/15/04 2,164,706 2,141,760
Israel Export Trust Certificates Series 1994-1
(assets of Trust guaranteed by U.S. Government
through Export-Import Bank) 6.88%, 1/26/03 1,270,454 1,272,162
Private Export Funding Corp. secured:
7.90%, 3/31/00 3,890,000 4,030,896
8.40%, 7/31/01 5,390,000 5,732,103
7.30%, 1/31/02 2,415,000 2,464,266
6.24%, 5/15/02 910,000 883,792
5.65%, 3/15/03 2,891,000 2,810,543
8 3/4%, 6/30/03 4,635,000 5,088,720
5.48%, 9/15/03 3,626,250 3,481,998
7.03%, 10/31/03 4,210,000 4,239,175
5.80%, 2/1/04 1,055,000 1,007,567
6.86%, 4/30/04 1,065,600 1,066,367
State of Israel (guaranteed by U.S. Government through
Agency for International Development):
7 3/4%, 4/1/98 1,379,566 1,404,260
4 7/8%, 9/15/98 55,030,000 53,410,467
7 1/8%, 8/15/99 3,247,000 3,292,500
7 3/4%, 11/15/99 7,584,000 7,830,328
8%, 11/15/01 15,680,000 16,482,189
6 1/4%, 8/15/02 7,852,000 7,627,700
6 1/8%, 3/15/03 2,437,000 2,335,182
5 5/8%, 9/15/03 11,550,000 10,710,662
6 5/8%, 2/15/04 1,460,000 1,419,193
7 5/8%, 8/15/04 1,320,000 1,362,934
5.89%, 8/15/05 9,430,000 8,704,173
8 1/2%, 4/1/06 11,490,000 12,361,976
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Student Loan Marketing Association 8.41%, 12/16/02 $ 2,000,000 $ 2,141,320
U.S. Housing & Urban Development 6.98%, 8/1/05 8,000,000 7,940,800
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 348,456,635
TOTAL U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS (Cost $488,565,020) 487,016,437
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 29.5%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 13.7%
6 1/2%, 5/1/08 3,612,733 3,511,107
7%, 6/1/01 to 8/1/01 2,788,929 2,795,384
7 1/2%, 10/1/96 to 1/1/98 1,017,197 1,025,473
8 1/2%, 5/1/10 to 1/1/22 7,213,687 7,441,201
9%, 10/1/10 to 11/1/16 2,151,100 2,242,389
9 1/2%, 4/1/18 to 8/1/21 11,791,146 12,599,753
10%, 7/1/09 to 2/1/23 19,689,496 21,283,615
10 1/2%, 9/1/09 to 12/1/20 13,009,636 14,294,061
10 3/4%, 7/1/13 188,602 207,207
11%, 8/1/00 to 9/1/20 1,412,315 1,565,525
11 1/4%, 2/1/10 to 10/1/14 1,481,526 1,640,651
11 1/2%, 10/1/15 to 8/1/19 797,665 893,812
11 3/4%, 1/1/10 to 10/1/15 351,895 392,675
12%, 1/1/00 to 11/1/19 3,447,218 3,911,784
12 1/4%, 7/1/10 to 8/1/15 1,666,127 1,897,517
12 1/2%, 10/1/09 to 6/1/19 17,171,321 19,802,008
12 3/4%, 2/1/10 to 8/1/11 260,679 298,881
13%, 9/1/10 to 5/1/17 2,504,348 2,931,821
13 1/4%, 8/1/13 to 12/1/14 252,094 291,000
13 1/2%, 8/1/11 to 10/1/14 506,797 600,023
13 3/4%, 10/1/14 33,455 38,349
14%, 11/1/12 to 4/1/16 150,621 179,181
14 1/2%, 10/1/10 to 9/1/12 115,643 137,614
14 3/4%, 3/1/10 44,057 52,427
16 1/4%, 7/1/11 10,923 13,064
100,046,522
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.6%
5 1/2%, 1/1/09 to 2/1/09 $ 12,624,423 $ 11,748,540
6%, 10/1/08 to 12/1/08 26,720,937 25,476,543
8%, 10/1/00 29,816 30,326
8 1/4%, 12/1/01 5,519,644 5,749,053
8 1/2%, 9/1/07 to 12/1/22 2,691,306 2,780,422
9%, 11/1/97 to 2/1/13 1,589,914 1,657,388
10%, 1/1/20 286,477 309,217
10 1/4%, 10/1/09 to 10/1/18 724,319 786,095
11%, 8/1/10 to 1/1/16 8,079,136 8,930,092
11 1/4%, 11/1/10 to 1/1/16 1,970,823 2,177,376
11 1/2%, 9/1/11 to 12/1/15 3,121,829 3,496,809
11 3/4%, 7/1/13 to 4/1/14 217,144 243,523
12 1/4%, 4/1/09 to 6/1/15 1,842,966 2,088,494
12 1/2%, 9/1/07 to 12/1/15 4,938,856 5,694,356
12 3/4%, 10/1/11 to 6/1/15 1,858,881 2,140,927
13%, 6/1/11 to 7/1/15 2,093,119 2,427,982
13 1/4%, 9/1/11 to 9/1/13 873,413 1,017,955
13 1/2%, 5/1/11 to 12/1/14 52,742 62,344
14%, 6/1/11 to 12/1/14 166,649 197,396
14 1/2%, 7/1/14 19,818 23,677
15%, 4/1/12 29,267 34,965
77,073,480
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.2%
8%, 9/15/06 to 11/15/07 1,354,993 1,390,034
8 1/2%, 4/15/16 to 4/15/17 130,298 135,028
9%, 11/15/4 to 5/15/17 2,372,612 2,508,411
9 1/2%, 6/15/09 to 1/15/17 10,276,566 11,053,614
10%, 12/15/09 to 10/15/20 2,602,809 2,835,002
10 1/2%, 8/15/15 to 4/15/16 256,586 282,204
11%, 8/15/98 to 1/15/19 1,453,121 1,604,359
11 1/2%, 3/15/10 to 1/15/21 11,347,390 12,781,521
12%, 11/15/12 to 6/15/15 1,287,907 1,479,397
12 1/4%, 1/15/14 52,492 60,925
12 1/2%, 6/15/14 67,480 78,192
13%, 1/15/11 to 5/15/15 1,625,303 1,911,267
13 1/4%, 9/15/13 to 10/15/14 308,480 363,427
13 1/2%, 5/15/10 to 12/15/14 840,632 997,445
13 3/4%, 8/15/14 to 9/15/14 72,465 85,736
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
14 %, 6/15/11 to 12/15/14 $ 155,136 $ 186,908
16%, 9/15/11 to 4/15/13 180,327 217,576
17%, 12/15/11 6,461 7,795
37,978,841
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-
BACKED SECURITIES (Cost $213,147,827) 215,098,843
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.4%
U.S. GOVERNMENT AGENCY - 0.4%
Federal Home Loan Mortgage Corporation sequential pay
Series 1353 Class A, 5 1/2%, 11/15/04 506,410 497,705
Federal National Mortgage Association planned amortization
class Series 1993-28 Class PD, 5 1/4%, 10/25/01 2,077,584 2,066,222
TOTAL U.S. GOVERNMENT AGENCY 2,563,927
PRIVATE SPONSOR - 0.0%
DLJ Acceptance Trust planned amortization class,
Series 1989 Class 1-F, 11%, 8/1/19 215,428 230,508
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $2,668,617) 2,794,435
REPURCHASE AGREEMENTS - 3.3%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.65%, dated
7/31/96 due 8/1/96 $ 24,022,770 24,019,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $728,400,464) $ 728,928,715
INCOME TAX INFORMATION
At July 31, 1996, the aggregate cost of investment securities for income
tax purposes was $728,466,234. Net unrealized appreciation aggregated
$462,481, of which $8,002,212 related to appreciated investment securities
and $7,539,731 related to depreciated investment securities.
At July 31, 1996, the fund had a capital loss carryforward of approximately
$56,361,000 of which $49,727,000 and $6,634,000 will expire on July 31,
2003 and 2004, respectively.
The fund intends to elect to defer to its fiscal year ending July 31, 1997
approximately $2,241,000 of losses recognized during the period November 1,
1995 to July 31,1996.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JULY 31, 1996
ASSETS
Investment in securities, at value (including repurchase $ 728,928,715
agreements of $24,019,000) (cost $728,400,464) -
See accompanying schedule
Cash 1,500
Receivable for investments sold 1,491,301
Interest receivable 11,735,640
TOTAL ASSETS 742,157,156
LIABILITIES
Payable for investments purchased $ 392,765
Payable for fund shares redeemed 966,067
Distributions payable 649,684
Accrued management fee 402,660
TOTAL LIABILITIES 2,411,176
NET ASSETS $ 739,745,980
Net Assets consist of:
Paid in capital $ 796,855,372
Undistributed net investment income 1,047,280
Accumulated undistributed net realized gain (loss) (58,684,923)
on investments
Net unrealized appreciation (depreciation) on 528,251
investments
NET ASSETS, for 76,685,926 shares outstanding $ 739,745,980
NET ASSET VALUE, offering price and redemption price $9.65
per share ($739,745,980 (divided by) 76,685,926 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED JULY 31, 1996
INVESTMENT INCOME $ 60,073,561
Interest
EXPENSES
Management fee $ 5,190,903
Non-interested trustees' compensation 3,391
Total expenses before reductions 5,194,294
Expense reductions (205,659) 4,988,635
NET INVESTMENT INCOME 55,084,926
REALIZED AND UNREALIZED GAIN (LOSS) 971,606
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on (13,098,063)
investment securities
NET GAIN (LOSS) (12,126,457)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 42,958,469
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1996 1995
INCREASE (DECREASE) IN NET ASSETS
Operations $ 55,084,926 $ 62,602,530
Net investment income
Net realized gain (loss) 971,606 (17,523,543)
Change in net unrealized appreciation (depreciation) (13,098,063) 19,639,558
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 42,958,469 64,718,545
FROM OPERATIONS
Distributions to shareholders from net investment income (51,913,908) (54,852,545)
Share transactions 141,362,428 113,876,634
Net proceeds from sales of shares
Reinvestment of distributions 42,680,423 45,254,545
Cost of shares redeemed (252,416,028) (370,039,092)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING (68,373,177) (210,907,913)
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS (77,328,616) (201,041,913)
NET ASSETS
Beginning of period 817,074,596 1,018,116,509
End of period (including under (over) distribution $ 739,745,980 $ 817,074,596
of net investment income of $1,047,280 and
$(2,232,101), respectively)
OTHER INFORMATION
Shares
Sold 14,329,830 11,937,664
Issued in reinvestment of distributions 4,348,999 4,736,018
Redeemed (25,709,360) (38,896,556)
Net increase (decrease) (7,030,531) (22,222,874)
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1996 1995 1994 C 1993 1992
SELECTED PER-SHARE DATA
Net asset value, beginning $ 9.760 $ 9.610 $ 10.310 $ 10.180 $ 10.060
of period
Income from Investment .678 .610 .470 .872 .836
Operations
Net investment income
Net realized and (.150) .143 (.410) (.087) .021
unrealized gain (loss)
Total from investment .528 .753 .060 .785 .857
operations
Less Distributions
From net investment (.638) (.603) (.540) (.605) (.677)
income
From net realized gain - - - (.050) (.060)
In excess of net realized - - (.220) - -
gain
Total distributions (.638) (.603) (.760) (.655) (.737)
Net asset value, end of $ 9.650 $ 9.760 $ 9.610 $ 10.310 $ 10.180
period
TOTAL RETURN A, B 5.49% 8.16% .57% 7.96% 8.78%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period $ 739,746 $ 817,075 $ 1,018,117 $ 1,529,181 $ 1,770,018
(000 omitted)
Ratio of expenses to average .63% D .65% .65% .65% .61%
D
net assets
Ratio of expenses to average .62% E .65% .65% .65% .61%
net assets after expense
reductions
Ratio of net investment 6.89% 7.18% 7.37% 8.05% 8.24%
income
to average net assets
Portfolio turnover rate 105% 210% 391% 324% 330%
</TABLE>
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
B TOTAL RETURNS DO NOT INCLUDE THE ACCOUNT CLOSEOUT FEE.
C EFFECTIVE AUGUST 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Spartan Limited Maturity Government Fund (the fund) is a fund of Fidelity
Income Fund (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent
that it distributes substantially all of its taxable income for its fiscal
year. The schedule of investments includes information regarding income
taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net interest income. Distributions from realized gains, if
any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities, market discount, capital loss
carryforwards and losses deferred due to wash sales and excise tax
regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. Losses
may arise due to changes in the market value of the underlying securities
or if the counterparty does not perform under the contract.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $818,565,268 and $905,982,093, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses,
except the compensation of the non-interested Trustees and certain
exceptions such as interest, taxes, brokerage commissions and extraordinary
expenses. FMR receives a fee that is computed daily at an annual rate of
.65% of the fund's average net assets.
FMR also bears the cost of providing shareholder services to the fund. To
offset the cost of providing these services, FMR or its affiliates collect
certain transaction fees from the fund's shareholders which amounted to
$19,049 for the period.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Corporation (FDC), an affiliate of FMR, may use their resources to pay
administrative and promotional expenses related to the sale of the fund's
shares. Subject to the approval of the Board of Trustees, the Plan also
authorizes payments to third parties that assist in the sale of the fund's
shares or render shareholder support services. No payments were made to
third parties under the Plan during the period.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse a portion of the fund's expenses. For
the period, the reimbursement reduced the expenses by $132,623.
In addition, FMR has entered into arrangements on behalf of the fund with
the fund's custodian and transfer agent whereby interest earned on
uninvested cash balances was used to offset a portion of the fund's
expenses. During the period, the fund's expenses were reduced by $73,036
under these arrangements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Spartan
Limited Maturity Government Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Spartan
Limited Maturity Government Fund (a fund of Fidelity Income Fund) at July
31, 1996, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Spartan Limited
Maturity Government Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at July 31, 1996, by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 6, 1996
DISTRIBUTIONS
A total of 34.76% of the dividends distributed during the fiscal year was
derived from interest on U.S. Government securities which is generally
exempt from state income tax.
The fund will notify shareholders in January 1997 of the applicable
percentage for use in preparing 1996 income tax returns.
TO CALL FIDELITY
FOR FUND INFORMATION AND QUOTES
The Fidelity Telephone Connection offers you special automated telephone
services for quotes and balances. The services are easy to use,
confidential and quick. All you need is a Touch Tone telephone.
YOUR PERSONAL IDENTIFICATION NUMBER
(PIN)
The first time you call one of our automated telephone services, we'll ask
you
to set up your Personal Identification
Number (PIN). The PIN assures that
only you have automated telephone
access to your account information.
Please have your Customer Number
(T-account #) handy when you call -
you'll need it to establish your PIN. If
you would ever like to change your PIN, just choose the "Change your
Personal
Identification Number" option when
you call. If you forget your PIN, please
call a Fidelity representative at 1-800-
544-6666 for assistance.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios(registered trademark).
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
TO VISIT FIDELITY
For directions and hours,
please call 1-800-544-9797.
ARIZONA
7373 N. Scottsdale Road
Scottsdale, AZ
CALIFORNIA
851 East Hamilton Avenue
Campbell, CA
527 North Brand Boulevard
Glendale, CA
19100 Von Karman Avenue
Irvine, CA
10100 Santa Monica Blvd.
Los Angeles, CA
811 Wilshire Boulevard
Los Angeles, CA
251 University Avenue
Palo Alto, CA
1760 Challenge Way
Sacramento, CA
7676 Hazard Center Drive
San Diego, CA
455 Market Street
San Francisco, CA
950 Northgate Drive
San Rafael, CA
1400 Civic Drive
Walnut Creek, CA
6300 Canoga Avenue
Woodland Hills, CA
COLORADO
1625 Broadway
Denver, CO
CONNECTICUT
265 Church Street
New Haven, CT
300 Atlantic Street
Stamford, CT
29 South Main Street
West Hartford, CT
DELAWARE
222 Delaware Avenue
Wilmington, DE
FLORIDA
4400 N. Federal Highway
Boca Raton, FL
90 Alhambra Plaza
Coral Gables, FL
4090 N. Ocean Boulevard
Ft. Lauderdale, FL
4001 Tamiami Trail, North
Naples, FL
1907 West State Road 434
Orlando, FL
2401 PGA Boulevard
Palm Beach Gardens, FL
8065 Beneva Road
Sarasota, FL
2000 66th Street, North
St. Petersburg, FL
GEORGIA
3525 Piedmont Road, N.E.
Atlanta, GA
1000 Abernathy Road
Atlanta, GA
HAWAII
700 Bishop Street
Honolulu, HI
ILLINOIS
215 East Erie Street
Chicago, IL
One North Franklin
Chicago, IL
540 Lake Cook Road
Deerfield, IL
1415 West 22nd Street
Oak Brook, IL
1700 East Golf Road
Schaumburg, IL
LOUISIANA
201 St. Charles Avenue
New Orleans, LA
MAINE
3 Canal Plaza
Portland, ME
MARYLAND
7401 Wisconsin Avenue
Bethesda, MD
1 West Pennsylvania Ave.
Towson, MD
MASSACHUSETTS
470 Boylston Street
Boston, MA
21 Congress Street
Boston, MA
25 State Street
Boston, MA
300 Granite Street
Braintree, MA
44 Mall Road
Burlington, MA
416 Belmont Street
Worcester, MA
MICHIGAN
280 North Woodward Ave.
Birmingham, MI
29155 Northwestern Hwy.
Southfield, MI
MINNESOTA
7600 France Avenue South
Edina, MN
MISSOURI
700 West 47th Street
Kansas City, MO
8885 Ladue Road
Ladue, MO
200 North Broadway
St. Louis, MO
NEW JERSEY
56 South Street
Morristown, NJ
501 Route 17, South
Paramus, NJ
505 Millburn Avenue
Short Hills, NJ
NEW YORK
1050 Franklin Avenue
Garden City, NY
999 Walt Whitman Road
Melville, L.I., NY
1271 Avenue of the
Americas
New York, NY
71 Broadway
New York, NY
350 Park Avenue
New York, NY
10 Bank Street
White Plains, NY
NORTH CAROLINA
4611 Sharon Road
Charlotte, NC
2200 West Main Street
Durham, NC
OHIO
600 Vine Street
Cincinnati, OH
28699 Chagrin Boulevard
Woodmere Village, OH
1903 East Ninth Street
Cleveland, OH
OREGON
121 S.W. Morrison Street
Portland, OR
PENNSYLVANIA
1735 Market Street
Philadelphia, PA
439 Fifth Avenue
Pittsburgh, PA
TENNESSEE
5100 Poplar Avenue
Memphis, TN
TEXAS
10000 Research Boulevard
Austin, TX
7001 Preston Road
Dallas, TX
1155 Dairy Ashford
Houston, TX
2701 Drexel Drive
Houston, TX
1010 Lamar Street
Houston, TX
400 East Las Colinas Blvd.
Irving, TX
14100 San Pedro
San Antonio, TX
UTAH
215 South State Street
Salt Lake City, UT
VERMONT
199 Main Street
Burlington, VT
VIRGINIA
8180 Greensboro Drive
McLean, VA
WASHINGTON
411 108th Avenue, N.E.
Bellevue, WA
511 Pine Street
Seattle, WA
WASHINGTON, DC
1775 K Street, N.W.
Washington, DC
WISCONSIN
595 North Barker Road
Brookfield, WI
TO WRITE FIDELITY
If more than one address is listed, please locate the address that is
closest to you. We'll give your correspondence immediate attention and send
you written confirmation upon completion of your request.
(LETTER_GRAPHIC)MAKING CHANGES
TO YOUR ACCOUNT
(such as changing name, address, bank, etc.)
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0002
(LETTER_GRAPHIC)FOR NON-RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
OVERNIGHT EXPRESS
Fidelity Investments
100 Crosby Parkway - KP2C
Covington, KY 41015-4399
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6I
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 193
Boston, MA 02210-0193
(LETTER_GRAPHIC)FOR RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6R
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISER
Fidelity Management & Research
(U.K.) Inc. London, England
Fidelity Management & Research
(Far East) Inc. Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Fred L. Henning, Jr., Vice President
Curt Hollingsworth, Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Short-Intermediate
Government
Spartan Short-Term Bond
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
