HOMESTEAD FUNDS INC, 485BPOS, 1996-05-01

HOMESTEAD FUNDS INC
485BPOS, 1996-05-01

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<PAGE> 1
Registration Nos. 33-35788
811-6136

As filed with the Securities and Exchange Commission on
May 1, 1996
--------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------

FORM N-1A

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / /

Pre-Effective Amendment No. _____ / /

Post-Effective Amendment No. 9 / x /
-----

and/or
REGISTRATION UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /

Amendment No. 10 / x /
-----

(Check appropriate box or boxes)

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

HOMESTEAD FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
4301 Wilson Boulevard, Arlington, VA 22203
(Address of Principal Executive Office)

Registrant's Telephone Number, including Area Code:
(703) 907-6026
--------------

William P. McKeithan, Esq.
Homestead Funds ,Inc.
4301 Wilson Boulevard, Arlington, VA 22203
(Name and Address of Agent for Service)

Copies to:

Michael Berenson, Esq.
Jorden Burt Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007

<PAGE> 2
Approximate Date of Proposed Public Offering.

It is proposed that this filing will become effective:

_____ immediately upon filing x on May 1, 1996
pursuant to paragraph (b) ----- pursuant to
paragraph (b)

_____ 60 days after filing _____ on ______ pursuant to
pursuant to paragraph (a)(1) paragraph (a)(1)

_____ 75 days after filing ____ on ______ pursuant to
pursuant to paragraph (a)(2) paragraph (a)(2) of
rule 485

If appropriate, check the following box:

_____ This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.

The Registrant has registered an indefinite number of its shares pursuant to
Rule 24f-2 under the Investment Company Act of 1940. The Registrant's Rule
24f-2 Notice for the fiscal year ended December 31, 1995 was filed on February
27, 1996.

<PAGE> 3
HOMESTEAD FUNDS, INC.

CROSS-REFERENCE SHEET

<TABLE>
<CAPTION>
Form N-1A Item No. Caption in Prospectus
- ------------------ ---------------------
<S> <C>
1. Cover Page Cover Page

2. Synopsis Cover Page; Introduction

3. Condensed Financial Information Financial Highlights

4. General Description of Registrant Introduction; Daily Income Fund;
Short-Term Bond Fund; Short-Term
Government Securities Fund; and Value
Fund; Other Investment Practices, Risk
Conditions, and Policies of the Funds

5. Management of the Fund How the Homestead Funds are
Managed

6. Capital Stock and Other Capital Stock
Securities

7. Purchase of Securities Being How to Purchase Shares;
Offered Shareholder Service; How Each
Fund's Net Asset Value is
Determined

8. Redemption or Repurchase Shareholder Services; How to
Redeem Shares

9. Pending Legal Proceedings Not applicable

<CAPTION>
Caption in Statement of
Form N-1A Item No. Additional Information
- ------------------ ----------------------
<S> <C>
10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History General Information and History

13. Investment Objectives and Investment Restrictions; Descrip-
Policies tion of Certain Investments

14. Management of the Fund Management of the Homestead Funds

15. Control Persons and Principal Principal Holders of Securities
Holders of Securities

16. Investment Advisory and Other Investment Management and Other
Services Services
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Caption in Statement of
Form N-1A Item No. Additional Information
- ------------------ ----------------------
<S> <C>
17. Brokerage Allocation and Other Brokerage Allocation and Other
Practices Practices

18. Capital Stock and Other Capital Stock and Corporate
Securities Matters

19. Purchase, Redemption and Pricing Purchase and Redemption of Sec-
of Securities Being Offered urities Being Offered; Determin-
ation of Net Asset Value

20. Tax Status Tax Status

21. Underwriters Distribution of Shares

22. Calculation of Performance Data Performance Information About the
Funds

23. Financial Statements Independent Auditors
</TABLE>
<PAGE> 5

------------------------------------
ABOUT THIS PROSPECTUS

This Prospectus sets forth concisely
the information about each Fund that
you should know before investing. It
should be retained for future
reference. A Statement of Additional
Information, dated May 1, 1996,
about each Fund has been filed with
the Securities and Exchange
Commission and is incorporated
herein by reference. You may obtain
a copy of the Statement of
Additional Information at no charge
by calling Homestead Funds, Inc. at
1-800-258-3030.

HOMESTEAD FUNDS, INC.
4301 Wilson Boulevard
Arlington, VA 22203
<PAGE> 6

- ------------------------------------------------------
INVESTMENT OBJECTIVES
OF EACH FUND

The Daily Income Fund seeks maximum current income, consistent with preservation
of capital and liquidity by investing in high-quality money market securities.
Shares in the Daily Income Fund are neither insured nor guaranteed by the U.S.
Government. There is no assurance that the Daily Income Fund will maintain a
stable net asset value of $1.00 per share.

The Short-Term Bond Fund seeks a high level of income consistent with
maintaining minimum fluctuation of principal by investing in high-quality
short-term debt securities. The share price of the Short-Term Bond Fund is
expected to fluctuate with changes in interest rates and bond market conditions.

The Short-Term Government Securities Fund seeks a high level of current income
from investments in a portfolio of securities backed by the full faith and
credit of the U.S. Government. Shares in the Short-Term Government Securities
Fund are neither insured or guaranteed by the U.S. Government. The share price
of the Short-Term Government Securities Fund is expected to fluctuate with
changes in interest rates and bond market conditions.

The Value Fund seeks long-term growth of capital and income for the long-term
investor. Current income is a secondary objective.

There can be no assurance that the objectives of each Fund will be realized. For
general information, please call Homestead Funds, Inc., c/o Rodney Square
Management Corporation ("RSMC") toll-free at 1-800-258-3030.
- ------------------------------------------------------
TABLE OF CONTENTS

PAGE

<TABLE>
<S> <C>
Introduction to the Funds................... 1
Financial Highlights........................ 2
Daily Income Fund........................... 6
Short-Term Bond Fund........................ 6
Short-Term Government Securities Fund....... 7
Value Fund.................................. 8
Other Investment Practices, Risk Conditions,
and Policies of the Funds............... 9
Dividends, Distributions, and Taxes......... 12
How to Purchase Shares...................... 13
Shareholder Services........................ 14
How Each Fund's Net Asset
Value is Determined..................... 17
How to Redeem Shares........................ 17
How the Homestead Funds are Managed......... 18
Capital Stock............................... 20
</TABLE>

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 7

- --------------------------------------------------------------------------------
INTRODUCTION TO THE FUNDS

FEE SUMMARY. The Fee Table, including the Examples below, is included to assist
your understanding of the various costs and expenses to which an investment in
each Fund would be subject. Homestead Funds, Inc. ("Homestead Funds") commenced
operations on November 19, 1990 with the Daily Income Fund and the Value Fund.
The Short-Term Bond Fund commenced operations on November 5, 1991 and the
Short-Term Government Securities Fund commenced operations on May 1, 1995. The
fees and expenses of each Fund, except the Short-Term Government Securities
Fund, set forth below are based on the actual expenses of each Fund for the year
ended December 31, 1995. Since the Short-Term Government Securities Fund
commenced operations in May 1995, the expenses set forth below for the Fund are
based on estimates made by management for the current fiscal year. Fees and
expenses for the Funds for the current year may be greater or less than those
stated below. A more complete description of all fees and expenses is included
in this prospectus under the section "Expenses."

<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME SHORT-TERM GOVERNMENT VALUE
FUND BOND FUND SECURITIES FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchase None None None None
Sales Load Imposed on Reinvested Dividends None None None None
Deferred Sales Load Imposed on Redemptions None None None None
Redemption Fee None None None None
Exchange Fee None None None None
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVER OR
ASSUMPTION(as a percentage of average daily net assets)
Investment Management Fee .38% .37% 0 .55%
12b-1 Fees None None None None
Other Expenses .37% .38% .75% .29%
Total Fund Operating Expenses .75%* .75%* .75%* .84%*
</TABLE>

* RE Advisers has agreed to assume all annual fund operating expenses of each
Fund (other than certain expenses that are capitalized and certain other
non-recurring expenses) ("Fund Operating Expenses") which in any year exceed
.75% of the average daily net assets for the Daily Income Fund, Short-Term
Bond Fund and Short-Term Government Securities Fund, and 1.25% of the average
daily net assets for the Value Fund. There were no fees waived for the Value
Fund for the year ended December 31, 1995. The total annual operating expenses
prior to any fee waivers for the year ended December 31, 1995 was .87% and
.86% for the Daily Income Fund and Short-Term Bond Fund, respectively. The
total operating expenses before any fee waivers or reimbursements for the
Short-Term Government Securities Fund for the year ending December 31, 1996
are estimated to be 3.50%.

EXAMPLES: An investor in each Fund would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and (2) redemption at the end of
each future time period**:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Daily Income Fund $8 $ 24 $42 $ 93
Short-Term Bond Fund $8 $ 24 $42 $ 93
Short-Term Government Securities Fund $8 $ 24 NA NA
Value Fund $8 $ 27 $46 $103
</TABLE>

**There are no charges imposed upon redemption.

THESE EXAMPLES SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
FEES OR EXPENSES FOR EACH FUND. ACTUAL FEES AND EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN ABOVE. Similarly, the annual rate of return assumed in the
Example is not an estimate or guarantee of future investment performance, but is
included for illustrative purposes.

----------------------------------------------------------------
- ----------------------------------------------------
1
<PAGE> 8

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

The following table includes selected data and other performance information
derived from the financial statements of each of the respective Funds. They
should be read in conjunction with the financial statements and notes thereto
appearing in the Fund's Annual Report to Shareholders for the fiscal year ended
December 31, 1995 ("Annual Report").

The unqualified report of Ernst & Young LLP, independent auditors, is included
in the Annual Report. The Annual Report also contains additional information
regarding the performance of the Fund. The Annual Report is incorporated by
reference in the Statement of Additional Information and may be obtained without
charge by calling the Fund at the telephone number given on the cover page of
this prospectus.

DAILY INCOME FUND
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

<TABLE>
<CAPTION>
NOVEMBER 19, 1990
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
-------------------------------------------------------- DECEMBER 31,
1995 1994 1993(d) 1992(d) 1991(d) 1990(d)
-------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.............................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----------
Income from investment operations
Net investment income(a)............. 0.05 0.04 0.03 0.03 0.06 0.01
----- ----- ----- ----- ----- ----------
Total from investment operations..... 0.05 0.04 0.03 0.03 0.06 0.01
----- ----- ----- ----- ----- ----------
Distributions
Net investment income................ (0.05) (0.04) (0.03) (0.03) (0.06) (0.01)
----- ----- ----- ----- ----- ----------
Total distributions.................. (0.05) (0.04) (0.03) (0.03) (0.06) (0.01)
----- ----- ----- ----- ----- ----------
NET ASSET VALUE, END OF PERIOD........... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ==========
TOTAL RETURN............................. 5.38% 3.63% 2.68% 3.39% 5.67% 0.74%(c)
===== ===== ===== ===== ===== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands).......................... $ 52,699 $ 36,668 $ 25,159 $ 22,330 $ 24,396 $ 15,490
Ratio of expenses to average net
assets(a)............................ 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%(b)
Ratio of net investment income to
average net assets(a)................ 5.25% 3.66% 2.64% 3.34% 5.44% 6.79%(b)
Ratio of gross expenses before
voluntary expense limitation to
average net assets................... 0.87% 0.99% 1.11% 1.21% 1.27% 1.98%(b)
</TABLE>

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

(a) Excludes investment management fees and other expenses in excess of 0.75%,
pursuant to the Expense Limitation Agreement with the Manager.

(b) Annualized.

(d) The Financial Highlights for periods prior to 1994 were audited by other
auditors.

- ----------------------------------------------------------------
- ----------------------------------------------------
2
<PAGE> 9

SHORT-TERM BOND FUND
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

<TABLE>
<CAPTION>
NOVEMBER 5, 1991
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
-------------------------------------------- DECEMBER 31,
1995 1994 1993(d) 1992(d) 1991(d)
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.......................................... $4.95 $5.19 $5.10 $5.06 $5.00
----- ----- ----- ----- ----------
Income from investment operations
Net investment income(a)......................... 0.28 0.24 0.24 0.26 0.04
Net realized and unrealized gain (loss) on
investments.................................... 0.24 (0.24) 0.09 0.04 0.06
----- ----- ----- ----- ----------
Total from investment operations................... 0.52 0.00 0.33 0.30 0.10
----- ----- ----- ----- ----------
Distributions
Net investment income............................ (0.28) (0.24) (0.24) (0.26) (0.04)
----- ----- ----- ----- ----------
Total distributions.............................. (0.28) (0.24) (0.24) (0.26) (0.04)
----- ----- ----- ----- ----------
NET ASSET VALUE, END OF PERIOD....................... $5.19 $4.95 $5.19 $5.10 $5.06
===== ===== ===== ===== ==========
TOTAL RETURN......................................... 10.81% 0.09% 6.62% 6.30% 1.99%(c)
===== ===== ===== ===== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands).............. $ 62,125 $ 52,257 $ 37,046 $ 10,991 $ 1,268
Ratio of expenses to average net assets(a)......... 0.75% 0.75% 0.75% 0.75% 0.75%(b)
Ratio of net investment income to average net
assets(a)........................................ 5.49% 4.84% 4.58% 5.20% 5.59%(b)
Ratio of gross expenses before voluntary expense
limitation to average net assets................. 0.86% 0.98% 1.16% 1.94% 5.61%(b)
Portfolio turnover rate............................ 35% 13% 14% 19% 0%
</TABLE>

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

(a) Excludes investment management fees and other expenses in excess of 0.75%,
pursuant to the Expense Limitation Agreement with the Manager.

(b) Annualized.

(d) The Financial Highlights for periods prior to 1994 were audited by other
auditors.

----------------------------------------------------------------
- ----------------------------------------------------
3
<PAGE> 10

SHORT-TERM GOVERNMENT SECURITIES FUND
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

<TABLE>
<CAPTION>
MAY 1, 1995
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
1995
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $5.00
-----------
Income from investment operations
Net investment income(a).................................................................. 0.18
Net realized and unrealized gain on investments........................................... 0.09
-----------
Total from investment operations.......................................................... 0.27
-----------
Distributions
Net investment income..................................................................... (0.18)
-----------
Total distributions....................................................................... (0.18)
-----------
NET ASSET VALUE, END OF PERIOD................................................................ $5.09
===========
TOTAL RETURN.................................................................................. 5.44%(c)
===========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)....................................................... $2,658
Ratio of expenses to average net assets(a).................................................. 0.75%(b)
Ratio of net investment income to average net assets(a)..................................... 5.18%(b)
Ratio of gross expenses before voluntary expense limitation to average net assets........... 6.21%(b)
Portfolio turnover rate..................................................................... 7%
</TABLE>

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

(a) Excludes investment management fees and other expenses in excess of 0.75%,
pursuant to the Expense Limitation Agreement with the Manager.

(b) Annualized.

- ----------------------------------------------------------------
- ----------------------------------------------------
4
<PAGE> 11

VALUE FUND
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD

<TABLE>
<CAPTION>
NOVEMBER 19, 1990
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
---------------------------------------------------------- DECEMBER 31,
1995 1994 1993(f) 1992(f) 1991(f) 1990(f)
--------- -------- -------- -------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.............................. $14.50 $14.54 $12.49 $11.48 $10.15 $10.12
------ ------ ------ ------ ------ -----------
Income from investment operations
Net investment income(a)............. 0.41 0.29 0.22 0.25 0.39 0.07(c)
Net realized and unrealized gain on
investments........................ 4.47 0.07 2.12 1.09 1.34 -
------ ------ ------ ------ ------ -----------
Total from investment operations..... 4.88 0.36 2.34 1.34 1.73 0.07
------ ------ ------ ------ ------ -----------
Distributions
Net investment income................ (0.41) (0.29) (0.22) (0.25) (0.39) (0.04)
Net realized gain.................... (0.53) (0.11) (0.07) (0.08) (0.01) -
------ ------ ------ ------ ------ -----------
Total distributions.................. (0.94) (0.40) (0.29) (0.33) (0.40) (0.04)
------ ------ ------ ------ ------ -----------
NET ASSET VALUE, END OF PERIOD........... $18.44 $14.50 $14.54 $12.49 $11.48 $10.15
====== ====== ====== ====== ====== ===========
TOTAL RETURN............................. 33.78% 2.50% 18.83% 11.68% 17.16% 0.58%(e)
====== ====== ====== ====== ====== ===========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands).......................... $147,506 $91,612 $53,616 $19,730 $10,398 $ 6,568
Ratio of expenses to average net
assets(a)............................ 0.84% 1.15% 1.25% 1.25% 1.25% 1.25%(d)
Ratio of net investment income to
average net assets(a)................ 2.50% 2.19% 1.92% 2.33% 3.80% 6.09%(d)
Ratio of gross expenses before
voluntary expense limitation to
average net assets................... n/a 1.15%(b) 1.25%(b) 1.61% 1.75% 2.34%(d)
Portfolio turnover rate................ 10% 4% 2% 5% 26% 0%
</TABLE>

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

(a) Excludes investment management fees and other expenses in excess of 1.25%,
pursuant to the Expense Limitation Agreement with the Manager.

(b) Includes investment management fees reimbursed to the manager pursuant to
the Expense Limitation Agreement with the Manager.

(d) Annualized.

(e) Aggregate total return for the period.

(f) The Financial Highlights for periods prior to 1994 were audited by other
auditors.

OVERVIEW OF THE HOMESTEAD FUNDS

Homestead Funds is a Maryland corporation registered with the Securities and
Exchange Commission as a no-load, open-end diversified management investment
company, commonly known as a mutual fund. The Homestead Funds currently consist
of four funds: the Daily Income Fund, Short-Term Bond Fund, Short-Term
Government Securities Fund and Value Fund ("Fund" or "Funds"). Each Fund in the
Homestead Funds is a separate investment portfolio with distinct investment
objectives, investment program, policies, and restrictions. Each Fund is advised
and

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- ----------------------------------------------------
5
<PAGE> 12

managed by RE Advisers Corporation ("RE Advisers"), which directs the day-to-day
operations of each Fund and the investment of each Fund's assets. RE Advisers is
an indirect wholly-owned subsidiary of National Rural Electric Cooperative
Association ("NRECA"), a non-profit membership organization whose members
provide electric light and power and other services to more than 25 million
people in 46 states.

No sales charges, redemption fees or penalties, or Rule 12b-1 fees are charged
by the Homestead Funds with respect to an investment in the Funds. This means
that all of the money you invest will be credited to your account(s) in the
Fund(s) and immediately go to work for you.

- ------------------------------------------------------
DAILY INCOME FUND

INVESTMENT OBJECTIVES: The Daily Income Fund seeks maximum current income,
consistent with preservation of capital and liquidity by investing in
high-quality money market securities.

INVESTMENT PROGRAM: In seeking to achieve its objectives, the Daily Income Fund
will invest in a diversified portfolio of high-quality U.S. dollar-denominated
money market securities that present minimal credit risks and which, at the time
of acquisition, are eligible securities. Eligible securities are rated in one of
the two highest credit categories for short-term debt obligations assigned by
any two nationally recognized statistical rating organizations ("NRSROs"), or by
one NRSRO, if only one has rated the money market securities ("Requisite
NRSROs") or, if unrated, are of comparable investment quality. The Daily Income
Fund will invest at least 95% of its total assets in eligible securities that
are rated within the highest rating category for short-term debt obligations by
the Requisite NRSROs or unrated securities of comparable investment quality. The
eligible money market securities in which the Fund may invest include: (i)
Short-term obligations of the U.S. Government (such as United States Treasury
bills), its agencies (such as the Government National Mortgage Association), and
instrumentalities (such as the Federal National Mortgage Association); (ii)
Short-term obligations of banks and savings and loan associations having total
assets in excess of one billion dollars, including certificates of deposit,
banker's acceptances, and time deposits; (iii) Short-term corporate obligations,
including notes and bonds with remaining maturities of 13 months or less; (iv)
Commercial paper (unsecured promissory notes having maturities of 9 months or
less) issued by corporations and finance companies; (v) Repurchase agreements
that are collateralized by securities described in (i) through (iv), above. See
"Repurchase Agreements" in this Prospectus for a fuller description of this
investment technique and its risks; (vi) U.S. dollar-denominated obligations
issued by the Government of Canada or its agencies or instrumentalities; and
(vii) U.S. dollar-denominated obligations of foreign issuers. See "U.S. Dollar-
Denominated Securities of Foreign Issuers" in this Prospectus for a fuller
description of these securities and their risks. Certain of these money market
securities may have adjustable rates of interest with periodic demand features.

MATURITY: The Fund will invest in eligible money market securities maturing in
13 months or less and will maintain a dollar-weighted average portfolio maturity
of 90 days or less. These practices are designed to minimize any price
fluctuation in the Fund's portfolio securities.

PRICE: The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible. The Fund will use
the amortized cost method of valuing its portfolio securities.

PORTFOLIO MANAGEMENT: RE Advisers actively manages the Fund, adjusting the
composition of investments and the average maturity of the Fund's portfolio
according to its outlook for short-term interest rates. During periods of rising
interest rates, a shorter average maturity may be expected, while a longer
maturity may be more appropriate when interest rates are falling.

SUITABILITY: The Fund is designed to be a convenient and economical medium for
investing short-term funds, while seeking to provide maximum current income
consistent with safety of principal. In addition, the Fund is also useful as a
component of a long-term, balanced investment program for the conservative
investor. The Fund's investment performance will vary depending on changes in
short-term interest rates or in the creditworthiness of issuers of its portfolio
securities.

- ------------------------------------------------------
SHORT-TERM BOND FUND

INVESTMENT OBJECTIVES: The Short-Term Bond Fund seeks to provide a high level of
current income

- ----------------------------------------------------------------
- ----------------------------------------------------
6
<PAGE> 13

consistent with stability of principal and current liquidity by investing in
high-grade short-term debt securities.

INVESTMENT PROGRAM: In seeking to achieve its objective, the Short-Term Bond
Fund will invest primarily in a diversified portfolio of short-term debt
securities rated within the three highest credit categories assigned by any
NRSRO or, if unrated, of comparable investment quality as determined by RE
Advisers.

The short-term debt securities in which the Fund may invest include: (i)
corporate debt securities; (ii) U.S. Government securities, including bonds,
notes and bills issued by the U.S. Treasury, and securities issued by agencies
and instrumentalities of the U.S. Government; (iii) mortgage pass-through
securities; (iv) collateralized mortgage obligations; (v) asset-backed
securities; (vi) zero-coupon bonds; and (vii) U.S. dollar-denominated debt
securities of foreign issuers. See "Other Investment Practices, Risk Conditions,
and Policies of the Funds" for a fuller description of these securities and
their risks.

Although the Short-Term Bond Fund will ordinarily invest at least 65% of its net
assets in high-grade short-term debt securities, to the extent the Fund is not
so invested, it may invest in other types of securities, including: (i) debt
securities rated BBB or its equivalent by any NRSRO or unrated debt securities
of comparable investment quality, limited to no more than 5% of the Fund's net
assets; (ii) equity-related securities (i.e., preferred stocks and securities
convertible into or exchangeable for common stocks); (iii) privately-placed
securities, limited to no more than 10% of the Fund's net assets; and (iv)
high-quality money market investments of the type in which the Daily Income may
invest. For temporary or defensive purposes, the Fund may invest in money market
securities without limitation.

The Fund may purchase debt securities and certain money market securities on a
when-issued or delayed delivery basis. Certain of these securities may have
adjustable rates of interest with periodic demand features.

MATURITY: The dollar weighted average effective maturity of the Fund's portfolio
will not exceed three years. Within this limitation, the Fund may purchase
individual securities with effective maturities greater than three years.

PORTFOLIO TURNOVER: The portfolio turnover rate for the Fund will vary and when
circumstances warrant, securities may be sold without regard to the length of
time held. Although the Fund cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 75%.

PORTFOLIO MANAGEMENT: To meet the Fund's objective, Douglas G. Kern, Senior
Fixed-Income Portfolio Manager of RE Advisers actively manages the Fund,
adjusting the composition of investments and the average maturity of the Fund's
portfolio based on general economic and financial trends, such as the level of
interest rates and inflation, and the supply and demand of debt securities. Mr.
Kern has managed the Fund since its inception in November 1991 and has been
Senior Fixed-Income Portfolio Manager of NRECA during the past ten years.

SUITABILITY: The Fund is designed for investors who seek a greater level of
income than normally provided by money market investments and less principal
fluctuation than that experienced by long-term bond funds. THE SHORT-TERM BOND
FUND IS NOT A MONEY MARKET FUND AND ITS SHARE PRICE IS EXPECTED TO FLUCTUATE
WITH CHANGES IN INTEREST RATES AND BOND MARKET CONDITIONS, ALTHOUGH THIS
FLUCTUATION SHOULD BE MORE MODERATE THAN THAT OF A FUND WITH A LONGER AVERAGE
MATURITY.

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SHORT-TERM GOVERNMENT
SECURITIES FUND

INVESTMENT OBJECTIVES: The Short-Term Government Securities Fund seeks to
provide a high level of current income consistent with stability of principal
and current liquidity by investing in securities backed by the full faith and
credit of the U.S. Government.

INVESTMENT PROGRAM: In seeking to achieve its objective, the Short-Term
Government Securities Fund will invest at least 65% of its portfolio in U.S.
Treasury bills, notes and bonds and securities issued by agencies and
instrumentalities of the U.S. Government that are guaranteed by the U.S.
Government.

The short-term debt securities in which the Fund may invest include: (i) U.S.
Government securities, including bonds, notes and bills issued by the U.S.
Treasury; (ii) Securities issued by agencies and

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instrumentalities of the U.S. Government that are guaranteed by the full faith
and credit of the U.S. Government; and (iii) Repurchase agreements
collateralized by U.S. Government securities or by securities issued by agencies
and instrumentalities of the U.S. Government and guaranteed by the U.S.
Government. See "Other Investment Practices, Risk Conditions, and Policies of
the Funds" for a fuller description of these securities and their risks.

PORTFOLIO MANAGEMENT: To meet the Fund's objective, Douglas G. Kern, Senior
Fixed-Income Portfolio Manager of RE Advisers actively manages the Fund,
adjusting the composition of investments and the average maturity of the Fund's
portfolio in an effort to minimize fluctuations in market value based on general
economic and financial trends, such as the level of interest rates and
inflation. Mr. Kern has managed the Fund since its inception in May 1995 and has
been Senior Fixed-Income Portfolio Manager of NRECA during the past ten years.

SUITABILITY: The Fund is designed for investors who seek an investment with less
principal fluctuation than that experienced by intermediate and long-term
government securities funds. THE SHORT-TERM GOVERNMENT SECURITIES FUND IS NOT A
MONEY MARKET FUND AND ITS SHARE PRICE IS EXPECTED TO FLUCTUATE WITH CHANGES IN
INTEREST RATES AND BOND MARKET CONDITIONS, ALTHOUGH THIS FLUCTUATION SHOULD BE
MORE MODERATE THAN THAT OF A FUND WITH A LONGER AVERAGE MATURITY. Fixed-income
securities experience appreciation when interest rates decline and depreciation
when interest rates rise.

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VALUE FUND

INVESTMENT OBJECTIVES: The Value Fund seeks long-term growth of capital and
income for the long-term investor. Current income is a secondary objective.

INVESTMENT PROGRAM: In seeking to achieve its objectives, the Value Fund will
invest primarily in a diversified and carefully selected portfolio of common
stocks of established companies that may be undervalued or overlooked by the
market. In selecting investments, RE Advisers, will emphasize fundamental
investment value. This approach is based on the belief that the common stocks of
certain companies may sell at a discount from their fundamental value.

The valuation process used by RE Advisers considers the following factors in
analyzing a security's fundamental value: (i) the relationship of a company's
potential earning power to the current market price of its stock; (ii) a low
price/earnings ratio relative to either that company's historical results or to
the current ratios for other similar companies; (iii) above-average dividend
income; (iv) discount to the stated book value of assets; and (v) a company's
strong competitive advantages, including well-recognized trademarks or brand
names or significant market position. The Value Fund may invest in equity
securities of companies that are considered by RE Advisers to be financially
sound and attractive investments based on their long-term operating history, but
which may be experiencing temporary earnings declines due to adverse economic
conditions that may be company or industry specific or due to unfavorable
publicity. The Value Fund may invest in such companies when RE Advisers believes
that they will react positively to changing economic conditions or that such
companies have taken or are expected to take actions designed to return their
earnings to historical levels or otherwise increase the market price of their
securities.

The utilization of a valuation approach may result, in some cases, in investment
selections that may be out-of-favor or counter to those of other investors.
However, such an approach may also produce significant capital appreciation.

Although the Value Fund will ordinarily invest at least 80% of its net assets in
common stocks, to the extent not so invested, it may invest in other types of
securities including: (i) equity-related securities (i.e., preferred stocks,
securities convertible into or exchangeable for common stocks, and warrants);
(ii) high-grade debt securities rated at least A by a NRSRO or, if unrated, of
equivalent investment quality as determined by RE Advisers; and (iii)
high-quality money market investments in

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8
<PAGE> 15

which the Daily Income Fund may invest. The Value Fund may use such money market
investments to reduce downside volatility during uncertain or declining market
conditions. For temporary or defensive purposes, the Fund may invest in money
market securities or short-term bonds without limitation.

Equity securities in which the Fund invests generally will be listed on a
national securities exchange. The Fund may, on occasion, purchase unlisted
securities that have an established over-the-counter market. The Fund may also
invest up to 10% of its net assets in U.S. dollar-denominated securities of
foreign issuers through the purchase of American Depository Receipts ("ADRs").
See "U.S. Dollar-Denominated Securities of Foreign Issuers" in this Prospectus
for a fuller description of these securities and their risks.

PORTFOLIO TURNOVER: The Fund will not trade in securities for short-term
profits; however, when circumstances warrant, securities may be sold without
regard to the length of time held. Although the Fund cannot accurately predict
its annual portfolio turnover rate, it is not expected to exceed 75%.

PORTFOLIO MANAGEMENT: To meet the Fund's objective, Stuart E. Teach, Senior
Equity Portfolio Manager of RE Advisers actively manages the Fund, adjusting the
composition of common stock investments in the Fund's portfolio based on general
economic and financial trends. Mr. Teach has managed the Fund since its
inception in November 1990 and has been Senior Equity Portfolio Manager of NRECA
during the past nine years.

SUITABILITY: The Fund is intended for investors seeking long-term growth of
capital and income. Because of the Fund's emphasis on investment in common
stocks, its value will fluctuate based on market conditions. Consequently, the
Fund is designed for long-term investors and should not be relied on for
short-term financial needs or for short-term investment in the stock market. The
net asset value of the Fund's shares will fluctuate based on market conditions.

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OTHER INVESTMENT
PRACTICES, RISK
CONDITIONS, AND
POLICIES OF THE FUNDS

REPURCHASE AGREEMENTS. Each Fund may utilize repurchase agreements through which
they may purchase a security (the "underlying security") from a well established
domestic securities dealer or bank that is a member of the Federal Reserve
System and the seller of the repurchase agreement (i.e., the securities dealers
or bank) agrees to repurchase the underlying security at a mutually agreed upon
time and price. In these repurchase transactions, the underlying security, which
must be a high quality money market security, is held by the custodian for the
applicable Fund through the federal book entry system as collateral and marked-
to-market on a daily basis to ensure full collateralization of the repurchase
agreement. For the Daily Income Fund, the underlying security must either be a
U.S. Government security or a security rated in the highest rating category by
the Requisite NRSROs and must be determined to present minimal credit risks. For
the Short-Term Government Securities Fund, the underlying security must be a
U.S. Government security or a security issued by an agency or instrumentality of
the U.S. Government and is guaranteed by the U.S. Government. In the event of
bankruptcy or default of certain sellers of repurchase agreements, the Funds
could experience costs and delays in liquidating the underlying security held as
collateral and might incur a loss if such collateral declines in value during
this period.

U.S. DOLLAR DENOMINATED SECURITIES OF FOREIGN ISSUERS. Subject to each Fund's
investment objectives, investment program, policies, and restrictions, the Daily
Income Fund, Short-Term Bond Fund and Value Fund each may invest in certain
types of U.S. dollar denominated securities of foreign issuers. With respect to
equity securities, the Short-Term Bond Fund and the Value Fund may purchase
ADRs. ADRs are U.S. dollar denominated certificates issued by a U.S. bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank. ADRs are traded
on domestic exchanges or in the U.S. over-the-counter market and, generally, are
in registered form.

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Investment in ADRs has certain advantages over direct investment in the
underlying non-U.S. securities because: (i) ADRs are U.S. dollar denominated
investments which are registered domestically, easily transferable, and for
which market quotations are readily available, and (ii) issuers whose securities
are represented by ADRs are subject to the same auditing, accounting, and
financial reporting standards as domestic issuers.

The Short-Term Bond Fund and Value Fund may also, in accordance with specific
investment objectives, investment program, policies, and restrictions, purchase
U.S. dollar denominated short-term debt securities of foreign issuers and money
market securities of foreign issuers of the type in which the Daily Income Fund
may normally invest. Such securities of foreign issuers may be issued and traded
domestically (e.g., Yankee securities), or may be issued abroad and traded
exclusively in foreign markets (e.g., Eurodollar securities).

Although investment in U.S. dollar-denominated securities of foreign issuers is
intended to reduce risk by providing further diversification of each Fund's
portfolio, investment in such securities may involve the following risks: the
possibility of adverse foreign political and economic developments; the
possibility of expropriation, confiscatory taxation, or nationalization of
foreign portfolio companies; and, for foreign securities that are not registered
domestically, there is less publicly available information regarding issuers of
such securities and such issuers are not subject to the same accounting,
auditing and financial reporting standards and practices as domestic issuers.

WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or
delayed delivery basis. When such transactions are negotiated, the price of such
securities is fixed at the time of the commitment, but delivery and payment for
the securities may take place up to 90 days after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and no
interest accrues to the purchaser during this period. When-issued securities
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. RE Advisers does not believe that the net asset
value or income of any Fund will be adversely affected by the purchase of
securities on a when-issued basis.

CONVERTIBLE SECURITIES AND PREFERRED STOCK. The Short-Term Bond Fund and Value
Fund may invest in debt securities that are convertible into or exchangeable for
common stock. The Short-Term Bond Fund and the Value Fund may also invest in
preferred stock, which are securities that represent an ownership interest in a
company and provide their owner with claims on the company's earnings and assets
prior to the claims of owners of common stock, but after those of bond owners.

MORTGAGE PASS-THROUGH SECURITIES. The Short-Term Bond Fund may invest in
mortgage pass-through securities, which are securities representing interests in
pools of mortgages. Principal and interest payments made on the mortgages in the
pools are passed through to the holder of such securities. Payment of principal
and interest on some mortgage pass-through securities (but not the market value
of the securities themselves) may be guaranteed by the full faith and credit of
the U.S. Government (in the case of securities guaranteed by the Government
National Mortgage Association, or "GNMAs"), or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). The
Short-Term Government Securities Fund may invest in GNMA securities.

The Short-Term Bond Fund may also invest in mortgage pass-through securities
created by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.

Unscheduled or early repayment of principal on mortgage pass-through securities
(arising from prepayments of principal due to the sale of the underlying
property, refinancing or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Like other fixed income securities, when interest rates rise, the
value of a

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10
<PAGE> 17

mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other fixed-income securities.

In the view of RE Advisers, collateralized mortgage obligations and asset-backed
securities may be considered derivative investments. Discussions pertaining to
these securities are included below and in the Statement of Additional
Information.

COLLATERALIZED MORTGAGE OBLIGATIONS. The Short-Term Bond Fund and Short-Term
Government Securities Fund may invest in collateralized mortgage obligations
("CMOs"). CMOs are debt securities collateralized by underlying mortgage loans
or pools of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA
and are generally issued by limited purpose finance subsidiaries of U.S.
government instrumentalities. The Short-Term Government Securities Fund may
invest in CMOs utilizing collateral guaranteed by GNMA.

CMOs are not, however, mortgage pass-through securities. Rather they are
pay-through securities, i.e., securities backed by the cash flow from the
underlying mortgages. Investors in CMOs are not owners of the underlying
mortgages, which serve as collateral for such debt securities, but are simply
owners of a debt security backed by such pledged assets. CMOs are typically
structured into multiple classes, with each class bearing a different stated
maturity and having different payment streams. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class; investors holding longer maturity classes receive principal
payments only after the shorter class or classes have been retired.

ASSET-BACKED SECURITIES. The Short-Term Bond Fund may purchase asset-backed
securities that represent either fractional interests or participation in pools
of leases, retail installment loans or revolving credit receivables held by a
trust or limited purpose finance subsidiary. Such asset-backed securities may be
secured by the underlying assets (such as Certificates for Automobile
Receivables or "CARS") or may be unsecured (such as Credit Card Receivable
Securities ("CARDS")). Depending on the structure of the asset-backed security,
monthly or quarterly payments of principal and interest or interest only are
passed-through (like mortgage pass-through securities) or paid through (like
CMOs) to certificate holders. Asset-backed securities may be guaranteed up to
certain amounts by guarantees, insurance, or letters of credit issued by a
financial institution affiliated or unaffiliated with the originator of the
pool.

Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. Certificate holders
may also experience delays in payment if the full amounts due on underlying
loans, leases or receivables are not realized because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the servicing agent for
the pool, the originator of the pool or the financial institution providing
credit support enhancement for the pool. If consistent with its investment
objective and policies, the Short-Term Bond Fund may invest in other
asset-backed securities that may be developed in the future.

ZERO-COUPON BONDS. The Short-Term Bond Fund may invest in zero-coupon bonds.
Such bonds may be issued directly by agencies and instrumentalities of the U.S.
Government or by private corporations. The Short-Term Government Securities Fund
may invest in zero-coupon bonds issued directly by agencies of the U.S.
Government. Zero-coupon bonds may originate as such or may be created by
stripping an outstanding bond. Zero-coupon bonds do not make regular interest
payments. Instead, they are sold at a deep discount from their face value.
Because a zero-coupon bond does not pay current income, its price can be very
volatile when interest rates change. In calculating its dividend, the Short-Term
Bond Fund takes into account as income a portion of the difference between a
zero-coupon bond's purchase price and its face value.

OTHER INVESTMENT COMPANIES. The Daily Income Fund's investment in other
investment companies is limited in amount so that no more than 5% of the Fund's
total net assets will be invested in any one investment company or in all other
investment companies in the aggregate. The Short-Term Bond

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Fund, Short-Term Government Securities Fund and Value Fund may invest in other
investment companies, limited in amount so that no more than 5% of each Fund's
respective total net assets will be invested in any one investment company and
no more than 10% in all other investment companies in the aggregate. The
Short-Term Government Securities Fund may purchase shares of investment
companies which invest in U.S. Government securities. Each Fund's investment in
such other investment companies will reflect the operating expenses of these
companies.

CERTAIN POLICIES TO REDUCE RISK. Each Fund has adopted certain fundamental
investment policies in managing its portfolio that are designed to maintain the
portfolio's diversity and reduce risk. Each Fund will not: (i) with respect to
75% of each Fund's total assets, invest in more than 10% of the outstanding
voting securities of any one issuer; (ii) invest 25% or more of its total assets
in securities of companies in the same industry except, that with respect to the
Daily Income Fund and the Short-Term Bond Fund, this limitation will not apply
to securities issued by domestic branches of U.S. banks and savings and loan
associations and U.S. branches of foreign banks (if subject to the same
regulation as domestic banks); and (iii) borrow more than 10% of that Fund's
total assets. The Funds will not borrow in order to increase income, but only to
facilitate redemption requests that might otherwise require untimely disposition
of portfolio securities. Limitations (i) and (ii) do not apply to obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. These investment policies are fundamental and may be changed
for a Fund only by approval of that Fund's shareholders. The Short-Term Bond
Fund will, as a matter of operating policy, normally concentrate 25% or more its
total assets in securities issued by domestic branches of U.S. banks and savings
and loan associations and U.S. branches of foreign banks (provided such banks
are subject to the same regulation as domestic banks) when the Short-Term Bond
Fund's position in issues maturing in one year or less equals 35% or more of the
Fund's total assets.

FURTHER INFORMATION. Each Fund's investment program is subject to further
restrictions as described in the Statement of Additional Information. Each
Fund's investment program, unless otherwise specified, is not fundamental and
may be changed without shareholder approval by the Board of Directors. Each
Fund's investment objectives are fundamental and may be changed only with
approval of that Fund's shareholders.

INVESTMENT PERFORMANCE. Each Fund may illustrate in advertisements its average
annual total return, which is the rate of growth of the Fund that would be
necessary to achieve the ending value of an investment kept in the Fund for the
period specified and is based on the following assumptions: (1) all dividends
and distributions by the Fund are reinvested in shares of the Fund at net asset
value, and (2) all recurring fees are included for applicable periods.

Each Fund may also illustrate in advertisements its cumulative total return for
several time periods throughout the Fund's life based on an assumed initial
investment of $1,000. Any such cumulative total return for each Fund will assume
the reinvestment of all income dividends and capital gains distributions for the
indicated periods and will include all recurring fees.

The Daily Income Fund may illustrate in advertisements its yield and effective
yield. The Daily Income Fund's yield refers to income generated by an investment
in the Fund over a seven (7) day period, expressed as an annual percentage rate.
The Daily Income Fund's effective yield is calculated similarly but assumes that
income earned from the investment is reinvested. The Fund's effective yield will
be slightly higher than its yield because of the compounding effect of this
assumed reinvestment.

The Short-Term Bond Fund and Short-Term Government Securities Fund may
illustrate in advertisements its yield based on a recent thirty (30) day period,
which reflects the income per share earned by the Fund's portfolio investments.
The yield is calculated by dividing the Fund's net investment income per share
during that period by the net asset value on the last day of that period and
annualizing the result. Further information on each Fund's performance
calculations is described in the Statement of Additional Information.

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DIVIDENDS, DISTRIBUTIONS,
AND TAXES

Each Fund intends to elect to be treated and to qualify as a "regulated
investment company" under

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12
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Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") in
which case it will not be subject to federal income tax on any income and
capital gains distributed to its shareholders. As a result, it is the policy of
each Fund to declare and distribute to its shareholders as income dividends or
capital gains distributions, at least annually, substantially all of its
ordinary income and capital gains realized from the sale of its portfolio
securities, if any.

Income dividends for the Daily Income Fund, Short-Term Bond Fund and Short-Term
Government Securities Fund will be declared daily and paid monthly. Income
dividends for the Value Fund will be declared and paid semi-annually. All
distributions of capital gains income of each Fund, if any, realized during the
fiscal year, will be declared and distributed no less frequently than annually.
Income dividends are derived from each Fund's net investment income, including
any net short-term capital gains and dividends received by a Fund, and are
taxable to you as ordinary income. Corporate shareholders may be entitled to
take a deduction for income dividends received that are attributable to
dividends received from a domestic corporation, provided that both the corporate
shareholder retains its shares in the applicable Fund for more than 45 days and
the Fund retains its shares in the issuer from whom it received the income
dividends for more than 45 days. Distributions of capital gains by each Fund are
derived from each Fund's long-term capital gains and are taxable to you as long-
term capital gains, regardless of how long you have held your shares. Income
dividends and distributions of capital gains income declared in October,
November or December and paid in January are taxable in the year they are
declared. The Homestead Funds will mail you a Form 1099 by the end of January
indicating the federal tax status of your income dividends and capital gains
distributions.

BACKUP WITHHOLDING. Each Fund is required by federal law to withhold 31% of
reportable payments (which may include income dividends, capital gains
distributions, and share redemption proceeds) paid to shareholders (other than
participants in tax-qualified retirement plans) who have not complied with IRS
regulations. In order to avoid this back-up withholding requirement, you must
certify on your Purchase Application Form ("Application"), or on a separate W-9
Form supplied by the transfer agent, that your Social Security or Taxpayer
Identification Number is correct (or that you have applied for such a number and
are waiting for it to be issued) and that you are not currently subject to
backup withholding, or you are exempt from backup withholding.

REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS. Unless you
elect otherwise, as permitted on the Application, income dividends and
distributions of capital gains income with respect to a particular Fund will be
reinvested in additional shares of that Fund and will be credited to your
account with that Fund at the net asset value per share next determined as of
the ex-dividend date. Both income dividends and distributions of capital gains
income are paid by the Funds on a per share basis. As a result, at the time of
such payment, the net asset value per share of the Short-Term Bond Fund,
Short-Term Government Securities Fund and Value Fund will be reduced by the
amount of such payment. Payment of dividends and distributions by the Daily
Income Fund will not affect the Fund's net asset value, but will reduce the
Fund's yield. Payments from each Fund to shareholders of income dividends and
capital gains distributions are taxable to shareholders of each Fund when such
dividends and distributions are declared, regardless of whether they are taken
in cash or reinvested in shares of the Funds, unless the accounts of such
shareholders are used to fund tax-qualified retirement plans, including
Individual Retirement Account Plans ("IRAs"), Simplified Employee Pensions
("SEP-IRAs"), and other tax-deferred plans or accounts. Participants in such
plans or accounts will be taxed when they begin receiving distributions from
such plans or accounts.

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HOW TO PURCHASE SHARES

THE INITIAL MINIMUM INVESTMENT IS $1,000 PER FUND, EXCEPT AS NOTED BELOW. SUCH
MINIMUM INVESTMENT AMOUNT MAY, IN CERTAIN CASES, BE WAIVED OR LOWERED BY THE
HOMESTEAD FUNDS OR RE INVESTMENT.

OPENING AN ACCOUNT. You may make an initial purchase of shares of each Fund by
mail or by wire. Shares of the Funds may be purchased on any day the Funds are
open for business.

A COMPLETED AND SIGNED APPLICATION IS REQUIRED FOR EACH NEW ACCOUNT YOU OPEN
WITH EACH FUND REGARDLESS OF HOW YOU CHOOSE TO MAKE YOUR INITIAL PURCHASE OF
SHARES.

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BY MAIL. You may purchase shares of the Funds by mailing the completed
Application, with your check made payable to Homestead Funds, Inc., to:
Homestead Funds, Inc. c/o Rodney Square Management Corporation, P.O. Box 8987,
Wilmington, DE 19899.

BY WIRE. You may also purchase shares of each Fund by wiring funds to the wire
bank account for each Fund. Before wiring funds, please call RSMC toll free at
1-800-258-3030 to advise the Homestead Funds of your intention to invest in one
of the Funds and to receive instructions as to how and where to wire your
investment. Please remember to return your completed Application to RSMC, as
described in the prior paragraph. Your bank may charge you a fee for the wire.

SUBSEQUENT INVESTMENTS: Subsequent purchases of shares of the Funds may be made
by mail or by wire (see instructions above), or through means of certain
services available to shareholders of the Funds, such as the Telephone
Investment Privilege, the Exchange Privilege, and the Automatic Investment Plans
described below under "Shareholder Services."

SHARE PRICE. Your shares in each Fund will be priced at the net asset value per
share of that Fund next determined after your purchase order has been received
by the Homestead Funds' transfer agent in "good order."

With respect to the Daily Income Fund, if your purchase payment is transmitted
by federal funds wire or bank wire, the purchase order will be considered in
good order upon receipt of the wire payment by the Homestead Funds' transfer
agent. If your purchase payment as transmitted to the Homestead Funds' transfer
agent is not in federal funds (i.e., monies credited to the transfer agent by a
Federal Reserve Bank), your payment must first be converted to federal funds
before your purchase order will be considered in "good order." If your purchase
payment is by a check drawn on a member bank of the Federal Reserve System,
conversion to federal funds usually occurs within one business day of receipt of
the check by the transfer agent. Checks drawn on banks which are not members of
the Federal Reserve System may take longer to convert into federal funds. During
the period prior to receipt of federal funds, your money will not be invested in
the Daily Income Fund.

With respect to the Short-Term Bond Fund, Short-Term Government Securities Fund
and Value Fund, receipt of federal funds by the transfer agent is not necessary
for a purchase order to be considered in good order.

CONDITIONS OF YOUR PURCHASE. The Homestead Funds and RE Investment Corporation
("RE Investment"), the distributor for the Homestead Funds, each reserve the
right to reject any purchase for any reason and to cancel any purchase due to
nonpayment. Purchases are not binding on the Homestead Funds or RE Investment or
considered received until such purchase orders are received by the transfer
agent, RSMC, in good order. All purchases must be made in United States dollars
and, to avoid fees and delays, all checks must be drawn only on United States
banks. No cash will be accepted. As a condition of this offering, if your
purchase is canceled due to nonpayment or because your check does not clear
(and, therefore, your account is required to be redeemed), you will be
responsible for any loss the Funds incur.

STOCK CERTIFICATES. Stock certificates will not be issued for your shares unless
you have been a shareholder for at least thirty (30) days and unless you
specifically request them. Most shareholders elect not to receive stock
certificates. Certificates for full shares only will be issued. If you lose a
stock certificate you may incur an expense to replace it.

RETIREMENT PLAN ACCOUNTS. If you are a participant in a corporate or
institutional retirement plan account (including any deferred compensation
plan), you must contact your Plan Administrator regarding purchase and
redemption procedures, including limitations thereon, contained in your
retirement plan. REQUESTS FOR REDEMPTIONS FROM RETIREMENT PLAN ACCOUNTS
(INCLUDING IRAS) MUST BE IN WRITING. REDEMPTIONS BY TELEPHONE ARE NOT PERMITTED.

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SHAREHOLDER SERVICES

SHAREHOLDER INQUIRIES AND SERVICES OFFERED. If you have any questions about the
Homestead Funds or the following services, please call RSMC at 1-800-258-3030 or
write the Homestead Funds c/o Rodney Square Management Corporation at P.O. Box
8987, Wilmington, DE 19899. The Homestead Funds reserve the right to amend the
shareholder services described below or to change

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their terms or conditions upon sixty (60) days notice to shareholders.

SHAREHOLDER STATEMENTS AND REPORTS. Each time you buy or sell shares or reinvest
a dividend or distribution in any Fund, you will receive a statement with
respect to that Fund confirming such transaction and listing your current share
balance with that Fund. The Homestead Funds also will send you annual and
semi-annual reports. In addition, you will receive year-end tax information
about your accounts with each Fund.

TELEPHONE PRIVILEGES. For your convenience, the Homestead Funds provide
telephone privileges that allow you by telephone authorization to (i) purchase
shares in each Fund; (ii) exchange shares from your account in one Fund for
shares in another Fund; and (iii) redeem shares in each Fund. To utilize these
telephone privileges, you must select such services by checking the appropriate
boxes on the Application and must supply us with the information required.
Procedures have been established by the Homestead Funds and its transfer agent
that are considered to be reasonable and are designed to confirm personal
identification information prior to acting on telephone instructions, tape
recording telephone communication, and providing written confirmation of
instructions communicated by telephone. If the transfer agent does not employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, it may be liable for any losses arising out of any action on its part
or any failure or omission to act as a result of its own negligence, lack of
good faith, or willful misconduct. In light of the procedures established, the
Homestead Funds will not be liable for following telephone instructions that it
or its transfer agent believe to be genuine. During periods of extreme economic
conditions or market changes, requests by telephone may be difficult to make due
to heavy volume. During such times, please consider placing your order by mail.

THE TELEPHONE PRIVILEGES ARE NOT AVAILABLE WITH RESPECT TO SHARES FOR WHICH
CERTIFICATES HAVE BEEN ISSUED OR WITH RESPECT TO REDEMPTIONS FOR ACCOUNTS
REQUIRING SUPPORTING LEGAL DOCUMENTS. IN ADDITION, SHARES HELD UNDER RETIREMENT
PLANS (INCLUDING IRAS) MAY NOT BE REDEEMED BY USING THE TELEPHONE REDEMPTION
PRIVILEGE. EXCHANGES BETWEEN THE FUNDS UTILIZING THE TELEPHONE EXCHANGE
PRIVILEGE ARE AVAILABLE TO SHARES HELD UNDER RETIREMENT PLANS (INCLUDING IRAS).

(1) TELEPHONE INVESTMENT PRIVILEGE. After your account with the Homestead Funds
has been opened, you may make additional investments in your account by
telephoning the Homestead Funds at 1-800-258-3030 between 9:00 a.m. and 4:00
p.m. Eastern Time on any day the Homestead Funds are open. Telephone
investment requests made after 4:00 p.m. Eastern Time will not be accepted.
In accordance with your instructions, we will electronically transfer monies
from your bank account designated on the Application, to your account with
the Homestead Funds. Your designated bank must be a member of the Automated
Clearing House ("ACH") network and able to make electronic transfers in
order for you to use this privilege.

(2) TELEPHONE EXCHANGE PRIVILEGE. The Telephone Exchange Privilege permits you
to exchange shares from your account in one Fund for shares in another Fund
(if the accounts in each Fund are identically registered) by telephoning the
Homestead Funds at 1-800-258-3030 between 9:00 a.m. and 4:00 p.m. Eastern
Time on any day the Homestead Funds are open. In establishing a new account
by exchange, the shares being exchanged must have a value of at least
$1,000. Shares exchanged will be valued at their respective net asset values
next determined after a telephone exchange request is received. Telephone
exchange requests made after 4:00 p.m. Eastern Time will not be accepted;
however, such requests will be processed as of the close of business the
next business day. Please notify the Homestead Funds in writing of all
current plans or shareholder service privileges you wish to continue in any
new account opened by a telephone exchange request. See "Exchange Privilege"
below for further information concerning exchanges.

(3) TELEPHONE REDEMPTION PRIVILEGE. The Telephone Redemption Privilege permits
you to authorize the redemption of some or all shares in your account with
the Homestead Funds by telephoning the Homestead Funds at 1-800-258-3030
between 9:00 a.m. and 4:00 p.m. Eastern Time on any day the Homestead Funds
are open. In accordance

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15
<PAGE> 22

with your telephone instructions, we will redeem your Fund shares at their net
asset value next determined after your telephone redemption request is received.
Telephone redemption requests made after 4:00 p.m. Eastern Time will not be
accepted; however, such requests will be processed as of the close of
business the next business day. Redemption proceeds will, in accordance with
your prior election, be mailed to you at your current address or
electronically transmitted to your designated bank account. Your designated
bank must be a member of the ACH network and able to receive electronic
transfers in order for you to use this privilege. SHARES HELD UNDER
RETIREMENT PLANS (INCLUDING IRAS) MAY NOT BE REDEEMED BY USING THE TELEPHONE
REDEMPTION PRIVILEGE.

EXCHANGE PRIVILEGE. The exchange privilege is a convenient way to buy shares in
each Fund in order to respond to changes in your investment goals or in market
conditions. In addition to the Telephone Exchange Privilege described above,
shareholders in each Fund may exchange their shares for shares in the other Fund
by a written request, in proper form, sent to the transfer agent. Such shares
exchanged will be valued at their respective net asset values next determined
after the receipt of the written exchange request. When making a written
exchange request, please provide your current Fund's name, your account name(s)
and number(s), the name of the Fund into which you wish to exchange your
investment, the amount you wish to exchange, and specify all current plans or
shareholder service privileges you wish to continue in your new account (e.g.
Automatic Monthly Investment Plans). For written exchange requests, the
signatures of all registered owners are required. Signature guarantees are also
required if the accounts will not be identically registered. (See "How to Redeem
Shares" concerning requirements relating to signature guarantees.) No sales
charge, redemption fee or penalty is imposed on exchanges. In order to prevent
excessive transaction activity and to protect shareholders, the Value Fund may,
in its discretion, limit your exchanges to one exchange every calendar quarter
into and out of the Value Fund. If you exceed this limit, your future purchases
of or exchanges into the Value Fund may be permanently refused. Please note
that, for tax purposes, an exchange may involve a taxable transaction. The
exchange privilege is available to shareholders in all states where it is
legally permitted. Currently all states permit such exchanges.

AUTOMATIC INVESTMENT AND WITHDRAWAL PLANS. For your convenience, the Homestead
Funds provide three plans that may enable you to add to your investment or
withdraw from your account(s) with a minimum of paperwork. The Application for
these plans is included with this Prospectus.

(1) AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan permits you to
purchase shares in any Fund at regular intervals selected by you.* Fund
shares are purchased by transferring funds from your designated checking,
NOW, or bank account. Only an account maintained at a domestic financial
institution that is an ACH member may be so designated. The twenty-fifth day
of each month will be selected by you as a purchase date and your automatic
monthly purchases will be made on or about that day. *For individuals
selecting the Automatic Investment Plan, no minimum initial investment is
required. The amount of subsequent monthly investments are at the discretion
of the shareholder.

(2) AUTOMATIC PAYROLL INVESTMENTS AND OTHER DIRECT DEPOSIT PRIVILEGES. If
permitted by your employer, including the federal government, you may elect
to have certain amounts automatically deducted, on a periodic basis, from
your salary, Social Security payment or certain other payments from the
federal government, and transferred to your account(s) with the Fund(s).
Individuals selecting the Automatic Payroll Investment Plan can establish an
account with no minimum initial investment. Subsequent investments per pay
period are at the discretion of the shareholder.

(3) AUTOMATIC CASH WITHDRAWAL PLAN. The Automatic Cash Withdrawal Plan permits
you to have payments automatically transferred from your account(s) in any
Fund to your designated bank account on a monthly or quarterly basis. Only a
bank account maintained at a domestic financial institution that is an ACH
member may be so designated. The transaction will take place on or about the
twenty-fifth of each month.

INDIVIDUAL RETIREMENT ACCOUNTS AND SIMPLIFIED EMPLOYEE PENSIONS. An IRA is a
very attractive

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16
<PAGE> 23

retirement-savings vehicle for certain qualified individuals. You may save for
your retirement and shelter your investment income from current taxes by either:
(i) having the Homestead Funds establish a new IRA for you that can be used to
invest in the Funds, or (ii) using your existing IRA to invest in the Funds.
Using your IRA, you can invest up to $2,000 per year on a tax-favored basis in
the Funds or you may either transfer or "roll-over" to the Fund monies from
other existing IRA accounts or qualified distributions from a pension plan. In
addition, an employer may: (i) have the Homestead Funds establish a new SEP-IRA
for its employees that can be used to invest on a tax-favored basis in the
Funds, or (ii) use the Funds as additional funding vehicles for an existing
SEP-IRA.

CHECKWRITING SERVICE. Checkwriting is available only for shareholders of the
Daily Income Fund. You may write an unlimited number of checks. The minimum
amount of each check must be $100 or more. Checks written on amounts subject to
the ten (10) day check clearing period, described below under "How to Redeem
Shares", will be returned, marked "uncollected." This checkwriting service is
subject to RSMC's rules and regulations and is governed by the Delaware Uniform
Commercial Code. Please note that for retirement accounts (including IRAs),
checkwriting will be limited, as applicable, to account owners who are at least
age 59 1/2. All notices with respect to checks drawn on the Daily Income Fund
must be given to RSMC. Any stop payment instructions must be given to RSMC by
calling 1-800-258-3030. Checkbook orders are subject to a cost of $4.51 which
will be deducted from the shareholder's account.

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HOW EACH FUND'S NET ASSET
VALUE IS DETERMINED

The net asset value per share of each of the Funds is normally calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange"),
typically 4:00 p.m. Eastern Time, every day the Exchange is open for trading.
The per share net asset value, calculated as described below, is effective for
all orders received in good order (as previously described) prior to the close
of trading on the Exchange for that day. Orders received after the close of
trading on the Exchange or on a day when the Exchange is not open for business
will be priced at the per share net asset value next computed.

The net asset value of each Fund's shares is determined by adding the value of
all securities, cash and other assets of the Fund, subtracting liabilities
(including accrued expenses and dividends payable) and dividing the result by
the total number of outstanding shares in the Fund.

For purposes of calculating the Daily Income Fund's net asset value per share,
portfolio securities are valued on the basis of amortized cost, which method
does not take into account unrealized gains or losses on the portfolio
securities. Amortized cost valuation involves initially valuing a security at
its cost, and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. While this method provides certainty in
valuation, it may result in periods during which the value of a security, as
determined by amortized cost, may be higher or lower than the price the Daily
Income Fund would receive if it sold the security.

For purposes of calculating the net asset value per share of the Short-Term Bond
Fund, Short-Term Government Securities Fund and Value Fund, portfolio securities
are valued primarily based on market quotations, or if market quotations are not
available, by a method that the Board of Directors believes accurately reflects
fair value. In accordance with procedures and agreements approved by the Board
of Directors, the Homestead Funds will use RSMC to perform the above-described
valuation functions and RE Advisers continuously monitors RSMC's performance of
those functions.

- ------------------------------------------------------
HOW TO REDEEM SHARES

Shareholders have the right to redeem (subject to the restrictions outlined
below) all or any part of their shares in the Funds at a price equal to the net
asset value of such shares next computed following receipt and acceptance of the
redemption request by the transfer agent for the Funds. Unless you have selected
the Telephone Redemption Privilege and provided the required information, in
order to redeem shares in the Funds, a written request in "proper form" (as
explained below) must be sent directly to Rodney Square Management Corporation,
P.O. Box 8987, Wilmington, DE 19899. You cannot redeem shares by telephone or

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17
<PAGE> 24

telegram unless you are eligible to use the Telephone Redemption Privilege. In
addition, we cannot accept requests which specify a particular date for
redemption or which specify any other special conditions.

PROPER FORM FOR ALL REDEMPTION REQUESTS. Your redemption request must be in
proper form. To be in proper form, your redemption request must include: (1)
your share certificates, if any, endorsed by all registered shareholders for the
account exactly as the shares are registered and the signature(s) must be
guaranteed, as described below; (2) for written redemption requests, a "letter
of instruction," which is a letter specifying the name of the Fund, the number
of shares to be sold, the name(s) in which the account is registered, and your
account number. The letter of instruction must be signed by all registered
shareholders for the account using the exact names in which the account is
registered; (3) other supporting legal documents, as may be necessary, for
redemption requests by corporations, estates, trusts, guardianships,
custodianships, partnerships, and pension and profit sharing plans; and (4) any
signature guarantees that are required as described above in (1), or required by
the Homestead Funds where the value of the shares being redeemed is $25,000 or
greater, or where the redemption proceeds are to be sent to an address other
than the address of record or to a person other than the registered
shareholder(s) for the account. Signature guarantees are not required for
redemptions made using the Telephone Redemption Privilege, unless redemption
proceeds are to be sent to a person other than the registered shareholders for
the account or to an address or account other than that of record.

Signature guarantees, when required, can be obtained from any one of the
following institutions: (i) a bank; (ii) a securities broker or dealer,
including a government or municipal securities broker or dealer, that is a
member of a clearing corporation or has net capital of at least $100,000; (iii)
a credit union having authority to issue signature guarantees; (iv) a savings
and loan association, a building and loan association, a cooperative bank, a
federal savings bank or association; or (v) a national securities exchange, a
registered securities exchange or a clearing agency. Notary publics are not
acceptable guarantors.

Your request for redemption will not be processed and will be held until it is
in proper form, as described above.

RECEIVING YOUR REDEMPTION PAYMENT. Except under certain emergency conditions,
your redemption payment will be sent to you within seven (7) days after receipt
of your telephone or written redemption request, in proper form, by the transfer
agent. No charge of any kind is imposed on any redemption request.

If your redemption request is with respect to shares purchased by a personal,
corporate, or government check within ten (10) days of the purchase date, the
redemption payment will be held until the purchase check has cleared (which
usually takes up to ten (10) days), although the shares redeemed will be priced
for redemption upon receipt of your redemption request. You can avoid the
inconvenience of this ten (10) day check clearing period by purchasing shares
with a certified, treasurer's or cashier's check, or with a federal funds or
bank wire.

MINIMUM ACCOUNT SIZE. Due to the relatively high cost of maintaining smaller
accounts, the Funds reserve the right to redeem shares in any account if, as the
result of redemptions, the value of that account drops below $500. You will be
allowed at least sixty (60) days, after notice by the Homestead Funds, to make
an additional investment to bring your account value up to at least $500 before
the redemption is processed.

EXCESSIVE TRADING. To protect the Value Fund's shareholders and to minimize
costs, the Value Fund may, in its discretion, limit your exchanges into and out
of the Fund to one exchange every calendar quarter. This policy does not
prohibit you from redeeming shares of the Fund, but may prohibit you from making
future purchases of or exchanges into the Fund.

- ------------------------------------------------------
HOW THE HOMESTEAD FUNDS
ARE MANAGED

BOARD OF DIRECTORS. The management of the Homestead Funds' business and affairs
is the responsibility of its Board of Directors. Although the Board is not
involved in the day-to-day operations of each Fund, the Board has the
responsibility for

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18
<PAGE> 25

establishing broad corporate policies and supervising the overall performance of
each Fund.

INVESTMENT MANAGER. RE Advisers, 4301 Wilson Boulevard, Arlington, VA 22203, is
responsible for the selection and management of each Fund's portfolio
investments in accordance with each Fund's investment objectives, investment
program, policies, and restrictions. RE Advisers, incorporated in the
Commonwealth of Virginia in 1995 (formerly incorporated in the District of
Columbia in 1990), is a direct subsidiary of RE Investment and an indirect
wholly-owned subsidiary of NRECA, a non-profit organization which serves and
represents the nation's consumer-owned rural electric cooperatives. RE Advisers
currently provides investment advice to the Homestead Funds as well as to
certain private advisory accounts. In addition, persons employed by RE Advisers
currently provide investment advice to and supervision and monitoring of a
qualified defined benefit plan, a qualified defined contribution plan, and a
welfare benefit plan provided by NRECA for its employees and employees of its
rural electric cooperative members, that together have assets of over $3
billion. RE Advisers employs staff necessary to provide investment advisory
services and certain administrative services to the Homestead Funds and also
furnishes the Homestead Funds with all office facilities, furnishings, and
office equipment necessary for the performance of its duties under its
Investment Management Agreements on behalf of each Fund. The Homestead Funds pay
RE Advisers, on a monthly basis, an investment management fee based on each
Fund's average daily net assets at the following annualized rates: with respect
to the Daily Income Fund, .50% of average daily net assets up to $100 million;
.40% of the average daily net assets up to the next $100 million; .30% of the
average daily net assets up to the next $300 million; and .25% of such assets in
excess of $500 million; with respect to the Short-Term Bond Fund and Short-Term
Government Securities Fund, .50% of the average daily net assets up to $50
million; .40% of the average daily net assets up to the next $50 million; and
.30% of such assets in excess of $100 million; and with respect to the Value
Fund, .65% of average daily net assets up to $50 million; .50% of average daily
net assets up to the next $50 million; and .40% of such assets in excess of $100
million.

DISTRIBUTOR. RE Investment, a wholly-owned subsidiary of NRECA United, Inc., a
holding company organized by NRECA to hold stock of certain NRECA subsidiaries,
located at 4301 Wilson Boulevard, Arlington, VA 22203, serves as distributor for
the Homestead Funds under a Distribution Agreement between the Homestead Funds
and RE Investment, which was approved by the Board of Directors of the Homestead
Funds, including a majority of the independent Directors, at a meeting held on
August 31, 1995.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING AGENT.
Rodney Square Management Corporation, P.O. Box 8987, Wilmington, DE 19899,
serves as transfer agent, dividend disbursing agent, and shareholder servicing
agent for the Homestead Funds. RSMC also serves as custodian and provides
accounting services for the Homestead Funds.

EXPENSES. The Homestead Funds bear all expenses of its operation, other than
those assumed by RE Advisers under the Investment Management Agreements with
respect to each Fund and the Expense Limitation Agreements, as described below.
In particular, absent such assumption of expenses, the Homestead Funds pay:
investment management fees; shareholder servicing fees and expenses; custodian
fees and expenses; accounting services fees and expenses (including expenses of
computing each Fund's net asset value per share and calculating standardized
performance information for each Fund); transfer agent and dividend disbursing
agent fees and expenses; independent legal and accounting fees and expenses;
expenses of preparing, printing, and distributing Prospectuses, Statements of
Additional Information, and shareholder communications and reports, except as
used to market the Funds' shares; charges for necessary equipment; federal and
state registration fees and expenses, other than those with respect to the
initial registration of such shares; proxy and shareholder meeting expenses;
expenses of issuing, redeeming, and transferring shares of the Funds;
independent Directors' fees and expenses; expenses of bond, liability, and other
insurance coverage; brokerage commissions, taxes, and trade association fees;
and certain nonrecurring and extraordinary expenses. The underlying assets of
each Fund are segregated on the books of account for the Homestead Funds and are
charged with the liabilities of the particular Fund and a proportionate share of
the general liabilities of the Homestead Funds.

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RE Advisers has agreed, as part of the Expense Limitation Agreements entered
into with the Homestead Funds with respect to each Fund, to assume as its own
expense and reimburse each Fund for all Fund Operating Expenses, which in any
year exceed .75% of the average daily net assets of the Daily Income Fund,
Short-Term Bond Fund and Short-Term Government Securities Fund and 1.25% of the
average daily net assets of the Value Fund ("Operating Expense Limits"). If the
Fund Operating Expenses for a particular Fund are less than the Operating
Expense Limit for that Fund and the assets of that Fund exceed $50 million, the
Fund Operating Expenses assumed and paid by RE Advisers on behalf of a
particular Fund could be reimbursed by that Fund, provided that in doing so the
Operating Expense Limit for that Fund was not exceeded and the period over which
such reimbursements are made does not exceed five years from the date of the
first such payment. In addition, the expense of organizing the Homestead Funds
and registering and qualifying the initial shares of each of its Funds under
federal and state securities laws was assumed and paid by RE Advisers. For the
year ended December 31, 1995, the Total Fund Operating Expenses paid by the
Daily Income Fund, Short-Term Bond Fund, Short-Term Government Securities Fund
and Value Fund were .75%, .75%, .75% and .84%, respectively of that Fund's
average daily net assets.

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CAPITAL STOCK

Homestead Funds, Inc., a Maryland corporation organized in 1990, currently
consists of four portfolios, each of which represents a separate series of
capital stock in the Homestead Funds having different investment objectives,
investment programs, policies and restrictions. Each share of capital stock of
each Fund represents an equal proportionate interest in that Fund with each
other share of stock, and each share is entitled to such dividends and
distributions of income belonging to that Fund as are declared by the Board of
Directors. In the event of the liquidation of a Fund, each share of capital
stock of that Fund is entitled to a pro rata share of the net assets of that
Fund.

Shareholders having at least two-thirds of the outstanding shares of the
Homestead Funds may remove a Director from office by a vote cast in person or by
proxy at a meeting of shareholders called for that purpose at the request of
holders of 10% or more of the outstanding shares of the Homestead Funds. The
Homestead Funds have an obligation to assist in such shareholder communications.
Homestead Funds does not routinely hold annual meetings of shareholders. Each
share of capital stock is entitled to one vote on all matters submitted to a
vote of all shareholders of the Homestead Funds. Fractional shares, when issued,
have the same rights, proportionately, as full shares. Shares of a particular
Fund will be voted separately from shares of the other Fund on matters affecting
only that Fund, including approval of the Investment Management Agreement for
that Fund and changes in the fundamental objectives, policies or restrictions of
that Fund. All shares are fully paid and nonassessable when issued and have no
preemptive, conversion or cumulative voting rights. The total authorized capital
stock of the Daily Income Fund, Short-Term Bond Fund, Short-Term Government
Securities Fund and Value Fund consists of 250 million shares, respectively,
each having a par value of $.01.

As of March 31, 1996, NRECA and affiliates owned 8.2% of the outstanding voting
securities of the Daily Income Fund and 11.4% of the outstanding voting
securities of the Short-Term Government Securities Fund, and may be deemed to be
an affiliated person of those Funds.

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[This Page Intentionally Left Blank]

<PAGE> 28
HOMESTEAD FUNDS, INC
- ---------------------------
P R O S P E C T U S

MAY 1, 1996

[HOMESTEAD FUNDS LOGO]
<PAGE> 29

HOMESTEAD FUNDS, INC.
4301 WILSON BOULEVARD
ARLINGTON, VA 22203

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectus about the Funds dated May 1, 1996,
which may be obtained by telephoning Homestead Funds, Inc. c/o Rodney Square
Management Corporation at 1-800-258-3030.

The date of this Statement of Additional Information is May 1, 1996.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
General Information and History 1

Investment Restrictions 2

Description of Certain Investments 5

Management of the Homestead Funds 13

Committees of the Board of Directors 13

Principal Holders of Securities 14

Investment Management and Other Services 14

Custodian 17

Brokerage Allocation and Other Practices 18

Purchase and Redemption of Securities Being Offered 19

Determination of Net Asset Value 20

Distribution of Shares 21

Taxes 21

Capital Stock and Corporate Matters 22

Performance Information About the Funds 23

Independent Auditors 26

Legal Matters 27

Appendix 28
</TABLE>

GENERAL INFORMATION AND HISTORY

Homestead Funds, Inc. ("Homestead Funds") is a Maryland corporation registered
with the Securities and Exchange Commission ("SEC") under the Investment
Company Act of 1940 ("1940 Act") as a diversified, open-end management
investment company, commonly known as a "mutual fund."

1
<PAGE> 30
The Homestead Funds currently consist of four portfolios, the Daily Income
Fund, the Short-Term Bond Fund, the Short-Term Government Securities Fund and
the Value Fund, each of which represents a separate series of capital stock in
the Homestead Funds having different investment objectives, investment
programs, policies, and restrictions. The Daily Income Fund, the Short-Term
Bond Fund, the Short-Term Government Securities Fund and the Value Fund are
sometimes referred to individually as the "Fund" and collectively as the
"Funds."

Each Fund is advised and managed by RE Advisers Corporation ("RE Advisers"),
which directs the day-to-day operations of each Fund and the investment of
each Fund's assets. RE Advisers is an indirect, wholly-owned subsidiary of
National Rural Electric Cooperative Association ("NRECA"), a non-profit
membership organization whose members provide electric light and power and
other services to more than 25 million people in 46 states.

INVESTMENT RESTRICTIONS

In addition to the restrictions set forth in the Prospectus with respect to
each Fund, which are described as fundamental investment policies, investment
restrictions (1), (2), (3), (5), (7) (11), (14), and (16) described below,
have been adopted as fundamental investment policies of each Fund. Such
fundamental investment policies may be changed only with the consent of a
"majority of the outstanding voting securities" of the particular Fund. As
used in the Prospectus and in this Statement of Additional Information, the
term "majority of the outstanding voting shares" means the lesser of (1) 67%
of the shares of a Fund present at a meeting where the holders of more than
50% of the outstanding shares of a Fund are present in person or by proxy, or
(2) more than 50% of the outstanding shares of a Fund. Shares of each Fund
will be voted separately on matters affecting only that Fund, including
approval of changes in the fundamental objectives, policies, or restrictions
of that Fund.

The following investment restrictions apply to each Fund except as indicated
to the contrary.

A Fund will not:

(1) MARGIN AND SHORT SALES: Purchase securities on margin or sell securities
short, except the Short-Term Bond Fund and the Value Fund may make margin
deposits in connection with permissible options and futures transactions
subject to (5) and (8) below and may make short sales against the box. As a
matter of operating policy, the Short-Term Bond Fund and the Value Fund have
no current intention, in the foreseeable future (i.e., the next year), of
making short sales against the box;

(2) SENIOR SECURITIES AND BORROWING: Issue any class of securities senior
to any other class of securities, although each Fund may borrow for temporary
or emergency purposes. Each Fund may borrow up to 10% of its total assets.
No additional securities will be purchased for a Fund when borrowed money
exceeds 5% of the Fund's total assets. The Short-Term Bond Fund and Value Fund
may each enter into futures contracts subject to (5) below;

(3) REAL ESTATE: Purchase or sell real estate, or invest in real estate
limited partnerships, except each Fund may, as appropriate and consistent with
its respective investment objectives, investment program, policies and other
investment restrictions, buy securities of issuers that engage in real estate
operations and securities that are secured by interests in real estate
(including shares of real estate investment trusts, mortgage pass-through
securities, mortgage-backed securities, and collateralized mortgage
obligations) and may hold and sell real estate acquired as a result of
ownership of such securities;

2
<PAGE> 31
(4) CONTROL OF PORTFOLIO COMPANIES: Invest in portfolio companies for the
purpose of acquiring or exercising control of such companies;

(5) COMMODITIES: Purchase or sell commodities and invest in commodities
futures contracts, except that the Short-Term Bond Fund and the Value Fund may
each enter into only futures contracts and options thereon that are listed on
a national securities or commodities exchange where, as a result thereof, no
more than 5% of the total assets for that Fund (taken at market value at the
time of entering into the futures contracts) would be committed to margin
deposits on such future contracts and premiums paid for unexpired options on
such futures contracts; provided that, in the case of an option that is
"in-the-money" at the time of purchase, the "in-the-money" amount, as defined
under Commodity Futures Trading Commission regulations, may be excluded in
computing such 5% limit. The Short-Term Bond Fund and the Value Fund will
each utilize only listed futures contract and options thereon. As a matter of
operating policy, Short-Term Bond Fund and the Value Fund have no current
intention, in the foreseeable future (i.e., the next year), of entering into
futures contracts or options thereon;

(6) INVESTMENT COMPANIES: Invest in the securities of other open-end
investment companies, except that each Fund may purchase securities of other
open-end investment companies provided that each such Fund (i) owns no more
than 3% of the total outstanding voting securities of any one investment
company and (ii) invests no more than 5% of its total assets in the securities
of any one investment company or 10% in all other investment companies in the
aggregate. Further, as a matter of operating policy, the Daily Income Fund
will limit its investments in other investment companies in accordance with
the diversification requirements for money market funds specified in (16)
below. The Short-Term Government Securities Fund may purchase shares of other
investment companies which invest in U.S. Government securities.

(7) UNDERWRITING: Underwrite securities issued by other persons, except to
the extent that a Fund may be deemed to be an underwriter, within the meaning
of the Securities Act of 1933, in connection with the purchase of securities
directly from an issuer in accordance with that Fund's investment objectives,
investment program, policies, and restrictions;

(8) OPTIONS, STRADDLES AND SPREADS: Invest in puts, calls, straddles,
spreads or any combination thereof, except that the Short-Term Bond Fund and
the Value Fund each may invest in and commit its assets to writing and
purchasing only put and call options that are listed on a national securities
exchange and issued by the Options Clearing Corporation to the extent
permitted by the Prospectus and this Statement of Additional Information. In
order to comply with the securities laws of several states, neither the
Short-Term Bond Fund nor the Value Fund (as a matter of operating policy) will
write a covered call option if, as a result, the aggregate market value of all
portfolio securities covering call options or subject to put options for that
Fund exceeds 25% of the market value of that Fund's net assets. In addition,
the Short-Term Bond Fund and the Value Fund will utilize only listed options
issued by the Options Clearing Corporation. The Short-Term Bond Fund and the
Value Fund have no current intention, in the foreseeable future (i.e., the
next year), of investing in options, straddles and spreads;

(9) OIL AND GAS PROGRAMS: Invest in interests in oil, gas, or other mineral
exploration or development programs or oil, gas and mineral leases, although
investments may be made in the securities of issuers engaged in any such
businesses;

(10) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS: Purchase
or retain the securities of any issuer if to the knowledge of the Homestead
Funds, those officers and directors of the Homestead Funds or RE Advisers who

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individually own more than 1/2 of 1% of the securities of such issuer
collectively own more than 5% of the securities of such issuer;

(11) LOANS: Make loans, except that each Fund in accordance with that Fund's
investment objectives, investment program, policies, and restrictions may: (i)
invest in a portion of an issue of publicly issued or privately placed bonds,
debentures, notes, and other debt securities for investment purposes, and (ii)
purchase money market securities and enter into repurchase agreements,
provided such instruments are fully collateralized and marked to market daily;

(12) UNSEASONED ISSUERS: Invest more than 5% of its total assets in
securities of issuers, including their predecessors and unconditional
guarantors, which, at the time of purchase, have been in operation for less
than three years, other than obligations issued or guaranteed by the United
States Government, its agencies, and instrumentalities;

(13) RESTRICTED SECURITIES, SECURITIES NOT READILY MARKETABLE, AND ILLIQUID
SECURITIES: Knowingly purchase or otherwise acquire any security or invest in
a repurchase agreement if, as a result, more than 15% of the net assets of the
Short-Term Bond Fund, Short-Term Government Securities Fund and Value Fund
(10% of the net assets of the Daily Income Fund) would be invested in
securities that are restricted, illiquid, or not readily marketable, including
repurchase agreements maturing in more than seven days and foreign issuers
whose securities are not listed on a recognized domestic or foreign exchange.
The Short-Term Government Securities Fund will only invest in repurchase
agreements collateralized by U.S. Government securities or by securities
issued by agencies and instrumentalities of the U.S. Government and guaranteed
by the U.S. Government. As a matter of operating policy, in compliance with
certain state regulations, no more than 5% of any Fund's total assets will be
invested in restricted securities;

(14) MORTGAGING: Mortgage, pledge, or hypothecate in any other manner, or
transfer as security for indebtedness any security owned by a Fund, except
(i) as may be necessary in connection with permissible borrowings (in which
event such mortgaging, pledging, and hypothecating may not exceed 10% of each
Fund's total assets) and (ii) with respect to the Short-Term Bond Fund and
Value Fund, as may be necessary, in connection with the use of options and
futures contracts;

(15) WARRANTS: The Daily Income Fund, Short-Term Bond Fund and Short-Term
Government Securities Fund will not invest in warrants. The Value Fund will
limit its investment in warrants to no more than 5% of its net assets, valued
at the lower of cost or market value, and will further limit its investment in
unlisted warrants to no more than 2% of its net assets.

(16) DIVERSIFICATION: Make an investment unless 75% of the value of that
Fund's total assets is represented by cash, cash items, U.S. Government
securities, securities of other investment companies and other securities.
For purposes of this restriction, the purchase of "other securities" is
limited so that no more than 5% of the value of the Fund's total assets would
be invested in any one issuer. As a matter of operating policy, each Fund
will not consider repurchase agreements to be subject to the above-stated 5%
limitation if all the collateral underlying the repurchase agreements are U.S.
Government securities and such repurchase agreements are fully collateralized.
Further, as a matter of operating policy, the Daily Income Fund will invest no
more than 5% of the value of that Fund's total assets in securities of any one
issuer, other than U.S. Government securities, except that the Daily Income
Fund may invest up to 25% of its total assets in First Tier Securities (as
defined in Rule 2a-7 under the 1940 Act) of a single issuer for a period of up
to three business days after the purchase of such security. Further, as a
matter of operating policy, the Daily Income Fund will not invest more than
(i) the

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<PAGE> 33
greater of 1% of its total assets or $1,000,000 in Second Tier Securities (as
defined in Rule 2a-7 under the 1940 Act) of a single issuer and (ii) 5% of the
Daily Income Fund's total assets, when acquired, in Second Tier Securities.

DESCRIPTION OF CERTAIN INVESTMENTS

The following is a description of certain types of investments which may be
made by the Funds.

MONEY MARKET INSTRUMENTS

As stated in the Prospectus, the Daily Income Fund will invest in a
diversified portfolio of U.S. dollar-denominated money market instruments,
which are considered eligible securities for purposes of Rule 2a-7 under the
1940 Act and present minimal credit risks. The Short-Term Bond Fund,
Short-Term Government Securities Fund and Value Fund may invest in
high-quality money market instruments of the same type as the Daily Income
Fund in order to enable it to; (1) take advantage of buying opportunities; (2)
meet redemption requests or ongoing expenses; or (3) take defensive action as
necessary, or for other temporary purposes. The Short-Term Government
Securities Fund will invest in securities backed by the full faith and credit
of the U.S. Government. The money market instruments that may be used for
investment (except as noted above) include:

UNITED STATES GOVERNMENT OBLIGATIONS: These consist of various types of
marketable securities issued by the United States Treasury, i.e., bills, notes
and bonds. Such securities are direct obligations of the United States
Government and differ mainly in the length of their maturity. Treasury bills,
the most frequently issued marketable government security, have a maturity of
up to one year and are issued on a discount basis.

UNITED STATES GOVERNMENT AGENCY SECURITIES: These consist of debt securities
issued by agencies and instrumentalities of the United States Government,
including the various types of instruments currently outstanding or which may
be offered in the future. Agencies include, among others, the Federal Housing
Administration, Government National Mortgage Association, Farmer's Home
Administration, Export-Import Bank of the United States, Maritime
Administration, and General Services Administration. Instrumentalities
include, for example, each of the Federal Home Loan Banks, the National Bank
for Cooperatives, the Federal Home Loan Mortgage Corporation, the Farm Credit
Banks, the Federal National Mortgage Association, and the United States Postal
Service. These securities are either; (i) backed by the full faith and credit
of the United States Government (e.g., United States Treasury Bills); (ii)
guaranteed by the United States Treasury (e.g., Government National Mortgage
Association mortgage-backed securities); (iii) supported by the issuing
agency's or instrumentality's right to borrow from the United States Treasury
(e.g., Federal National Mortgage Association Discount Notes); or (iv)
supported only by the issuing agency's or instrumentality's own credit (e.g.,
each of the Federal Home Loan Banks).

BANK AND SAVINGS AND LOAN OBLIGATIONS: These include certificates of deposit,
bankers' acceptances, and time deposits. Certificates of deposit generally are
short-term, interest-bearing negotiable certificates issued by commercial
banks or savings and loan associations against funds deposited in the issuing
institution. Bankers' acceptances are time drafts drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction (e.g., to finance the import, export, transfer, or storage of
goods). With a bankers' acceptance, the borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Most bankers' acceptances have maturities of six months
or less and are traded in secondary markets prior to maturity. Time deposits

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<PAGE> 34
are generally short-term, interest-bearing negotiable obligations issued by
commercial banks against funds deposited in the issuing institutions. The
Funds will not invest in any security issued by a commercial bank or a savings
and loan association unless the bank or savings and loan association is
organized and operating in the United States, has total assets of at least one
billion dollars, and is a member of the Federal Deposit Insurance Corporation
("FDIC"), in the case of banks, or insured by the FDIC in the case of savings
and loan associations; provided, however, that such limitation will not
prohibit investments in foreign branches of domestic banks which meet the
foregoing requirements. The Funds will not invest in time-deposits maturing
in more than seven days.

COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE DEBT INSTRUMENTS: These
include commercial paper, (i.e., short-term, unsecured promissory notes issued
by corporations to finance short-term credit needs). Commercial paper is
usually sold on a discount basis and has a maturity at the time of issuance
not exceeding nine months. Also included are non-convertible corporate debt
securities (e.g., bonds and debentures). Corporate debt securities with a
remaining maturity of less than 13 months are liquid (and tend to become more
liquid as their maturities lessen) and are traded as money market securities.
The Daily Income Fund, Short-Term Bond Fund and Value Fund may purchase
corporate debt securities having no more than 13 months remaining to maturity
at the date of settlement; however, the Short-Term Bond Fund and the Value
Fund may also purchase corporate debt securities having greater maturities.

REPURCHASE AGREEMENTS: The Funds may invest in repurchase agreements. A
repurchase agreement is an instrument under which the investor (such as the
Fund) acquires ownership of a security (known as the "underlying security")
and the seller (i.e., a bank or primary dealer) agrees, at the time of the
sale, to repurchase the underlying security at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period, unless the seller defaults on its repurchase obligations. The
underlying securities will consist only of high grade money market
instruments. With respect to the Daily Income Fund, the underlying security
must be either a U.S. Government security or a security rated in the highest
rating category for short-term debt securities by the Requisite NRSROs (as
defined in Rule 2a-7 under the 1940 Act) and must be determined to present
minimal credit risks. With respect to the Short-Term Government Securities
Fund, the underlying security must be a U.S. Government security or a security
issued by an agency or instrumentality of the U.S. Government and guaranteed
by the U.S. Government. Repurchase agreements are, in effect, collateralized
by such underlying securities, and, during the term of a repurchase agreement,
the seller will be required to mark-to-market such securities every business
day and to provide such additional collateral as is necessary to maintain the
value of all collateral at a level at least equal to the repurchase price.
Repurchase agreements usually are for short periods, often under one week, and
will not be entered into by a Fund for a duration of more than seven days if,
as a result, more than 15% of the net value of that Fund (10% of the net
assets of the Daily Income Fund) would be invested in such agreements or other
securities which are not readily marketable.

The Funds will seek to assure that the amount of collateral with respect to
any repurchase agreement is adequate. As with a true extension of credit,
however, there is risk of delay in recovery or the possibility of inadequacy
of the collateral should the seller of the repurchase agreement fail
financially. In addition, a Fund could incur costs in connection with
disposition of the collateral if the seller were to default. The Funds will
enter into repurchase agreements only with sellers deemed to be creditworthy
by the Homestead Funds' Board of Directors and only when the economic benefit
to the Funds is believed to justify the attendant risks. The Funds have
adopted standards for the

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<PAGE> 35
sellers with whom they will enter into repurchase agreements. The Board of
Directors believe these standards are designed to reasonably assure that such
sellers present no serious risk of becoming involved in bankruptcy proceedings
within the time frame contemplated by the repurchase agreement. The Funds may
enter into repurchase agreements only with member banks of the Federal Reserve
System or primary dealers in United States Government securities.

ADJUSTABLE RATE SECURITIES: Adjustable rate securities (i.e., variable rate
and floating rate instruments) are securities that have interest rates that
are adjusted periodically, according to a set formula. The maturity of some
adjustable rate securities may be shortened under certain special conditions
described more fully below.

Variable rate instruments are obligations (usually certificates of deposit)
that provide for the adjustment of their interest rates on predetermined dates
or whenever a specific interest rate changes. A variable rate instrument
whose principal amount is scheduled to be paid in 13 months or less is
considered to have a maturity equal to the period remaining until the next
readjustment of the interest rate. Many variable rate instruments are subject
to demand features which entitle the purchaser to resell such securities to
the issuer or another designated party, either (1) at any time upon notice of
usually 13 months or less, or (2) at specified intervals, not exceeding 13
months, and upon 30 days notice. A variable rate instrument subject to a
demand feature is considered to have a maturity equal to the longer of the
period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand.

Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions
similar to those for variable rate instruments and may be subject to demand
features like those for variable rate instruments. The interest rate is
adjusted, periodically (e.g., daily, monthly, semi-annually), to the
prevailing interest rate in the marketplace. The interest rate on floating
rate securities is ordinarily determined by reference to, or is a percentage
of, a bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of
return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure. The maturity of a
floating rate instrument is considered to be the period remaining until the
principal amount can be recovered through demand.

DEBT SECURITIES

As noted in the Prospectus, the Short-Term Bond Fund invests at least 65% of
its net assets in a managed portfolio of high-quality debt securities which
includes short-term corporate debt securities, U.S. Government and agency
notes and bonds, mortgage pass-through securities, collateralized mortgage
obligations, other mortgage-related securities and asset-backed securities
described below.

The Short-Term Government Securities Fund invests at least 65% of its net
assets in a managed portfolio which includes U.S. Government bills, notes and
bonds and securities issued by agencies and instrumentalities of the U.S.
Government that are guaranteed by the U.S. Government.

The Value Fund may invest up to 20% of its assets in high-grade debt
securities. Debt securities are considered to be high-grade if they are rated
at least A, or its equivalent by one of the NRSROs, or if not rated, are of
equivalent investment quality as determined by RE Advisers. See the Appendix
for a description of each rating category.

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<PAGE> 36
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage pass-through
securities differ from other forms of debt securities (which normally provide
periodic payments of interest in fixed amounts and the payment of principal in
a lump sum at maturity or on specified call dates). Instead, mortgage
pass-through securities provide monthly payments consisting of both interest
and principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on the underlying
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Unscheduled payments of principal may be made if the
underlying mortgage loans are repaid, refinanced or the underlying properties
are foreclosed, thereby shortening the securities' weighted average life.
Some mortgage pass-through securities (such as securities guaranteed by the
Government National Mortgage Association) are described as "modified
pass-through securities." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain
fees, on the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.

The principal governmental guarantor of mortgage pass-through securities is
the Government National Mortgage Association ("GNMA"). GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Treasury, the timely
payment of principal and interest on securities issued by lending institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgage loans. These mortgage loans
are either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. A "pool" or group of such mortgage loans is
assembled and after being approved by GNMA, is offered to investors through
securities dealers.

Government-related guarantors (i.e., not backed by the full faith and credit
of the U.S. Treasury) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It
is subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional (i.e., not insured or guaranteed by
any government agency) residential mortgages from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Mortgage pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the U.S. Treasury.

FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home
Loan Banks and now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCs") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely
payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the U.S. Treasury.

Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage pass-through
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the former pools. Timely payment of interest and principal of these pools may
be supported by various forms of insurance or guarantees, including individual

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<PAGE> 37
loan, title, pool and hazard insurance and letters of credit. The insurance
and guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a mortgage
pass-through security meets the Short-Term Bond Fund's investment quality
standards. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Short-Term Bond Fund may buy mortgage pass-through
securities without insurance or guarantees if RE Advisers determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Short-Term Bond Fund
will limit investment in mortgage pass-through securities or other securities
which may be considered illiquid to no more than 15% of the Fund's total
assets.

COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt securities collateralized by underlying whole mortgage loans
or, more typically, by pools of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA and their income streams. CMOs are generally structured
into multiple classes or tranches, each bearing a different stated maturity.
The actual maturity and average life of a CMO will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is
first returned to investors holding the shortest maturity class. Investors
holding the longer maturity classes receive principal only after the first
class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.

In a typical CMO transaction, a corporation issues multiple series of CMO
bonds (e.g., Series A, B, C, and Z bonds). Proceeds of the CMO bond offering
are used to purchase mortgages or mortgage pass-through certificates which are
used as collateral for the loan ("Collateral"). The Collateral is generally
pledged to a third party trustee as security for the CMO bonds. Principal and
interest payments from the Collateral are used to pay principal on the CMO
bonds. The Series A, B, and C bonds all bear current interest. Interest on
the Series Z bond is accrued and added to principal and a like amount is paid
as principal on the Series A, B, or C bond currently being paid off. When the
Series A, B, and C bonds are paid in full, interest and principal on the
Series Z bond begins to be paid currently. With some CMOs, the issuer serves
as a conduit to allow loan originators (primarily builders or savings and loan
associations) to borrow against their loan portfolios.

In reliance on an SEC interpretation, the Short-Term Bond Fund's investment in
certain qualifying CMOs, including CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits ("REMICs"), are not subject to the
1940 Act's limitation on acquiring interests in other investment companies. In
order to be able to rely on the SEC's interpretation, the CMOs and REMICs must
be unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed
securities, (ii) do not issue redeemable securities, (iii) operate under
general exemptive orders exempting them from all provisions of the 1940 Act,
and (iv) are not registered or regulated under the 1940 Act as investment
companies. To the extent that the Short-Term Bond Fund selects CMOs or REMICs
that do not meet the above requirements, the Fund may not invest more than 10%
of its assets in all such entities in the aggregate and may not acquire more
than 3% of the outstanding voting securities of any single such entity. The
Short-Term Government Securities Fund may invest in CMOs guaranteed by GNMA.

OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities include
securities other than those described above that directly or indirectly

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<PAGE> 38
represent a participation in, or are secured by and payable from, mortgage
loans on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt
securities issued by agencies or instrumentalities of the U.S. Government or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, homebuilders, mortgage banks, commercial banks,
investment banks, partnerships, trusts and special purpose entities of the
foregoing.

ASSET-BACKED SECURITIES. The Short-Term Bond Fund may invest in asset-backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations (such as Certificates for Automobile
Receivables or "CARs") and credit card receivables (such as Credit Card
Receivable Securities or "CARDS"). Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. However, such securities may
also be issued on a pay-through basis (like CMOs) and, in such case, are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such asset and issuing such pay-through security.
Asset-backed securities are not issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. The payment of principal and interest on
such obligations may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution (such as a
bank or insurance company) affiliated or unaffiliated with the issuers of such
securities.

The purchase of asset-backed securities raises considerations concerning the
credit support for such securities due to the financing of the instruments
underlying such securities. For example, most organizations that issue
asset-backed securities relating to motor vehicle installment purchase
obligations perfect their interests in their respective obligations only by
filing a financing statement and by having the servicer of the obligations,
which is usually the originator, take custody thereof. In such circumstances,
if the servicer were to sell the same obligations to another party, in
violation of its duty not to do so, there is a risk that such party could
acquire an interest in the obligations superior to that of the holders of the
asset-backed securities. Also, although most such obligations grant a
security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to perfect such security interest against competing claims of other parties.
Due to the large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the obligations underlying the
asset-backed securities, usually is not amended to reflect the assignment of
the seller's security interest for the benefit of the holders of the
asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws
give the motor vehicle owner the right to assert against the holder of the
owner's obligation certain defenses such owner would have against the seller
of the motor vehicle. The assertion of such defenses could reduce payments on
the related asset-backed securities.

Insofar as credit card receivables are concerned, credit card holders are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such holders the right to set off certain amounts
against balances owed on the credit card, thereby reducing the amounts paid on
such receivables. In addition, unlike most other asset-backed securities,
credit card receivables are unsecured obligations of the cardholder.

The development of asset-backed securities is at an early stage compared to
mortgage pass-through or mortgage-backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for such
securities is not as well developed as that for mortgage pass-through

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<PAGE> 39
securities guaranteed by government agencies or instrumentalities. RE
Advisers intends to limit its purchases of asset-backed securities to
securities that are readily marketable at the time of purchase.

MATURITY OF DEBT SECURITIES

The maturity of debt securities may be considered long (10 or more years),
intermediate (3 to 10 years), or short-term (1 to 3 years). In general, the
principal values of longer-term securities fluctuate more widely in response
to changes in interest rates than those of shorter-term securities, providing
greater opportunity for capital gain or risk of capital loss. A decline in
interest rates usually produces an increase in the value of debt securities,
while an increase in interest rates generally reduces their value.

WHEN-ISSUED SECURITIES

Each Fund may, from time to time, purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally,
the settlement date occurs within one month of the purchase, but may take up
to three months. During the period between purchase and settlement, no
payment is made by a Fund to the issuer and no interest accrues to a Fund.
While when-issued securities may be sold prior to the settlement date, each
Fund intends to purchase such securities with the purpose of actually
acquiring them, unless a sale appears to be desirable for investment reasons.
At the time a Fund makes the commitment to purchase a security on a when
issued basis, it will record the transaction and reflect the value of the
security in determining its net asset value. Each Fund will maintain, in a
segregated account with the custodian, cash and liquid high-quality debt
securities equal in value to commitments for when-issued securities.

WARRANTS

Warrants are securities that give the holder the right to purchase equity
securities from the issuer at a specific price (the "strike price") for a
limited period of time. The strike price of warrants typically is higher than
the prevailing market price of the underlying security at the time the warrant
is issued, while the market value of the warrant is typically much lower than
the current market price of the underlying securities. Warrants are generally
considered to be more risky investments than the underlying securities, but
may offer greater potential for capital appreciation than the underlying
securities.

Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change
with the value of the underlying securities, and a warrant ceases to have
value if it is not exercised prior to the expiration date. These factors can
make warrants more speculative than other types of investments. The Daily
Income Fund, Short-Term Bond Fund and Short-Term Government Securities Fund
will not invest in warrants. The Value Fund will limit its investment in
warrants to no more than 5% of its net assets, valued at the lower of cost or
market value, and will further limit its investment in unlisted warrants to no
more than 2% of its net assets.

U.S. DOLLAR-DENOMINATED SECURITIES OF FOREIGN ISSUERS

Subject to each Fund's investment objectives, investment program, policies,
and restrictions, the Daily Income Fund, Short-Term Bond Fund and Value Fund
may invest in certain types of U.S. dollar-denominated securities of foreign

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<PAGE> 40
issuers. As described in the Prospectus, with respect to equity securities,
the Short-Term Bond Fund and the Value Fund may purchase American Depository
Receipts ("ADRs"). The Daily Income Fund, Short-Term Bond Fund and Value Fund
also may purchase U.S. dollar-denominated money market instruments, and the
Short-Term Bond Fund and Value Fund may purchase longer-term debt securities
of foreign issuers. Such money market instruments and debt securities of
foreign issuers may be issued and traded domestically (e.g., Yankee
securities), or traded exclusively in foreign markets (e.g., Eurodollar
securities).

Yankee securities include money market instruments and bonds of foreign
issuers who customarily register such securities with the SEC and borrow U.S.
dollars by underwritings of securities intended for delivery in the United
States. Although the principal trading market for Yankee securities is the
United States, foreign buyers can and do participate in the Yankee securities
market. Interest on such Yankee bonds is customarily paid on a semi-annual
basis. The marketability of these "foreign bonds" in the United States is in
many cases better than that for foreign bonds in foreign markets, but is, of
course, dependent upon the quality of the issuer.

Eurodollar securities include money market instruments and bonds underwritten
by an international syndicate and sold "at issue" to non-U.S. investors. Such
securities are not registered with the SEC or issued domestically and
generally may only be sold to U.S. investors after the initial offering and
cooling-off periods. The market for Eurodollar securities is dominated by
foreign-based investors and the primary trading market for these securities is
London.

The Daily Income Fund, Short-Term Bond Fund and Value Fund may invest in U.S.
dollar denominated securities issued by foreign broker-dealers, commercial
banks or registered investment advisers. In general, however, mutual funds
are prohibited under Section 12(d)(3) of the 1940 Act and current rules
thereunder from purchasing the securities of any foreign broker-dealer,
commercial bank or registered investment adviser that, in its most recent
fiscal year, derived more than 15% of such entity's gross revenues from
securities-related activities. The SEC adopted certain amendments to Rule
12d3-1 under the 1940 Act that would permit mutual funds to acquire the equity
securities of certain foreign securities-related businesses.

Although investments in securities of foreign issuers are intended to reduce
risk by providing further diversification, such investments involve risks not
ordinarily associated with investments in securities of domestic issuers.
These risks include: the possibility of foreign political and economic
instability; difficulties of predicting international trade patterns and the
possibility of the imposition of exchange controls; and the possibility of
expropriation, confiscatory taxation, or nationalization of foreign portfolio
companies. Securities of foreign issuers that are traded primarily abroad
(e.g., Eurodollar securities) also may be less liquid and subject to greater
price fluctuations than securities of domestic issuers. Moreover, there may
be less publicly available information about foreign issuers whose securities
are not registered with the SEC and such foreign issuers may not be subject to
the accounting, auditing and financial reporting standards applicable to
issuers registered domestically. In addition, foreign issuers, stock
exchanges, and brokers generally are subject to less government regulation.
Moreover, there may be difficulties in obtaining and enforcing court judgment
abroad and there may be difficulties in effecting the repatriation of capital
invested abroad. Finally, there may be difficulties and delays in the
settlement of transactions in certain foreign markets.

The portfolio turnover rates for the years ended December 31, 1995 and 1994
were 35% and 13%, respectively for the Short-Term Bond Fund and 10% and 4%,

12
<PAGE> 41
respectively for the Value Fund. The portfolio turnover rate for the period
ended December 31, 1995 for the Short-Term Government Securities Fund was 7%.

MANAGEMENT OF THE HOMESTEAD FUNDS

DIRECTORS AND OFFICERS

Directors and officers of the Homestead Funds, together with information as to
their principal business occupations during the last five years, are shown
below. Each Director who is considered an "interested person" of the
Homestead Funds (as defined in Section 2(a)(19) of the 1940 Act) is indicated
by an asterisk next to his name. The address for all interested persons is 4301
Wilson Boulevard, Arlington, VA 22203.

<TABLE>
<CAPTION>
Position with the Homestead Funds
and Principal Occupation within
Business Address Past Five Years
- ---------------- -----------------------------------
<S> <C>
John G. Adelhelm Director; Retired Vice President, Group
2852 Furlong Road Department, The Prudential Insurance
Doylestown, PA 18901 Company.
Age 63

Anthony M. Marinello* Vice President and Director; Executive
Age 50 Director of Marketing and Service
Operations of NRECA (1988-Present).

Peter R. Morris* Secretary, Treasurer and Director; Vice
Age 47 President and Director of RE Advisers;
Secretary, Treasurer and Director of RE
Investment; Executive Director of
Investments of NRECA (1988-Present).

James F. Perna Director; Partner, Krooth & Altman (law
1850 M Street, N.W., Suite 400 firm).
Washington, D.C. 20036
Age 48

Anthony C. Williams* President, Chairman of the Board and
Age 54 Director; President and Director of RE
Advisers; President and Director of RE
Investment; Director of Retirement,
Safety and Insurance Department of NRECA
(1985-Present); Director, Cooperative
Benefit Administrators, Inc., Electric
Life Cooperative Insurance Company and
Cooperative Insurance Services, Inc.
(1985-Present).

William P. McKeithan* Vice President and Counsel; Vice
Age 48 President of RE Investment; Counsel,
NRECA (1983-Present).

Catherine M. Blushi* Compliance Officer and Assistant
Age 35 Secretary; Compliance Officer of RE
Advisers; Securities Compliance Officer
of RE Investment and NRECA (August
1990-Present).
</TABLE>

COMMITTEES OF THE BOARD OF DIRECTORS

The Homestead Funds have an Audit Committee and an Executive Committee. The
duties of these two committees and their present membership are as follows:

13
<PAGE> 42

AUDIT COMMITTEE: The members of the Audit Committee will consult with the
Homestead Funds' independent auditors if the auditors or Audit Committee deem
it desirable, and will meet with the Homestead Funds' independent auditors at
least once annually to discuss the scope and results of the annual audit of
the Funds and such other matters as the Audit Committee members may deem
appropriate or desirable. Messrs. Adelhelm and Perna are members of the Audit
Committee.

EXECUTIVE COMMITTEE: During intervals between Board Meetings, the Executive
Committee possesses and may exercise all of the powers of the Board of
Directors in the management of the Homestead Funds except as to matters where
action of the full Board of Directors is specifically required. Included
within the scope of such powers are matters relating to valuation of
securities held in each Fund's portfolio and the pricing of each Fund's shares
for purchase and redemption. Messrs. Williams, Marinello, and Morris are
members of the Executive Committee.

PRINCIPAL HOLDERS OF SECURITIES

Directors and officers of the Homestead Funds, as a group, owned less than 1%
of the outstanding voting securities of the Daily Income Fund, Short-Term Bond
Fund and Value Fund as of March 31, 1996 and owned 2.0% of the outstanding
voting securities of the Short-Term Government Securities Fund.

NRECA and its affiliates, 4301 Wilson Boulevard, Arlington, VA 22203, as of
March 31, 1996, owned 8.2% of the outstanding voting securities of the Daily
Income Fund and owned 11.4% of the Short-Term Government Securities Fund and
may be considered an interested person of those Funds.

INVESTMENT MANAGEMENT AND OTHER SERVICES

RE Advisers, 4301 Wilson Boulevard, Arlington, VA 22203, serves as investment
manager of the Daily Income Fund, Short-Term Bond Fund, Short-Term Government
Securities Fund and the Value Fund pursuant to separate Investment Management
Agreements that have been annually approved by the Board of Directors of the
Homestead Funds, including a majority of independent Directors. The
Investment Management Agreements with respect to the Daily Income Fund and the
Value Fund were approved by the majority vote of the respective shareholders
of the Daily Income Fund and the Value Fund at the Meeting of Shareholders
held on April 18, 1991. The Investment Management Agreement between the
Homestead Funds, with respect to the Short-Term Bond Fund, and RE Advisers was
approved by the majority vote of the shareholders of that Fund at the Meeting
of Shareholders held on April 24, 1992. The investment management agreement
between the Homestead Funds, with respect to the Short-Term Government
Securities Fund was approved by the Board of Directors, including a majority
of the independent Directors, on March 7, 1995.

The initial term of each Investment Management Agreement is two years.
However, once the Investment Management Agreements for each Fund are approved
by the respective shareholders of each Fund, each such Agreement may continue
in effect from year to year thereafter if approved at least annually by a vote
of a majority of the Board of Directors (including a majority of the Directors
who are not parties to the Investment Management Agreement or interested
persons of any such parties) cast in person at a meeting called for the
purpose of voting on such renewal, or by the vote of a majority of the
outstanding shares of the particular Fund.

14
<PAGE> 43
RE ADVISERS

The directors and the principal executive officers of RE Advisers are Anthony
C. Williams, Peter R. Morris, and Stuart E. Teach. RE Advisers is a direct
subsidiary of RE Investment, which is a wholly-owned subsidiary of NRECA
United, Inc., a holding company organized by NRECA to hold stock of certain
NRECA subsidiaries.

In addition to the duties set forth in the Prospectus, RE Advisers, in
furtherance of such duties and responsibilities, is authorized and has agreed
to provide or perform the following functions: (1) formulate and implement a
continuing investment program for use in managing the assets and resources of
each Fund in a manner consistent with each Fund's investment objectives,
investment program, policies, and restrictions, which program may be amended
and updated from time to time to reflect changes in financial and economic
conditions; (2) make all determinations with respect to the investment of each
Fund's assets in accordance with (a) applicable law, (b) each Fund's
investment objectives, investment program, policies, and restrictions as
provided in the Homestead Funds' Prospectus and Statement of Additional
Information, as amended from time to time, (c) provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), relating to regulated
investment companies, and (d) such other limitations as the Board of Directors
of the Homestead Funds may impose by written notice; (3) make all
determinations as to the purchase or sale of portfolio securities, including
advising the Board of Directors as to certain matters involving each Fund's
portfolio securities that are not in the nature of investment decisions; (4)
buy, sell, exchange, convert for each Fund's use, and otherwise trade in
portfolio securities and other assets; (5) furnish to the Board of Directors
periodic reports concerning RE Adviser's economic outlook and investment
strategy, as well as information concerning each Fund's portfolio activity and
investment performance; (6) select the broker-dealers, underwriters, or
issuers to be used, place orders for the execution of portfolio transactions
with such broker-dealers, underwriters or issuers, and negotiate the
commissions (if any) for the execution of transactions in securities with or
through such broker-dealers, underwriters or issuers selected by RE Advisers;
(7) obtain and evaluate business and financial information in connection with
the exercise of its duties; (8) determine the quality of the Daily Income
Fund's portfolio; (9) determine the creditworthiness of the issuers,
obligors, or guarantors of portfolio securities; and (10) evaluate the
creditworthiness of any entities with which the Funds propose to engage in
repurchase transactions. In addition, RE Advisers has agreed to provide a
number of administrative services to the Homestead Funds including:
maintenance of the Homestead Funds' corporate existence and corporate records;
maintenance of the registration and qualification of each Fund's shares under
federal and state law; coordination and supervision of the financial,
accounting, and administrative functions for each Fund; selection,
coordination of the activities of, supervision, and service as liaison with
various agents and other parties employed by the Homestead Funds (e.g.,
custodian, transfer agent, auditors, and attorneys); and assistance in the
preparation and development of all shareholder communications and reports. RE
Advisers also will furnish to or place at the disposal of the Funds such
information, reports, evaluations, analyses, and opinions as the Homestead
Funds may, from time to time, reasonably request or which RE Advisers believes
would be helpful to the Funds.

Under a Joint Services Agreement by and between NRECA, RE Advisers and RE
Investment Corporation ("RE Investment"), NRECA has agreed to provide
personnel, property, and services to RE Investment and RE Advisers in carrying
out their responsibilities and services under agreements with the Homestead
Funds. In turn, RE Advisers has agreed to provide, without cost to the
Homestead Funds, persons (who are directors, officers, or employees of RE
Advisers) to serve as directors, officers, or members of any committees of the

15
<PAGE> 44
Board of Directors of the Homestead Funds. As between the Homestead Funds and
RE Advisers, RE Advisers has agreed to pay all necessary salaries, expenses
and fees, if any, of the directors, officers and employees of the Homestead
Funds who are affiliated with RE Advisers.

As compensation for its services and for the expenses which it assumes, the
Homestead Funds pay RE Advisers, on a monthly basis, an investment management
fee based on each Fund's average daily net assets at the following annualized
rates: with respect to the Daily Income Fund, .50% of average daily net
assets up to $100 million; .40% of average daily net assets up to the next
$100 million; .30% of average daily net asset up to the next $300 million; and
.25% of average daily net assets in excess of $500 million; with respect to
the Short-Term Bond Fund and Short-Term Government Securities Fund, .50% of
average daily net assets up to $50 million; .40% of average daily net assets
up to the next $50 million; and .30% of average daily net assets in excess of
$100 million and with respect to the Value Fund, .65% of average daily net
assets up to $50 million; .50% of average daily net assets up to the next $50
million; and .40% of average daily net assets in excess of $100 million.

For the years ended December 31, 1995 and 1994, investment management fees
paid to RE Advisers by the Daily Income Fund were $173,992 and $77,645,
respectively, the Value Fund paid $654,453 and $547,757, respectively, and the
Short-Term Bond Fund paid $216,250 and $127,833, respectively. For the period
ended December 31, 1995, the Short-Term Government Securities Fund paid no
investment management fees, pursuant to the provisions contained in the
Expense Limitation Agreement with respect to that Fund described below. The
investment management fees for each Fund were paid pursuant to provisions
contained in the Expense Limitation Agreement between the Homestead Funds and
RE Advisers, with respect to each Fund and are described directly below.

Each Expense Limitation Agreement provides that to the extent that the
aggregate expenses incurred by each Fund in any fiscal year, including but not
limited to fees of RE Advisers, computed as hereinabove set forth (but
excluding interest, taxes, brokerage commissions, and other expenditures which
are capitalized in accordance with generally accepted accounting principles,
and other extraordinary expenses not incurred in the ordinary course of each
Fund's business) (hereinafter referred to as "Fund Operating Expenses"),
exceed the lowest applicable limit actually enforced by any state in which a
Fund's shares are qualified for sale ("State Expense Limit"), such excess
amount ("Excess Amount") will be the liability of RE Advisers. To determine
RE Advisers' liability for the Excess Amount, the Fund Operating Expenses will
be annualized monthly as of the last day of the month. If the annualized Fund
Operating Expenses for any month exceed the State Expense Limit, RE Advisers
will first waive or reduce its investment management fee for such month, as
appropriate, to the extent necessary to pay such Excess Amount. In the event
the Excess Amount exceeds the amount of the investment management fee for such
month, RE Advisers, in addition to waiving its entire investment management
fee for such month, will also remit to the applicable Fund the difference
between the Excess Amount and the amount due as the investment management fee,
provided, however, that an adjustment will be made on or before the last day
of the first month of the next succeeding fiscal year if the aggregate Fund
Operating Expenses for that Fund for the fiscal year do not exceed the State
Expense Limit.

In addition, the Expense Limitation Agreements provide that RE Advisers is
also liable for any other Fund Operating Expenses which in any year exceed
.75% of the Daily Income Fund's, Short-Term Bond Fund's or Short-Term
Government Securities Fund's average daily net assets; and 1.25% of the Value
Fund's average daily net assets (the "Operating Expense Limit"). To determine
RE Advisers' liability for each Fund's expenses, the expenses of each Fund
will be annualized monthly as of the last day of the month. If the annualized

16
<PAGE> 45
expenses for any month exceed the Operating Expense Limit, for each Fund, such
excess amount ("Excess Operating Amount") will be the liability of RE
Advisers. To pay such liability, RE Advisers will first waive or reduce its
investment management fee for such month, as appropriate, and, if necessary,
will also assume as its own expense and reimburse each Fund for the difference
between the Excess Operating Amount and the investment management fee up to
the amount of the State Expense Limit; provided, however, that an adjustment,
if necessary, will be made on or before the last day of the first month of the
next succeeding fiscal year, if the aggregate Fund Operating Expenses for the
fiscal year do not exceed the Operating Expense Limit.

Pursuant to the Expense Limitation Agreements, RE Advisers will be entitled to
reimbursement from the Funds for any amounts waived or assumed by RE Advisers
if, in any year during which total assets of a Fund are greater than
$50,000,000 (and in which the Investment Management Agreement is still in
effect), the aggregate Fund Operating Expenses for the fiscal year are less
than the Operating Expense Limit for that Fund for that year after payment of
the Reimbursement Amount described below. The Funds will be obligated to pay
to RE Advisers a Reimbursement Amount, or any portion thereof, equal to the
sum of (i) all investment management fees previously waived or reduced by RE
Advisers during any preceding year and (ii) all Excess Operating Amounts paid
by RE Advisers attributable to any preceding year that have been previously
reflected in a payment received by RE Advisers pursuant to (i) above. The
period during which such Reimbursement Amount may be paid by the Fund to RE
Advisers will not exceed five years from the date on which the first payment,
if any, of the Reimbursement Amount, is made by the Fund.

For the period ended December 31, 1995, the Fund Operating Expenses assumed
and reimbursed and the investment management fees waived by RE Advisers to the
Short-Term Government Securities Fund were $48,899 and $4,919, respectively.
For the years ended December 31, 1995 and 1994, RE Advisers waived or reduced
its investment management fee by $53,465 and $72,981, respectively for the
Daily Income Fund and $66,694 and $111,375, respectively for the Short-Term
Bond Fund. For the years ended December 31, 1995 and 1994, the Value Fund
paid RE Advisers $0 and $93,669, respectively, for previously reimbursed
expenses and waived investment management fees.

CUSTODIAN

Wilmington Trust Company ("WTC"), 1105 N. Market Street, Wilmington, DE
19890, is custodian of the securities and cash owned by the Funds. WTC is
responsible for holding all securities and cash of each Fund, receiving and
paying for securities purchased, delivering against payment securities sold,
receiving and collecting income from investments, making all payments covering
expenses of the Homestead Funds, computing the net asset value of the Daily
Income Fund, the Short-Term Bond Fund, the Short-Term Government Securities
Fund and the Value Fund, calculating each Fund's standardized performance
information, and performing other administrative duties, all as directed by
persons authorized by the Homestead Funds. WTC does not exercise any
supervisory function in such matters as the purchase and sale of portfolio
securities, payment of dividends, or payment of expenses of the Funds or the
Homestead Funds. Portfolio securities of the Funds purchased in the United
States are maintained in the custody of WTC and may be entered into the
Federal Reserve Book Entry System, or the security depository system of the
Depository Trust Company. Pursuant to the Custodian Agreement, portfolio
securities purchased outside the United States are maintained in the custody
of various foreign custodians, including foreign banks and foreign securities
depositories, as are approved by the Board of Directors, in accordance with
regulations under the 1940 Act. The Funds may invest in obligations of WTC
and may purchase or sell securities from or to WTC.

17
<PAGE> 46
Rodney Square Management Corporation is the transfer agent and dividend
disbursing agent for the Funds and provides the Funds with various shareholder
services, including shareholder communications and responses to shareholder
inquiries.

BROKERAGE ALLOCATION AND OTHER PRACTICES

Neither the Homestead Funds nor any of its Directors or officers nor those of
RE Advisers have any interest in any brokerage firm through which or with
which each Fund effects purchases or sales of its portfolio securities that
would cause such brokerage firm to be considered an affiliated person of such
entity or person.

Subject to the general supervision of the Board of Directors, RE Advisers is
responsible for making decisions with respect to the purchase and sale of
portfolio securities on behalf of each Fund. RE Advisers is also responsible
for the implementation of those decisions, including the selection of
broker-dealers to effect portfolio transactions, the negotiation of
commissions, and the allocation of principal business and portfolio brokerage.

Purchases and sales of common stock and other equity securities are usually
effected on an exchange through brokers who charge a commission. The purchase
of money market instruments and other debt securities traded in the
over-the-counter market usually will be on a principal basis directly from
issuers or dealers serving as primary market makers. Occasionally, equity
securities may be traded in the over-the-counter market as well. The price of
such money market instruments and debt securities, as well as equity
securities traded in the over-the counter market, is usually negotiated, on a
net basis, and no brokerage commissions are paid. Although no stated
commissions are paid for securities traded in the over-the-counter market,
transactions in such securities with dealers usually include the dealer's
"mark-up" or "mark-down." Money market instruments and other debt securities
as well as certain equity securities may also be purchased in underwritten
offerings, which include a fixed amount of compensation to the underwriter,
generally referred to as the underwriting discount or concession.

In selecting brokers and dealers to execute transactions for each Fund, RE
Advisers' primary consideration is to seek to obtain the best execution of the
transactions, at the most favorable overall price, and in the most effective
manner possible, considering all the circumstances. Such circumstances
include: the price of the security; the rate of the commission or
broker-dealer's "spread"; the size and difficulty of the order; the
reliability, integrity, financial condition, general execution and operational
capabilities of competing broker-dealers; and the value of research and other
services provided by the broker-dealer. RE Advisers may also rank
broker-dealers based on the value of their research services and may use this
ranking as one factor in its selection of broker-dealers.

In placing orders for each Fund, RE Advisers, subject to seeking best
execution, is authorized pursuant to the Investment Management Agreements to
cause each Fund to pay broker-dealers that furnish brokerage and research
services (as such services are defined under Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) a higher commission than
that which might be charged by another broker-dealer that does not furnish
such brokerage and research services or who furnishes services of lesser
value. However, such higher commissions must be deemed by RE Advisers as
reasonable in relation to the brokerage and research services provided by the
broker-dealer, viewed in terms of either that particular transaction or the
overall decision-making responsibilities of RE Advisers with respect to the
Homestead Funds or other accounts, as to which it exercises investment
discretion (as such term is defined under Section 3(a)(35) of the 1934 Act).

18
<PAGE> 47

For the years ended December 31, 1995 and 1994, the Daily Income Fund and
Short-Term Bond Fund paid no brokerage commissions. For the period ended
December 31, 1995, the Short-Term Government Securities Fund paid no brokerage
commissions. For the years ended December 31, 1995 and 1994, the Value Fund
paid $66,978 and $58,149, respectively in brokerage commissions, all of which
were paid to brokers that provided research and other brokerage services to RE
Advisers.

RE Advisers currently provides investment advice to the Homestead Funds as
well as certain private advisory accounts. In addition, persons employed by
RE Advisers currently provide investment advice to and supervision and
monitoring of a qualified defined benefit plan, a qualified defined
contribution plan, and a welfare benefit plan provided by NRECA for its
employees and employees of its rural electric cooperative members ("NRECA
Plans"). Some of the NRECA Plans and other accounts have investment
objectives and programs similar to the Homestead Funds. Accordingly,
occasions may arise when RE Advisers and the NRECA investment personnel may
engage in simultaneous purchase and sale transactions of securities that are
consistent with the investment objectives and programs of the Homestead Funds,
the NRECA Plans, and other accounts.

On those occasions when such simultaneous investment decisions are made, RE
Advisers and the NRECA investment personnel will allocate purchase and sale
transactions in an equitable manner according to written procedures approved
by the Homestead Funds' Board of Directors. Specifically, such written
procedures provide that, in allocating purchase and sale transactions made on
a combined basis, RE Advisers and the NRECA investment personnel will seek to
achieve the same average unit price of securities for each entity and will
seek to allocate, as nearly as practicable, such transactions on a pro-rata
basis substantially in proportion to the amounts ordered to be purchased or
sold by each entity. Such procedures may, in certain instances, be either
advantageous or disadvantageous to the Homestead Funds.

PURCHASE AND REDEMPTION OF SECURITIES BEING OFFERED

The shares of each Fund are offered to the public for purchase directly
through RE Investment, which serves as the principal underwriter and
distributor for the Homestead Funds.

The offering and redemption price of the shares of each Fund is based upon
that Fund's net asset value per share next determined after a purchase order
or redemption request has been received in good order by the Homestead Funds'
transfer agent. See "Determination of Net Asset Value" below. Each Fund
intends to pay all redemptions of its shares in cash. However, each Fund may
make full or partial payment of any redemption request by the payment to
shareholders of portfolio securities of the applicable Fund (i.e., by
redemption-in-kind), at the value of such securities used in determining the
redemption price. The Funds, nevertheless, pursuant to Rule 18f-1 under the
1940 Act, have filed a notification of election under which each Fund is
committed to pay in cash to any shareholder of record, all such shareholder's
requests for redemption made during any 90-day period, up to the lesser of
$250,000 or 1% of the applicable Fund's net asset value at the beginning of
such period. The securities to be paid in-kind to any shareholders will be
readily marketable securities selected in such manner as the Board of
Directors of the Homestead Funds deems fair and equitable. If shareholders
were to receive redemptions-in-kind, they would incur brokerage costs should
they wish to liquidate the portfolio securities received in such payment of
their redemption request. The Homestead Funds do not anticipate making
redemptions-in-kind.

The right to redeem shares or to receive payment with respect to any
redemption of shares of the Funds may only be suspended (1) for any period
during which

19
<PAGE> 48
trading on the New York Stock Exchange ("Exchange") is restricted or such
Exchange is closed, other than customary weekend and holiday closings, (2) for
any period during which an emergency exists as a result of which disposal of
securities or determination of the net asset value of the Fund is not
reasonably practicable, or (3) for such other periods as the SEC may by order
permit for protection of shareholders of the Funds.

DETERMINATION OF NET ASSET VALUE

The net asset value of shares of each Fund is normally calculated as of the
close of trading on the Exchange on every day the Exchange is open for
trading, except (1) on days where the degree of trading in the Fund's
portfolio securities would not materially affect the net asset value of the
Fund's shares and (2) on days during which no shares of the Fund were tendered
for redemption and no purchase orders were received. The Exchange is open
Monday through Friday except on the following national holidays: New Year's
Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.

The assets of each Fund are valued as follows:

With respect to the Daily Income Fund, all money market instruments held by
that Fund are valued on an amortized cost basis. In addition, with respect to
the Short-Term Bond Fund, Short-Term Government Securities Fund and Value
Fund, all money market instruments with a remaining maturity of 60 days or
less are also valued on an amortized cost basis. Amortized cost valuation
involves initially valuing a security at its cost, and thereafter, assuming a
constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than
the price the Fund would receive if it sold the security. During periods of
declining interest rates, the quoted yield on shares of the Daily Income Fund
may be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio securities. Thus, if the
use of the amortized cost method of valuation by the Daily Income Fund results
in a lower aggregate portfolio value on a particular day, (1) a prospective
investor in the Daily Income Fund would be able to obtain a somewhat higher
yield if he purchased shares of the Daily Income Fund on that day than would
result from investment in a fund utilizing solely market values, and (2)
existing investors in the Daily Income Fund would receive less investment
income. The converse would apply in a period of rising interest rates.

Common Stocks, preferred stocks, and convertible preferred stocks listed on
national securities exchanges and certain over-the-counter issues traded on
the NASDAQ national market system are valued at the last quoted sale price at
the close of the New York Stock Exchange. Over-the-counter issues not quoted
on the NASDAQ system and other equity securities for which no sale price is
available, are valued at the mean of the closing bid and asked prices as
obtained from published sources (including Quotron), where available, and
otherwise from brokers who are market makers for such securities.

Short-term debt instruments with a remaining maturity of more than 60 days,
intermediate and long-term bonds, convertible bonds, and other debt securities
are generally valued at prices obtained from an independent pricing service.
Where such prices are not available, valuations will be obtained from brokers
who are market makers for such securities. However, in circumstances where RE
Advisers deems it appropriate to do so, the mean of the bid and asked prices
for over-the-counter securities or the last available sale price for exchange
traded debt securities may be used. Where no last sale price for exchange

20
<PAGE> 49
traded debt securities is available, the mean of the bid and asked prices may
be used.

Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided, as described above, are
valued in good faith by the Fund's Board of Directors using its best judgment.

DISTRIBUTION OF SHARES

Pursuant to a Distribution Agreement between the Homestead Funds and RE
Investment, a wholly-owned subsidiary of NRECA United, Inc., a holding company
organized by NRECA, RE Investment serves as the exclusive principal
underwriter and distributor of the shares of each Fund in a continuous
offering.

Under the terms of the Distribution Agreement, RE Investment is not obligated
to sell any specific number of shares of the Funds. Pursuant to the
Distribution Agreement, RE Investment has agreed to bear the costs and
expenses incurred by it in performing its obligations thereunder, including
the following costs and expenses: (1) the printing and distribution of the
Homestead Funds' Prospectus, Statement of Additional Information, and periodic
reports to potential investors in the Funds; (2) the preparation, printing,
and distribution of any advertisement or other sales literature; and, (3) all
other expenses which are primarily for the purpose of promoting the sale of
each Fund's shares.

As previously discussed in this Statement of Additional Information, NRECA has
agreed to provide personnel, property, and services to RE Investment in
carrying out its responsibilities and services under its agreement with the
Homestead Funds. In turn, RE Investment has agreed to provide, without cost
to the Homestead Funds, persons to serve as directors, officers, or employees
of the Homestead Funds.

RE Investment will not receive commissions or other compensation for acting as
principal underwriter and distributor of the Homestead Funds, and no
commission or other fee will be paid by the Homestead Funds or RE Investment
to any person or entity in connection with the sale of shares of the Funds.

TAXES

Each Fund intends to continue to qualify as a "regulated investment company"
("RIC") under Subchapter M of the Code. As such, each Fund must meet the
requirements of Subchapter M of the Code, including the requirements regarding
the character of investments in each Fund, investment diversification, and
distribution.

In general, to qualify as a RIC, at least 90% of the gross income of each Fund
for the taxable year must be derived from dividends, interest, and gains from
the sale or other disposition of securities, and less than 30% of its gross
income for the taxable year can be attributable to gains (without deductions
for losses) from the sale or other disposition of securities held for less
than three months.

A RIC must distribute to its shareholders 90% of its ordinary income and net
short-term capital gains. Moreover, undistributed net income may be subject
to tax at the RIC level.

In addition, each Fund must declare and distribute dividends equal to at least
98% of its ordinary income (as of the twelve months ended December 31) and
distributions of at least 98% of its capital gains net income (as of the
twelve months ended December 31), in order to avoid a federal excise tax.
Each Fund intends to make the required distributions, but they cannot
guarantee that they

21
<PAGE> 50
will do so. Dividends attributable to a Fund's ordinary income are taxable as
such to shareholders.

A corporate shareholder may be entitled to take a deduction for income
dividends received by it that are attributable to dividends received from a
domestic corporation, provided that both the corporate shareholder retains its
shares in the applicable Fund for more than 45 days and the Fund retains its
shares in the issuer from whom it received the income dividends for more than
45 days. A distribution of capital gains net income reflects a Fund's excess
of net long-term gains over its net short-term losses. Each Fund must
designate income dividends and distributions of capital gains net income and
must notify shareholders of these designations within sixty days after the
close of the Homestead Funds' taxable year. A corporate shareholder of a Fund
cannot use a dividends-received deduction for distributions of capital gains
net income.

If, in any taxable year, a Fund should not qualify as a RIC under the Code:
(1) that Fund would be taxed at normal corporate rates on the entire amount of
its taxable income without deduction for dividends or other distributions to
its shareholders, and (2) that Fund's distributions to the extent made out of
that Fund's current or accumulated earnings and profits would be taxable to
its shareholders (other than shareholders in tax deferred accounts) as
ordinary dividends (regardless of whether they would otherwise have been
considered capital gains dividends), and may qualify for the deduction for
dividends received by corporations.

If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFIC"), that Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on the Fund with respect to deferred taxes arising
from the distributions or gains. If a Fund were to purchase shares in a PFIC
and (if the PFIC made the necessary information available) elected to treat
the PFIC as a "qualified electing fund" under the Code, in lieu of the
foregoing requirements, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the PFIC,
even if not distributed to the Fund, and the amounts would be subject to the
90 percent and calendar year distribution requirements described above.

CAPITAL STOCK AND CORPORATE MATTERS

As a Maryland corporate entity, the Homestead Funds need not hold regular
annual shareholder meetings and, in the normal course, do not expect to hold
such meetings. The Homestead Funds, however, must hold shareholder meetings
for such purposes as, for example: (1) electing the initial Board of
Directors; (2) approving certain agreements as required by the 1940 Act; (3)
changing fundamental investment objectives, policies, and restrictions of the
Funds; and (4) filling vacancies on the Board of Directors in the event that
less than a majority of the Directors were elected by shareholders. The
Homestead Funds expect that there will be no meetings of shareholders for the
purpose of electing Directors unless and until such time as less than a
majority of the Directors holding office have been elected by shareholders.
At such time, the Directors then in office will call a shareholders meeting
for the election of Directors. In addition, holders of record of not less
than two-thirds of the outstanding shares of the Homestead Funds may remove a
Director from office by a vote cast in person or by proxy at a shareholder
meeting called for that purpose at the request of holders of 10% or more of
the outstanding shares of the Homestead Funds. The Funds have the obligation
to assist in such shareholder communications. Except as set forth above,
Directors will continue in office and may appoint successor Directors.

22
<PAGE> 51
PERFORMANCE INFORMATION ABOUT THE FUNDS

DAILY INCOME FUND YIELD CALCULATION

The Daily Income Fund calculates a seven-day "current yield" based on a
hypothetical account containing one share at the beginning of the seven-day
period. Current yield is calculated for the seven-day period by determining
the net change in the hypothetical account's value for the period (excluding
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation, and including all dividends accrued and
dividends reinvested in additional shares), and dividing the net change in the
account value by the value of the account at the beginning of the period in
order to obtain the base period return. This base period return is then
multiplied by 365/7 to annualize the yield figure, which is carried to the
nearest one-hundredth of one percent. Realized capital gains or losses and
unrealized appreciation or depreciation of the assets of the Daily Income Fund
are included in the hypothetical account for only the beginning of the period.
Account values also reflect all accrued expenses.

The Daily Income Fund's compound effective yield for the period is computed by
compounding the unannualized base period return by adding one to the base
period return, raising the sum to a power equal to 365/7, and subtracting one
from the result. Current and compound yields will fluctuate daily.
Accordingly, yields for any given seven-day period do not necessarily
represent future results.

The seven-day current yield and compound effective yield of the Daily Income
Fund at December 31, 1995 were 5.07% and 5.20%, respectively.

TOTAL RETURN CALCULATIONS

Each Fund may provide average annual total return information calculated
according to a formula prescribed by the SEC. According to that formula,
average annual total return figures represent the average annual compounded
rate of return for the stated period. Average annual total return quotations
reflect the percentage change between the beginning value of a static account
in the Fund and the ending value of that account measured by the then current
net asset value of that Fund assuming that all dividends and capital gains
distributions during the stated period were reinvested in shares of the Fund
when paid. Total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment that would equate the
initial amount invested to the ending redeemable value of such investment,
according to the following formula:

T=(ERV/P)1/n - 1

where T equals average annual total return; where ERV, the ending redeemable
value, is the value at the end of the applicable period of a hypothetical
$1,000 payment made at the beginning of the applicable period; where P equals
a hypothetical initial payment of $1,000; and where n equals the number of
years.

The average annual total returns for the 12 months ended December 31, 1995,
five years ended December 31, 1995 and since inception (on November 19, 1990)
for the Daily Income Fund were 5.38%, 4.14% and 4.19%, respectively, and for
the Value Fund were 33.78%, 16.35% and 16.07%, respectively. The average
annual total returns for the Short-Term Bond Fund for the 12 months ended
December 31, 1995 and since inception (on November 5, 1991) were 10.81% and
6.15%, respectively.

23
<PAGE> 52

If RE Advisers had not assumed certain Fund Operating Expenses for the Daily
Income Fund and Short-Term Bond Fund as noted above, in accordance with the
Expense Limitation Agreement with respect to each Fund, the average annual
total return for the 12 months ended December 31, 1995 would have been 5.26%
and 10.70%, respectively. The cumulative total return if RE Advisers had not
assumed certain Fund Operating Expenses for the Short-Term Government
Securities Fund for the period since inception (May 1, 1995) to December 31,
1995 would have been 1.77%.

Each Fund, from time to time, also may advertise its cumulative total return
figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period
were reinvested in shares of that Fund. Cumulative total return is calculated
by finding the compound rates of a hypothetical investment over such period,
according to the following formula (cumulative total return is then expressed
as a percentage):

C = (ERV/P) - 1

Where:

C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of the
applicable period.

The cumulative total return for the Daily Income Fund from its inception date
(November 19, 1990) to December 31, 1995 was 23.40%; for the Short-Term Bond
Fund from its inception date (November 5, 1991) to December 31, 1995 was
28.20%; for the Short-Term Government Securities Fund from its inception date
(May 1, 1995) to December 31, 1995 was 5.44%; and for the Value Fund from its
inception date (November 19, 1990) to December 31, 1995 was 114.44%.

SHORT-TERM BOND FUND AND SHORT-TERM GOVERNMENT SECURITIES FUND YIELD
CALCULATIONS. In addition to providing cumulative total return information,
the Short-Term Bond Fund and Short-Term Government Securities Fund may also
illustrate performance by providing yield information.

Each Fund's yield is based on a specified 30-day (or one month) period and is
computed by dividing the net investment income per share earned during the
specified period by the maximum offering price (i.e., net asset value) per
share on the last day of the specified period, and annualizing the net results
according to the following formula:

a-b 6
YIELD = 2[(--- + 1) -1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

Yield fluctuations may reflect changes in net income, and portfolio changes
resulting from net purchases or net redemptions of the Fund's shares may
affect its yield. Accordingly, yield may vary from day to day, and the yield
stated

24
<PAGE> 53
for a particular past period is not necessarily representative of the Fund's
future yield. The yields of the Short-Term Bond Fund and Short-Term
Government Securities Fund are not guaranteed, and the principal is not
insured.

The 30-day yield of the Short-Term Bond Fund and Short-Term Government
Securities Fund as of December 31, 1995 was 5.42% and 4.78%, respectively.

From time to time, in reports and promotional literature, each Fund's
performance may be compared to: (1) other groups of mutual funds tracked by:
(A) Lipper Analytical Services, a widely-used independent research firm which
ranks mutual funds by overall performance, investment objectives, and asset
size; (B) Forbes Magazine's Annual Mutual Funds Survey and Mutual Fund Honor
Roll; or (C) other financial or business publications, such as Business Week,
Money Magazine, and Barron's, which provide similar information; (2) the
Consumer Price Index (measure for inflation), which may be used to assess the
real rate of return from an investment in each Fund; (3) other government
statistics such as GNP, and net import and export figures derived from
governmental publications, e.g., The Survey of Current Business, which may be
used to illustrate investment attributes of each Fund or the general economic,
business, investment, or financial environment in which each Fund operates;
(4) Alexander Steele's Mutual Fund Expert, a tracking service which ranks
various mutual funds according to their performance; and (5) Morningstar, Inc.
which ranks mutual funds on the basis of historical risk and total return.
Morningstar rankings are calculated using the mutual fund's average annual
returns for a certain period and a risk factor that reflects the mutual fund's
performance relative to three-month Treasury bill monthly returns.
Morningstar's rankings range from five star (highest) to one star (lowest) and
represent Morningstar's assessment of the historical risk level and total
return of a mutual fund as a weighted average for 3, 5, and 10-year periods.
In each category, Morningstar limits its five star rankings to 10% of the
funds it follows and its four star rankings to 22.5% of the funds it follows.
Rankings are not absolute or necessarily predictive of future performance.

In addition, the performance of the Daily Income Fund may be compared to
indices of broad groups of similar but unmanaged securities or other
benchmarks considered to be representative of the Daily Income Fund's holdings
such as: (1) Advertising News Service, Inc.'s "Bank Rate Monitor - The Weekly
Financial Rate Reporter," a weekly publication which lists the yield on
various money market instruments offered to the public by 100 leading banks
and thrift institutions in the United States, including loan rates offered by
these banks; (2) Donoghue Organization, Inc., "Donoghue's Money Fund Reports,"
a weekly publication which tracks net assets, yield, maturity and portfolio
holdings of approximately 380 money market mutual funds offered in the United
States; and (3) indices prepared by the research departments of such financial
organizations as Lehman Brothers, Merrill Lynch, Pierce, Fenner and Smith,
Inc., and Lipper Analytical Services, Inc.

The performance of the Short-Term Bond Fund may be compared to indices of
broad groups of similar but unmanaged securities or other benchmarks
considered to be representative of the Short-Term Bond Fund's holdings,
including those listed above for the Daily Income Fund. Such benchmarks may
also include: (1) bank certificates of deposit ("CDs") which differ from an
investment in a mutual fund in several ways: (a) the interest rate established
by the sponsoring bank is fixed for the term of the CD, (b) there are
penalties for early withdrawal from Cds, and (c) the principal on a CD is
insured by the FDIC; (2) Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable
Bond Indices," including in particular the 1-2.99 Years Treasury Note Index;
(3) Salomon Brothers, Inc., "Bond Market Round-Up," a weekly publication that
tracks yields and yield prices in a large group of money market instruments,
public corporate debt obligations and U.S. Government securities; and (4)
other indices prepared

25
<PAGE> 54
by the research department of such financial institutions as Lehman Brothers
and Merrill Lynch, Pierce, Fenner & Smith, Inc.

The performance of the Short-Term Government Securities Fund may be compared
to indices of broad groups of similar but unmanaged securities or other
benchmarks considered to be representative of the Short-Term Government
Securities Fund's holdings, including those listed above for the Short-Term
Bond Fund.

The performance of the Value Fund also may be compared to indices of broad
groups of similar but unmanaged securities or other benchmarks considered to
be representative of the Value Fund's holdings such as: (1) the Standard and
Poor's 500 Composite Stock Index ("S&P 500 Index"), a well known measure of
the price performance of 500 leading large domestic stocks, which together
represent approximately 80% of the capitalization of the United States equity
market. The S&P 500 Index is widely regarded as representative of the equity
market in general and may include companies in which the Value Fund may
invest. The S&P 500 Index is unmanaged and capitalization weighted.
Performance of the S&P 500 Index assumes reinvestment of all capital gains
distributions and dividends paid by the stocks in that data base; (2) Lipper
Analytical Services, Inc.'s "Lipper Growth and Income Fund Performance
Analysis," a monthly publication that tracks net assets and total return of
approximately 143 growth and income mutual funds offered in the United States;
and (3) indices prepared by the research departments of such financial
institutions as Lehman Brothers and Merrill Lynch, Pierce, Fenner and Smith,
Inc.

The performance of the indices that may be used as benchmarks for each Fund's
performance, unlike the returns of the Funds, do not include the effect of
paying brokerage costs (for equity securities) and other transaction costs
that investors normally incur when investing directly in the securities in
those indices.

The Homestead Funds may also illustrate a particular Fund's investment returns
or returns in general by graphs and charts, that compare, at various points in
time, the return from an investment in the particular Fund (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the same return on a
taxable basis. In this regard, information derived from the following chart
may be used:

TAX-DEFERRED VERSUS TAXABLE RETURNS

Assuming 9% annual rate of return, $2,000 annual contribution and 28%
tax bracket, the following is a comparison of tax-deferred and taxable
returns:

<TABLE>
<CAPTION>
Year Taxable Tax Deferred
---- ------- ------------
<S> <C> <C>
10 $ 28,700 $ 33,100
15 $ 51,400 $ 64,000
20 $ 82,500 $111,500
25 $125,100 $184,600
30 $183,300 $297,200
</TABLE>

INDEPENDENT AUDITORS

Ernst & Young LLP, whose address is 1225 Connecticut Avenue, N.W., Washington,
D.C. 20036, have been selected as the independent auditors for the Homestead
Funds.

26
<PAGE> 55

The audited financial statements for the fiscal year ended December 31, 1995
and the report of the independent auditors for the year then ended, are
included in the Homestead Funds' Annual Report to Shareholders for December
31, 1995 ("Annual Report"). The Annual Report is incorporated by reference in
this Statement of Additional Information.

LEGAL MATTERS

Legal advice regarding certain matters relating to the federal securities laws
applicable to the offer and sale of the shares described in the Prospectus has
been provided by Jorden Burt Berenson & Johnson LLP, 1025 Thomas Jefferson
Street, N.W., Washington, DC 20007 which serves as Special Counsel to the
Homestead Funds.

27
<PAGE> 56
APPENDIX

DESCRIPTION OF RATINGS OF CERTAIN MONEY MARKET SECURITIES
AND OTHER DEBT SECURITIES

Description of Moody's Investors Service, Inc.'s commercial paper ratings:

Prime-1 (or related institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity will normally
be evidenced by the following characteristics:

1. Leading market positions in well established industries.
High rates of return on funds employed.

2. Conservative capitalization structures with moderate reliance
on debt and ample asset protection.

3. Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.

4. Well established access to a range of financial markets and
assured sources of alternate liquidity.

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

Description of Moody's Investors Service, Inc.'s corporate bond ratings:

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

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

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

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

Description of Standard & Poor's Corporation's commercial paper ratings:

28
<PAGE> 57
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.

A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.

Description of Standard & Poor's Corporation's corporate bond ratings:

AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.

A--Bonds rated A have strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

BBB--Bonds rated BBB are medium-grade category bonds, which are regarded as
having adequate capacity to pay principal and interest. Although these bonds
have adequate asset coverage and normally are protected by satisfactory
earnings, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and principal.

Description of Fitch Investor's Service, Inc.'s commercial paper ratings:

Fitch-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.

Fitch-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.

Description of Fitch Investor's Service, Inc.'s corporate bond ratings:

AAA--Bonds of this rating are regarded as strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions,
and liable to but slight market fluctuation other than through changes in the
money rate. The factor last named is of importance, varying with the length
of maturity. Such bonds are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA bond is a showing
of earnings several times or many times interest requirements with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Other features may enter, such as a
wide margin of protection through collateral security or direct lien on
specific property as in the case of high-class equipment certificates or bonds
that are first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt, by call or purchase are often factors, while guarantee
or assumption by parties other than the original debtor may influence the
rating.

AA--Bonds in this group are of safety virtually beyond question, and as a
class are readily saleable while many are highly active. Their merits are not
greatly unlike those of the "AAA" class, but a bond so rated may be of junior
though strong lien--in many cases directly following an AAA bond--or the
margin of safety is strikingly broad. The issue may be the obligation of a
small

29
<PAGE> 58
company, strongly secured but influenced as to rating by the lesser financial
power of the enterprise and more local type of market.

Description of Duff & Phelps Inc.'s commercial paper ratings:

Duff 1--High certainty of timely payment. Liquidity factors are excellent and
supported by strong fundamental protection factors. Risk factors are minor.

Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.

Description of Duff & Phelps Inc.'s corporate bond ratings:

Duff 1--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

Duff 2,3,4--High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.

30
<PAGE> 59

PART C. OTHER INFORMATION

Item 24. Financial Statements and Exhibits.

(a) Financial Statements incorporated by reference into the Prospectus:

Financial Highlights for the period November 19, 1990
(commencement of operations) to December 31, 1990, the years
ended December 31, 1991, 1992, 1993, 1994 and 1995 for the
Daily Income Fund and Value Fund, and for the period November
5, 1991 (commencement of operations) to December 31, 1991, the
years ended December 31, 1992, 1993, 1994 and 1995 for the
Short-Term Bond Fund, and for the period May 1, 1995
(commencement of operations) to December 31, 1995 for the
Short-Term Government Securities Fund.

Financial Statements incorporated by reference into the
Statement of Additional Information:

Statements of Assets and Liabilities as of December 31, 1995.

Statements of Operations for the year ended December 31, 1995.

Statements of Changes in Net Assets for the year ended December
31, 1995.

Portfolios of Investments as of December 31, 1995.

Report of Independent Auditors.

Notes to Financial Statements for the year ended December 31,
1995.

(b) Exhibits:

1. Articles of Incorporation of Homestead Funds, Inc.(1)

1(a). Articles Supplementary to the Articles of
Incorporation.(8)

2. By-Laws of Homestead Funds, Inc.(1)

3. Not applicable.

4(a). Specimen Certificate of Stock of the Daily Income
Fund.(3)

4(b). Specimen Certificate of Stock of the Value Fund.(3)

4(c). Specimen Certificate of Stock of the Short-Term Bond
Fund.(4)

4(d). Specimen Certificate of Stock of the Short-Term
Government Securities Fund.(9)

1
<PAGE> 60
5(a). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Daily Income
Fund, and RE Advisers Corporation.(3)

5(b). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Value Fund,
and RE Advisers Corporation.(3)

5(c). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Short-Term
Bond Fund, and RE Advisers Corporation.(4)

5(d). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Short-Term
Government Securities Fund, and RE Advisers
Corporation.(9)

6. Distribution Agreement between Homestead Funds, Inc.
and RE Investment Corporation.(3)

7. Not applicable.

8. Custodian Agreement by and between Homestead Funds,
Inc. and Wilmington Trust Company.(9)

9(a). Transfer Agency Agreement by and between Homestead
Funds, Inc. and Rodney Square Management
Corporation.(9)

9(b). Joint Services Agreement among National Rural
Electric Cooperative Association, RE Investment
Corporation, and RE Advisers Corporation.(2)

9(c). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the Daily Income
Fund, and RE Advisers Corporation.(2)

9(d). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Value Fund, and RE
Advisers Corporation.(2)

9(e). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Short-Term Bond Fund,
and RE Advisers Corporation.(4)

9(f). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Short-Term Government
Securities Fund, and RE Advisers Corporation.(9)

10. Opinion and Consent of Counsel regarding the legality
of the securities being registered.(1)

10(a). Opinion and Consent of Counsel regarding the legality
of the securities being registered.(4)

11. Consent of Ernst & Young LLP, independent auditors.

2
<PAGE> 61
12. Not applicable.

13(a). Stock Subscription Agreement by and between National
Rural Electric Cooperative Association and Homestead
Funds, Inc. on behalf of the Daily Income Fund and
Value Fund.(2)

13(b). Stock Subscription Agreement by and between National
Rural Electric Cooperative Association and Homestead
Funds, Inc. on behalf of the Short-Term Bond Fund.(4)

13(c). Stock Subscription Agreement by and between National
Rural Electric Cooperative Association and Homestead
Funds, Inc. on behalf of the Short-Term Government
Securities Fund.(9)

14. Specimen Individual Retirement Account Plan
Document.(3)

15. Not applicable.

16(a). Computation of a $1,000 Hypothetical Investment in
the Daily Income Fund, Short-Term Bond Fund,
Short-Term Government Securities Fund and Value Fund,
set forth in the Prospectus Fee Table.

16(b). Computations of the Current Yield and Compound
Effective Yield Quotations for the Daily Income Fund
for the period ended December 31, 1995, set forth in
the Statement of Additional Information.

16(c). Computation of the 30-Day Yield Quotation for the
Short-Term Bond Fund and Short-Term Government
Securities Fund for the period ended December 31,
1995, set forth in the Statement of Additional
Information.

16(d). Set forth in the Statement of Additional Information:
Computation of the Cumulative Total Returns for the
Daily Income Fund, Short-Term Bond Fund, Short-Term
Government Securities Fund and Value Fund for the
period ended December 31, 1995. SEC's Standardized
Average Annual Total Returns for the Daily Income
Fund and Value Fund for the year ended December 31,
1995, five years ended December 31, 1995 and since
the inception of each Fund. SEC's Standardized
Average Annual Total Returns for the Short-Term Bond
Fund for the year ended December 31, 1995 and since
inception.

17. Organizational Chart.(5)

18. Specimen Price Make-Up Sheet.

19(a). Power of Attorney.(1)

19(b) Power of Attorney.(2)

3
<PAGE> 62
(1)Incorporated herein by reference to initial filing, on July 9, 1990.
(2)Incorporated herein by reference to Pre-Effective Amendment No. 1 on
October 1, 1990 of Registrant's Registration Statement on Form N-aA, File No.
33-35788.
(3)Incorporated herein by reference to Post-Effective Amendment No. 2 on May
1, 1991 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(4)Incorporated herein by reference to Post-Effective Amendment No. 3 on
September 5, 1991 of Registrant's Registration Statement on Form N-1A, File
No. 33-35788.
(5)Incorporated herein by reference to Post-Effective Amendment No. 4 on May
1, 1992 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(6)Incorporated herein by reference to Post-Effective Amendment No. 5 on May
1, 1993 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(7)Incorporated herein by reference to Post-Effective Amendment No. 6 on April
29, 1994 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(8)Incorporated herein by reference to Post-Effective Amendment No. 7 on
January 20, 1995 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(9)Incorporated herein by reference to Post-Effective Amendment No. 8 on April
26, 1995 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.

Item 25. Persons Controlled by or under Common Control with Registrant.

No person is directly or indirectly controlled by Registrant. The
information on page 14 of the Registrant's Statement of Additional
Information dated May 1, 1996 relating to "control persons" is
incorporated herein by reference.

Item 26. Number of Holders of Securities, as of March 29, 1996.

<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Daily Income Fund 1,074
Short-Term Bond Fund 1,396
Short-Term Government Securities Fund 154
Value Fund 5,866
</TABLE>

Item 27. Indemnification

Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Form N-1A registration statement filed on October 1,
1990.

Item 28. Business and Other Connections of Investment Manager

Certain information pertaining to business and other connections of
the Registrant's investment manager, RE Advisers is hereby
incorporated herein by reference to the section of the Prospectus
captioned "How the Homestead Funds are Managed" and to the section
of the Statement of Additional Information captioned "Investment
Management and Other Services." Set forth below is a list of each
director and officer of RE Advisers indicating

4
<PAGE> 63
each business, profession, vocation, or employment of a substantial
nature in which each such person has been, at any time during the
past two fiscal years, engaged for his own account or in the
capacity of director, officer, partner, or trustee. The principal
business address of each organization listed in the table below is
4301 Wilson Boulevard, Arlington, VA 22203.

<TABLE>
<CAPTION>
Name Position and Organization
- ---- -------------------------
<S> <C>
Anthony C. Williams President and Director of Homestead
President and Director Funds; Vice President and Director of
RE Investment; Director of Retirement,
Safety and Insurance Department of NRECA
1985-present); Director, Cooperative
Benefit Administrators, Inc., Electric Life
Cooperative Insurance Company and,
Cooperative Insurance Services, Inc.
(1985-present).

Peter R. Morris Secretary, Treasurer and Director of
Vice President and Director Homestead Funds and RE Investment.
Executive Director of Investments of NRECA
(1988-present).

Stuart E. Teach President of RE Investment; Senior
Secretary, Treasurer and Director Equity Portfolio Manager of NRECA
(1985-present).

Catherine M. Blushi Compliance Officer and Assistant Compliance
Officer Secretary of Homestead Funds;
Securities Compliance Officer of NRECA and
RE Investment (1990-present).
</TABLE>

Item 29. Principal Underwriters.

(a) RE Investment acts as principal underwriter of the Registrant's
shares on a best-efforts basis and receives no fee or commission for
its underwriting and distribution services. RE Investment does not
serve as principal underwriter or distributor for any other
investment company.

(b) Set forth below is information concerning each director,
officer, or partner of RE Investment.

<TABLE>
<CAPTION>
Name and Principal Positions and Offices Offices with
Business Address* with Underwriter Registrant
---------------- ---------------- ----------
<S> <C> <C>
Stuart E. Teach President None

Peter R. Morris Secretary, Treasurer Secretary,
and Director Treasurer and
Director

William P. McKeithan Vice President, Vice President
Counsel and and Counsel
Director
</TABLE>

5
<PAGE> 64
<TABLE>
<S> <C> <C>
Anthony C. Williams Vice President and President and
Director Director

Catherine M. Blushi Securities Compliance Compliance
Officer Officer and
Secretary
</TABLE>

*The principal business address of each person listed in the table is 4301
Wilson Boulevard, Arlington, VA 22203.

Item 30. Location of Accounts and Records.

The following entities prepare, maintain and preserve the records
required by Section 31(a) of the Investment Company Act of 1940 (the
"1940 Act") for the Registrant. These services are provided to the
Registrant through written agreements between the parties to the
effect that such services will be provided to the Registrant for
such periods prescribed by the rules and regulations of the
Securities and Exchange Commission under the 1940 Act and such
records are the property of the entity required to maintain and
preserve such records and will be surrendered promptly on request.

Wilmington Trust Company ("WTC"), 1105 N. Market Street, Wilmington,
DE 19890, serves as custodian and accounting services agent for the
Registrant and in such capacity keeps records regarding securities
and other assets in custody and in transfer, bank statements,
canceled checks, financial books and records, and other records
relating to WTC's duties in its capacity as custodian and accounting
services agent.

Rodney Square Management Corporation serves as the transfer agent,
dividend disbursing agent, and shareholder servicing agent for the
Registrant and in such capacity keeps records regarding each
shareholder's account and all disbursements made to shareholders.
In addition, RE Advisers, pursuant to its Investment Management
Agreements with respect to each Fund, maintains all records required
pursuant to such agreements. RE Investment, as principal
underwriter for the Homestead Funds, maintains all records required
pursuant to the Distribution Agreement with the Homestead Funds.

Item 31. Management Services.

RE Advisers, pursuant to the Investment Management Agreements,
performs certain administrative services for the Homestead Funds.

Item 32. Undertakings.

The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
Annual Report to Shareholders, upon request without charge.

6
<PAGE> 65
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in Washington, D.C., on the 1st day of May 1996.

Homestead Funds, Inc.
------------------------------
(Registrant)

/s/Anthony C. Williams
------------------------------
Anthony C. Williams
President

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Anthony C. Williams President May 1, 1996
- ----------------------
Anthony C. Williams

John G. Adelhelm* Director May 1, 1996
- ----------------------
John G. Adelhelm

Anthony M. Marinello* Vice President and
- ---------------------- Director May 1, 1996
Anthony M. Marinello

Peter R. Morris* Secretary, Treasurer
- ---------------------- and Director May 1, 1996
Peter R. Morris

James F. Perna* Director May 1, 1996
- ----------------------
James F. Perna

*By:/s/William P. McKeithan
-----------------------
William P. McKeithan, Esq.
(Attorney-in-Fact)
</TABLE>

<PAGE> 66
EXHIBIT LIST

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11. Consent of Ernst & Young LLP, independent auditors.

16(a). Computation of $1,000 hypothetical investment in the
Daily Income Fund, Short-Term Bond Fund, Short-Term
Government Securities Fund and Value Fund set forth
in the Prospectus Fee Summary.

16(b). Computations Current Yield and Compound Effective Yield
Quotation for the Daily Income Fund for the period ended
December 31, 1995, set forth in the Statement of
Additional Information.

16(c). Computation of 30-Day Yield Quotation for the Short-Term
Bond Fund and Short-Term Government Securities Fund
for the period ended December 31, 1995, set forth in the
Statement of Additional Information.

16(d). Computation of the SEC's Standardized Average Annual Total Returns for
the Daily Income Fund, Short-Term Bond Fund and Value Fund for the
year ended December 31, 1995, five years ended December 31, 1995 and
since inception of each Fund. For the Short-Term Bond Fund, the SEC's
Standardized Average Annual Total Returns for the year ended December
31, 1995 and since inception. The computation ofthe Cumulative Total
Returns for the Daily Income Fund, Short-Term Bond Fund, Short-Term
Government Securities Fund and Value Fund for the period ended
December 31, 1995, set forth in the Statement of Additional
Information.

18. Specimen Price Make-up Sheet.
</TABLE>

<PAGE> 1

EXHIBIT 11

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference in this
Post-Effective Amendment Number 9 to Registration Statement Number 33-35788
(Form N-1A) of our report dated February 9, 1996, on the financial statements
and financial highlights of Homestead Funds, Inc. for the year ended December
31, 1995, included in the 1995 Annual Report to Shareholders.

Baltimore, Maryland
April 24, 1996

<PAGE> 1

EXHIBIT 16(a)

HOMESTEAD FUNDS - DAILY INCOME FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1995

<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.75%) RETURN (.75%) EXPENSE
- ---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.250% 43 8 8
2 1,043 4.250% 46 8 16
3 1,089 4.250% 47 8 24
4 1,136 4.250% 49 9 33
5 1,185 4.250% 51 9 42
6 1,236 4.250% 54 9 51
7 1,290 4.250% 56 10 61
8 1,346 4.250% 58 10 71
9 1,404 4.250% 61 11 82
10 1,465 4.250% 63 11 93
</TABLE>

<PAGE> 2

HOMESTEAD FUNDS - VALUE FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1995

<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.84%) RETURN (.84%) EXPENSE
- ---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.160% 38 8 8
2 1,038 4.160% 39 9 17
3 1,077 4.160% 41 10 27
4 1,118 4.160% 42 10 36
5 1,160 4.160% 44 10 46
6 1,204 4.160% 46 11 57
7 1,250 4.160% 47 11 67
8 1,297 4.160% 49 12 79
9 1,346 4.160% 51 12 91
10 1,397 4.160% 53 12 103
</TABLE>

<PAGE> 3

HOMESTEAD FUNDS - SHORT TERM BOND FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1995

<PAGE> 4

HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1995

<PAGE> 1

EXHIBIT 16(b)

HOMESTEAD FUNDS - DAILY INCOME FUND
SEVEN DAY CURRENT YIELD
DECEMBER 31, 1995

<TABLE>
<CAPTION>
Date Daily Rate
---------- ----------------
<S> <C> <C>
12/25/95 0.0001388750
12/26/95 0.0001388730
12/27/95 0.0001390260
12/28/95 0.0001386310
12/29/95 0.0001388880
12/30/95 0.0001388880
12/31/95 0.0001388880
----------------

Total 0.0009720690
================
</TABLE>

Formula: (Sum of 7 days daily rate) X (365/7) X 100

(.000972069) X 365/7 X 100 = 5.07%

<PAGE> 2

HOMESTEAD FUNDS - DAILY INCOME FUND
EFFECTIVE YIELD
DECEMBER 31, 1995

Total 0.0009720690
================
</TABLE>
(365/7)
Formula: [(Sum of 7 days daily rate +1) ] - 1 X 100

365/7
[(.000972069 + 1) ] - 1 X 100 = 5.20%

<PAGE> 1
EXHIBIT 16(c)

HOMESTEAD FUNDS - SHORT-TERM BOND FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
6
Formula: 2{[(a-b)/(c*d)=1] -1}

Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = The maximum offering price per share on the last day of the period.

6
{[(311,827.11 - 37,794.59)/ (11,824,415.848 * 5.19) + 1] - 1} = 5.42%
</TABLE>

<PAGE> 2

HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1995

<TABLE>
<S> <C>
6
Formula: 2{[(a-b)/(c*d)=1] -1}

6
2{[(11,101.80 - 1,488.31)/ (478,892.878 * 5.09) + 1] - 1} = 4.78%
</TABLE>

<PAGE> 1
EXHIBIT 16(d)

COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - DAILY INCOME FUND
DECEMBER 31, 1995

<TABLE>
<CAPTION>
December 31, 1995:
- ------------------
<S> <C>
Average Total Return
Since Inception 4.19%
For the Five Years Ended 4.14%
For the Year Ended 5.38%
Cumulative Total Return
Since Inception 23.40%
</TABLE>

<TABLE>
<CAPTION>
Formulas:
- ---------
<S> <C>
Average Total Return: (1/(# of days/365))
{(End Share Value - Beg Share Value) +1} -1 *100
------------------------------------
Beg Share Value

(1/(1,868/365))
Since Inception: {(1,233.97 - 1,000.00) +1} -1 * 100 = 4.19%
----------------------
1,000.00

(1/5)
For the Five Years Ended: {(1,233.97 - 1,007.38) +1} -1 * 100 = 4.14%
----------------------
1,007.38

For the Year Ended: {(1,233.97 - 1,170.98) * 100 = 5.38%
----------------------
1,170.98
</TABLE>

Cumulative Total Return Since Inception:
(End Share Value - Beg Share Value) * 100
-----------------------------------
Beg Share Value

{(1,233.97 - 1,000.00) * 100 = 23.40%
----------------------
1,000.00
<PAGE> 2

COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT-TERM BOND FUND
DECEMBER 31, 1995

<TABLE>
<CAPTION>
December 31, 1995:
- ------------------
<S> <C>
Average Total Return
Since Inception 6.15%
For the Year Ended 10.81%
Cumulative Total Return
Since Inception 28.20%
</TABLE>

<TABLE>
<CAPTION>
Formulas:
- ---------
<S> <C>

Average Total Return: (1/(# of days/365))
{(End Share Value - Beg Share Value) +1} -1 * 100
------------------------------------
Beg Share Value

(1/(1,518/365))
Since Inception: {(1,282.03 - 1,000.00) +1} -1 * 100 = 6.15%
----------------------
1,000.00

For the Year Ended: {(1,282.03 - 1,156.97) * 100 = 10.81%
----------------------
1,156.97
</TABLE>

Cumulative Total Return Since Inception:
(End Share Value - Beg Share Value) * 100
-----------------------------------
Beg Share Value

{(1,282.03 - 1,000.00) * 100 = 28.20%
----------------------
1,000.00

<PAGE> 3

COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
DECEMBER 31, 1995

<TABLE>
<CAPTION>
December 31, 1995:
- ------------------
<S> <C>
Cumulative Total Return
Since Inception 5.44%
</TABLE>

Formulas:
- ---------
Cumulative Total Return Since Inception:
(End Share Value - Beg Share Value) * 100
-----------------------------------
Beg Share Value

{(1,054.39 - 1,000.00) * 100 = 5.44%
----------------------
1,000.00

<PAGE> 4

COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - VALUE FUND
DECEMBER 31, 1995

<TABLE>
<CAPTION>
December 31, 1995:
- ------------------
<S> <C>
Average Total Return
Since Inception 16.07%
For the Five Years Ended 16.35%
For the Year Ended 33.78%
Cumulative Total Return
Since Inception 114.44%
</TABLE>

<TABLE>
<CAPTION>
Formulas:
- ---------
<S> <C>
Average Total Return: (1/(# of days/365))
{(End Share Value - Beg Share Value) +1} -1 * 100
------------------------------------
Beg Share Value

(1/(1,868/365))
Since Inception: {(2,144.44 - 1,000.00) +1} -1 * 100 = 16.07%
----------------------
1,000.00

(1/5)
For the Five Years Ended: {(2,144.44 - 1,005.82) +1} -1 * 100 = 16.35%
----------------------
1,005.82

For the Year Ended: {(2,144.44 - 1,602.93) * 100 = 33.78%
----------------------
1,602.93
</TABLE>

Cumulative Total Return Since Inception:
(End Share Value - Beg Share Value) * 100
-----------------------------------
Beg Share Value

{(2,144.44 - 1,000.00) * 100 = 114.44%
----------------------
1,000.00

<PAGE> 5
CALCULATION OF 1 YEAR TOTAL RETURN BEFORE EXPENSE WAIVERS
DECEMBER 31, 1995

<TABLE>
<CAPTION>
ST GOVERNMENT
DAILY ST (FOR THE PERIOD
INCOME BOND 5/1/95 - 12/31/95)
---------- --------- --------------------
<S> <C> <C> <C>
1 Year TR, 12/31/95 5.38% 10.81% 5.44%
---------- --------- --------------------
Expense Adjustment:
Ratio of gross expenses before
voluntary expense limitation
to average net assets -0.87% -0.86% -4.17%
Ratio of expenses to average
net assets -0.75% -0.75% -0.50%
---------- --------- --------------------
Total Return Adjustment -0.12% -0.11% -3.67%
---------- --------- --------------------

1 Year TR before expense
Waivers, 12/31/95 5.26% 10.70% 1.77%
========== ========= ====================
</TABLE>

<PAGE> 1
EXHIBIT 18

HOMESTEAD FUNDS
SPECIMEN PRICE MAKE-UP SHEET
AS OF DECEMBER 31, 1995

<TABLE>
<CAPTION>
Shares
Fund Net Assets Outstanding Share Price
<S> <C> <C> <C>
Daily Income Fund $52,699,149 52,699,149 $1.00

Short-Term Bond Fund $62,124,996 11,962,525 $5.19

Short-Term Government Securities Fund $2,658,200 522,066 $5.09

Value Fund $147,505,791 7,997,264 $18.44
</TABLE>