VANGUARD BALANCED INDEX FUND INC, 485APOS, 2000-09-26

VANGUARD BALANCED INDEX FUND INC
485APOS, 2000-09-26

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 33-48863) UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 16

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 18

VANGUARD BALANCED INDEX FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON OCTOBER 2, 2000, PURSUANT TO PARAGRAPH (A) OF RULE 485.

<PAGE>

VANGUARD(R) BALANCED
INDEX FUND

Investor Shares and Admiral Shares
Prospectus
October 2, 2000

This prospectus contains
financial data for the
Fund for the six
months ended
June 30, 2000.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

[A MEMBER OF THE VANGUARD GROUP LOGO]

<PAGE>

VANGUARD BALANCED INDEX FUND
Prospectus
October 2, 2000

A Balanced Mutual Fund

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CONTENTS

1 FUND PROFILE 16 FINANCIAL HIGHLIGHTS

4 ADDITIONAL INFORMATION 18 INVESTING WITH VANGUARD

4 AN INTRODUCTION TO INDEX FUNDS 18 Buying Shares

5 A WORD ABOUT RISK 19 Converting Shares

5 WHO SHOULD INVEST 20 Redeeming Shares

6 PRIMARY INVESTMENT STRATEGIES 22 Other Rules You Should Know

13 THE FUND AND VANGUARD 24 Fund and Account Updates

13 INVESTMENT ADVISER 25 Contacting Vanguard

14 DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)

15 SHARE PRICE
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WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided ''Plain Talk (R)'' explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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SHARE CLASSES

The Fund offers three separate classes of shares: Investor Shares, Admiral
Shares, and Institutional Shares. This prospectus offers the Fund's Investor
Shares and Admiral Shares. Please note that Admiral Shares are not available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts.
- Other retirement plan accounts receiving special administrative services
from Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
Please call Vanguard at 1-800-523-1036 to obtain a separate prospectus that
offers the Fund's Institutional Shares, which have an investment minimum of $10
million generally are not available through financial intermediaries or
retirement plans receiving special administrative services from Vanguard.
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. ALL REFERENCES IN THIS PROSPECTUS TO
FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR
SHARES OR ADMIRAL SHARES, UNLESS OTHERWISE NOTED.
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<PAGE>

FUND PROFILE

INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.

INVESTMENT STRATEGIES
The Fund typically invests 60% of its assets in common stocks and 40% in bonds.
The stock portion of the Fund seeks to match the total return of the Wilshire
5000 Total Market Index, a widely recognized measure for the U.S. stock market.
The Fund's bond portion seeks to replicate the returns of the Lehman Brothers
Aggregate Bond Index, a measure of regularly traded, U.S. investment-grade
bonds.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:
- Stock market risk, which is the chance that stock prices in general will
decline over short or even long periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline.
- Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for the Fund.
- Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for the Fund.
- Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
- Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date because the underlying mortgages have been
paid off ahead of schedule. If a bond is called, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- Index sampling risk, which is the chance that the securities selected for
the Fund will not provide investment performance matching that of the
index. Index sampling risk for the Fund should be low.

PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Both the bar chart and the table present information
for the Fund's Investor Shares, since Admiral Shares only were not available
during the time periods shown. Keep in mind that the Fund's past performance
does not necessarily indicate how it will perform in the future.

<PAGE>

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ANNUAL TOTAL RETURNS-INVESTOR SHARES
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1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
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Total return figures do not reflect the annual account maintenance fee of $10.
The Fund's year-to-date return as of the calendar quarter ended June 30, 2000,
was 1.2%.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 12.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.57% (quarter ended September 30, 1998).

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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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SINCE
1 YEAR 5 YEARS INCEPTION*
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Vanguard Balanced Index Fund-
Investor Shares** 13.61% 19.13% 14.89%
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond Index -0.82 7.73 6.57
Balanced Composite Index+ 13.54 19.30 15.19
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*November 9, 1992.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index and
40% Lehman Brothers Aggregate Bond Index.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon expenses
incurred in the fiscal year ended December 31, 1999; for Admiral Shares, the
expenses are based on estimated amounts for the current fiscal year.
<PAGE>

INVESTOR ADMIRAL
SHARES SHARES
---------------- ----------
SHAREHOLDER FEES (fees paid directly from your investment)

Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None None
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter*

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17% 0.12%
12b-1 Distribution Fee: None None
Other Expenses: 0.03% 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% 0.15%

*The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less than the
fee, fractional shares will be automatically redeemed to make up the
difference.

The Fund reserves the right to deduct a transaction fee of 0.08% from an
investor's cumulative purchases over $100 million. Where it applies, the fee is
retained by the Fund to offset transaction costs of investing large new
contributions into the market. The fee is not paid to Vanguard and is not a
sales charge.

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PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income or assets, are expressed as a percentage of the net
assets of the fund. Vanguard Balanced Index Fund's Investor Shares had an
expense ratio of 0.20% in fiscal year 1999, or $2 per $1,000 of average net
assets. It is estimated that the Fund's Admiral Shares will have an annualized
expense ratio of 0.15% for the current fiscal year, or $1.50 per $1,000 of
average net assets. The average balanced mutual fund had expenses in 1999 of
1.33%, or $13.30 per $1,000 of average net assets (derived from data provided by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which are one part of operating expenses, include investment advisory fees as
well as other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
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The following example is intended to help you compare the cost of investing
in the Fund's Investor Shares or Admiral Shares with the cost of investing in
other mutual funds. It illustrates the hypothetical expenses that you would
incur over various periods if you invest $10,000 in the Fund. This example
assumes that the Fund provides a return of 5% a year, and that operating
expenses remain the same for Investor Shares and match our estimates for Admiral
Shares. The results apply whether or not you redeem your investment at the end
of each period.

<PAGE>

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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Investor Shares $20 $64 $113 $255
Admiral Shares $15 $48 $85 $192
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

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ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed quarterly Investor Shares--May be converted to
in March, June, September, and Admiral Shares if you meet certain
December; capital gains, if any, are account balance and tenure requirements
distributed annually in December

INVESTMENT ADVISER Admiral Shares--Will be converted to
The Vanguard Group, Valley Forge, Investor Shares if you are no longer
Pa., eligible for Admiral Shares
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE Investor Shares--Balanced
Investor Shares-November 9, 1992 Admiral Shares--.
Admiral Shares-November 13, 2000
(Expected) VANGUARD FUND NUMBER
Investor Shares--02
Admiral Shares--502.

NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
JUNE 30, 2000 Investor Shares--921931101
$3.5 billion Admiral Shares--.

TICKER SYMBOL
SUITABLE FOR IRAS Investor Shares--VBINX
Yes

MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for
IRAs and custodial accounts for
minors
Admiral Shares--$250,000
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PLAIN TALK ABOUT
THE COSTS OF INVESTING

Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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AN INTRODUCTION TO INDEX FUNDS

WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that make up the index.
The target index may be a group of stocks or bonds, or a combination of
stocks and bonds. Balanced index funds hold a mix of stocks and bonds.
<PAGE>

Index funds do not have active managers who buy and sell securities based
on research and analysis. Rather, index funds are passively managed by the
adviser who seeks to match a market benchmark.

WHY INVEST IN INDEX FUNDS?

Index funds appeal to many investors for a number of reasons:
- Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their benchmarks.
- Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.

KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.

================================================================================
A WORD ABOUT RISK

This prospectus describesrisks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

WHO SHOULD INVEST

The Fund may be a suitable investment for you if:
- You are seeking moderate current income and long-term growth of income and
capital.
- You are seeking a diversified combination of U.S. stocks and bonds.
- You are willing to invest for the long term--at least five years.
<PAGE>

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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.

The Fund has adopted the following policies, among others, to discourage short-
term trading:
- The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- Telephone and online exchanges generally are not accepted for non-IRA
accounts.
- There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- The Fund reserves the right to stop offering shares at any time.

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PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of income and
capital. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, prepayment risk, and credit risk--faced by
investors in the Fund. The Fund's Board of Trustees, which oversees the
management of the Fund, may change the Fund's investment objective or strategies
in the interest of shareholders, without a shareholder vote.

MARKET EXPOSURE

STOCKS
About 60% of the Fund's assets is invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.
<PAGE>

[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.

Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular, which invests
approximately 40% of its assets in bonds.
While the Fund's holdings will typically include the 500 largest stocks in
the Wilshire 5000 Index, they will not include all of the securities in the
Index. Instead, the Fund will invest in a representative sample of stocks.
Keep in mind, too, that while the Wilshire 5000 Index is dominated by
large-cap stocks (those contained in the S&P 500 Index), small- and mid-cap
issues are also represented. The Fund's stock holdings are adjusted on a regular
basis to reflect the Wilshire 5000 Index. As of December 31, 1999, about 22.16%
of the market value of the Wilshire 5000 Index was made up of securities that
were not in the S&P 500 Index. Stocks of smaller companies have historically
been more volatile than--and at times have performed quite differently from--the
stocks of larger companies.

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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 billion. Vanguard
periodically reassesses these classifications.
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<PAGE>

BONDS
About 40% of the Fund's assets is invested in bonds, in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.

[FLAG]THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE MODERATE FOR SHORTER-TERM BOND
FUNDS AND HIGH FOR LONGER-TERM BOND FUNDS. BECAUSE THE FUND INVESTS IN A
PORTFOLIO OF BONDS WITH AN INTERMEDIATE AVERAGE MATURITY (5-10 YEARS),
INTEREST RATE RISK IS MODERATE.

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PLAIN TALK ABOUT
BONDS AND INTEREST RATES

As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.

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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
--------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assumes a 7% yield.
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These figures are for illustration only, and should not be regarded as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Changes in interest rates will affect bond income as well as bond prices.

[FLAG]THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR
LONG-TERM BOND FUNDS.
<PAGE>

[FLAG]BECAUSE IT INVESTS IN MORTGAGE-BACKED BONDS, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE THAT MORTGAGE-BACKED BONDS WILL BE
PAID OFF EARLY DUE TO HOMEOWNERS REFINANCING THEIR MORTGAGES DURING PERIODS
OF FALLING INTEREST RATES. FORCED TO REINVEST THE UNANTICIPATED PROCEEDS AT
LOWER INTEREST RATES, THE FUND WOULD EXPERIENCE A DECLINE IN INCOME AND
LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE APPRECIATION ASSOCIATED WITH
FALLING RATES.

Since the Fund invests only a portion of its assets in mortgage-backed
bonds, the risk to the Fund is limited.

[FLAG]THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND ISSUER
WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.

The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The weighted average credit quality of the Fund's holdings,
as rated by Moody's Investors Service, as of June 30, 2000, was Aa1.

To a limited extent, the Fund is also exposed to event risk, which is the
chance that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring or other corporate event.
Finally, because stock and bond prices often move in different directions,
the Fund's bond holdings help to dampen--but not eliminate--some of the stock
market volatility experienced by the Fund. Likewise, changes in interest rates
may not have as dramatic an effect on the Fund as they would on a fund made up
entirely of bonds.

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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hopes of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
--------------------------------------------------------------------------------

SECURITY SELECTION

these larger indexes use a "sampling" technique. Using a sophisticated computer
program, these funds select securities that will recreate their target indexes
in terms of industry, size, and other characteristics. For instance, if 10% of
the Wilshire 5000 Index were made up of utility stocks, the Balanced Index Fund
would allocate about 10% of its stock investment to the utility stocks of the
index with similar characteristics.

[FLAG]THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED WILL NOT PROVIDE INVESTMENT PERFORMANCE MATCHING THAT
OF THE TARGET INDEXES. INDEX SAMPLING RISK SHOULD BE LOW.

STOCKS
The Fund's common stock portfolio is designed to have investment characteristics
that parallel those of the Wilshire 5000 Index. The Fund is expected to
replicate approximately 1,000 of the largest securities in the Wilshire 5000
Index as measured by market capitalization, plus a representative sample of the
remainder, which are selected primarily on the basis of market capitalization,
industry weightings, and other fundamental characteristics. Typically, the Fund
holds a total of between 3,000 and 3,500 stocks.

BONDS
The Fund's bond portfolio is designed to have investment characteristics that
parallel those of the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index that encompasses five major classes of investment-grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, mortgage-backed securities, international
dollar-denominated bonds, and asset-backed securities with maturities greater
than one year. The Fund will invest in a representative sample of fixed-income
securities in the Index, which, taken together, are expected to perform
similarly to the Index. These securities are described further as follows:
- U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
- Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
- Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association
<PAGE>

(FNMA), often referred to as "Fannie Mae," and the Federal Housing Authority
(FHA). GNMA bonds are guaranteed by the full faith and credit of the U.S.
government as to the timely payment of principal and interest; bonds issued by
other government agencies are not. (Note: The Fund may also invest in
conventional mortgage-backed securities, which are packaged by private
corporations and are not guaranteed by the U.S. government.)
- International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
- Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 9.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and to approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.

TURNOVER RATE

Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. Generally,
index-oriented funds sell securities only in response to redemption requests or
changes in the composition of a target index. The FINANCIAL HIGHLIGHTS section
of this prospectus shows historic turnover rates for the Fund. A turnover rate
of 100%, for example, would mean that the Fund has sold and replaced securities
valued at 100% of its net assets within a one-year period.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of March 31, 2000, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately 96%, according to Morningstar, Inc.
--------------------------------------------------------------------------------

ACCOUNT MAINTENANCE FEE

Vanguard assesses an account maintenance fee on index fund shareholders whose
account balances are below $10,000 (for any reason, including a decline in the
value of the Fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the
<PAGE>

costs of maintaining accounts more equitably among shareholders. The account
maintenance fee is $2.50 per quarter, deducted from the quarterly dividend,
which usually is distributed during the last two weeks of each calendar quarter.
If the fee is deducted from your dividend distribution, you will still be taxed
on the full amount of your dividend (unless you hold your shares through a
nontaxable account). If you are due a dividend that is less than the fee,
fractional shares will be automatically redeemed to make up the difference. This
fee cannot be prepaid.

OTHER INVESTMENT POLICIES AND RISKS

Besides investing in U.S. common stocks and bonds, the Fund may make certain
other kinds of investments to achieve its objective. The Fund may invest in
fixed-income securities not in the target index (non-public, investment grade
securities--generally referred to as 144A securities--as well as smaller public
issues or medium term notes not included in the index due to their size). The
vast majority of these securities will have characteristics and risks similar to
those in the target index. The Fund may also purchase money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund,
reduce transaction costs, or add value when these instruments are favorably
priced.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest, to a limited extent, in stock and bond futures
and options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES

A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------

<PAGE>

THE FUND AND VANGUARD

The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $570 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------

INVESTMENT ADVISER

The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Quantitative Equity and Fixed
Income Groups. As of the fiscal year ended June 30, 2000, Vanguard served as
adviser for about $388.1 billion in assets. Vanguard manages the Fund on an
at-cost basis, subject to the control of the Trustees and officers of the Fund.
For the six months ended June 30, 2000, the Fund's investment advisory expenses
represented an effective annual rate of approximately 0.01%.
The adviser is authorized to choose brokers-dealers to handle the purchase
and sale of the Fund's securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.

<PAGE>

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER

The individuals primarily responsible for overseeing the Fund's investments are:

GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing investment policy and
strategy since joining the company in 1987; has served as the portfolio manager
for the stock portion of the Fund since inception; A.B., Dartmouth College;
M.B.A., University of Chicago.

IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
joining the company in 1981; has been responsible for overseeing the portfolio
management of the bond portion of the Fund since inception; B.A., Lafayette
College; M.B.A., Pennsylvania State University.

FELIX B. LIM, Fund Manager; has worked in investment management since completing
his education in 1996; joined Vanguard in January 1999; worked as a credit
analyst until January 2000; B.A. and M.S., University of Pennsylvania (Wharton
School).
--------------------------------------------------------------------------------

DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year. You can receive distributions of income dividends or capital gains in
cash, or you can have them automatically reinvested in more shares of the Fund.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
--------------------------------------------------------------------------------

BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
<PAGE>

- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Any conversion between classes of shares of the same fund is a non-taxable
event. By contrast, a conversion between classes of shares of different
funds is a taxable event.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.

GENERAL INFORMATION

BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"

Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------

<PAGE>

SHARE PRICE

The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets
attributed to each share class by the number of shares outstanding for that
class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is BALANCED for the Fund's Investor Shares and . for the Fund's Admiral Shares.

FINANCIAL HIGHLIGHTS

The following financial highlights table pertains to the Fund's Investor Shares;
the Fund's Admiral Shares were not available during the periods shown. The table
is intended to help you understand the Fund's financial performance for the past
five years, and certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would
have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). This information
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD BALANCED INDEX FUND--INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $20.22 $18.48 $16.29 $13.92 $12.77 $10.34
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .33 .58 .54 .520 .50 .45
Net Realized and Unrealized Gain (.09) 1.88 2.33 2.525 1.26 2.48
(Loss) on Investments
-----------------------------------------------------------------------------------
Total from Investment Operations .24 2.46 2.87 3.045 1.76 2.93
-----------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.30) (.58) (.54) (.530) (.49) (.45)
Distributions from Realized Capital (.01) (.14) (.14) (.145) (.12) (.05)
Gains
-----------------------------------------------------------------------------------
Total Distributions (.31) (.72) (.68) (.675) (.61) (.50)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $20.15 $20.22 $18.48 $16.29 $13.92 $12.77
==========================================================================================================================
TOTAL RETURN* 1.17% 13.61% 17.85% 22.24% 13.95% 28.64%
==========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,543 $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to Average
Net Assets 0.22%** 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 3.29%** 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate 20%** 29% 25% 18% 37%+ 16%
==========================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
**Annualized
+Turnover rate excluding in-kind redemptions was 30%.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began the six months ended June 30, 2000, with a net asset value
(price) of $20.22 per share. During the period, the Fund earned $0.33 per share
from investment income (interest and dividends). There was a decline of $0.09
per share from investments that had depreciated in value or that were sold for
lower prices than the Fund paid for them.

Shareholders received $0.31 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
period's income or capital gains.

The earnings ($0.24 per share) minus the distributions ($0.31 per share)
resulted in a share price of $20.15 at the end of the period. This was a
decrease of $0.07 per share (from $20.22 at the beginning of the period to
$20.15 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
1.17% for the period.

As of June 30, 2000, the Fund had $3.5 billion in net assets. For the six-month
period, its expense ratio was 0.22% ($2.20 per $1,000 of net assets); and its
net investment income amounted to 3.29% of its average net assets. It sold and
replaced securities valued at 20% of its net assets.
--------------------------------------------------------------------------------

"Standard & Poor's (R)," "S&P (R)," "S&P 500 (R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>

--------------------------------------------------------------------------------
INVESTING WITH VANGUARD

This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.

BUYING SHARES
CONVERTING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------

BUYING SHARES

ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT:$3,000 for regular
INVESTOR SHARES accounts; $1,000 for IRAs and custodial accounts for
minors.
TO ADD TO AN EXISTING ACCOUNT:$100 by mail or
exchange; $1,000 by wire.

ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT:$250,000 for new
ADMIRAL SHARES investors; $150,000 or $50,000 for existing investors
who are eligible to convert Investor Shares into
Admiral Shares (see Converting Shares).
TO ADD TO AN EXISTING ACCOUNT:$100 by mail or
exchange; $1,000 by wire.

HOW TO BUY SHARES BY CHECK: Mail your check and a completed account
registration to Vanguard. When adding to an existing
account, send your check with an Invest-By-Mail form
detached from your last account statement. For
addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with
the proceeds of a redemption from another Vanguard
fund. All open Vanguard funds permit exchange
purchases requested in writing. MOST VANGUARD FUNDS
- OTHER THAN THE INDEX-ORI ENTED FUNDS - ALSO ACCEPT
EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Knowfor
specifics.
BY WIRE: Call Vanguard to purchase shares by wire.
For wire instructions, see Contacting Vanguard.

YOUR PURCHASE CHECK When investing by check, make the check payable to:
The Vanguard Group--02 (Investor Shares) or .
(Admiral Shares.

<PAGE>

YOUR PURCHASE PRICE You buy shares at a fund's next-determined net asset
value (NAV) after Vanguard accepts your purchase
request. As long as your request is accepted
before the close of regular trading on the New York
Stock Exchange (generally 4 p.m. Eastern time),
you will buy your shares at that day's NAV. This is
known as your TRADE DATE.

PURCHASE RULES YOU ADMIRAL SHARESPlease note that Admiral Shares are not
SHOULD KNOW available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special
administrative services from Vanguard; or
- Accounts maintained by financial intermediaries
except in limited circumstances.

THIRD PARTY CHECKS. To protect the funds from check
fraud, Vanguard will not accept checks made payable
to third parties.
U.S. CHECKS ONLY. All purchase checks must be
written in U.S. dollars and drawn on a U.S. bank.
LARGE PURCHASES. Vanguard reserves the right to
reject any purchase request that may disrupt a fund's
operation or performance. Please call us before
attempting to invest a large dollar amount.
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation number
has been assigned (if applicable).
FUTURE PURCHASES. All Vanguard funds reserve the
right to stop selling shares at any time.

CONVERTING SHARES
Any conversion between classes of shares of the same
Fund is a non-taxable event.

IMMEDIATE CONVERSIONS All shares purchased before the Fund began issuing
INTO ADMIRAL SHARES Admiral Shares are considered Investor Shares. You
may convert Investor Shares into Admiral Shares at
any time if your account balance in the Fund is
at least $250,000. Registered users of
vanguard.com may request a conversion to
Admiral Shares on-line. Or, you may contact
Vanguard by telephone or mail to request this
transaction.

TENURE CONVERSIONS INTO THREE YEAR PRIVILEGE. After three years in the Fund,
ADMIRAL SHARES you may convert Investor Shares into Admiral
Shares if your account balance is at least
$150,000 and you are registered with
vanguard.com.
TEN YEAR PRIVILEGE. After ten years in the Fund, you
may convert Investor Shares into Admiral Shares if
your account balance is at least $50,000 and you are
registered with vanguard.com.
Registered users of vanguard.com may request a
tenure conversion on-line. Or, you may contact
Vanguard by telephone mail to request this
transaction.

MANDATORY CONVERSIONS If an investor no longer meets the requirements
INTO INVESTOR SHARES for Admiral Shares, the Fund may reclassify the
investor's Admiral Shares into Investor Shares. A
decline in theinvestor's account balance due to
market movement may result in such a conversion. The
Fund will notify the investor in writing before any
mandatory conversion into Investor Shares.

<PAGE>

REDEEMING SHARES

HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before
initiating your request.
ONLINE: Request a redemption through our website at
Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to
request a redemption. For telephone numbers, see
Contacting Vanguard.
BY MAIL: Send your written redemption instructions to
Vanguard. For addresses, see Contacting Vanguard.

YOUR REDEMPTION PRICE You redeem shares at a Fund's next-determined
net asset value (NAV) after Vanguard accepts your
redemption request, including any special
documentation required under the cir cumstances . As
long as your request is accepted before the close
of regular trading on the New York Stock Exchange
(generally 4 p.m. Eastern time), your shares are
redeemed at that day's NAV. This is known as your
TRADE DATE.

TYPES OF REDEMPTION CHECK REDEMPTIONS: Unless instructed otherwise,
Vanguard will mail you a check, normally within two
business days of your redemption.
EXCHANGE REDEMPTIONS: You may instruct Vanguard to
apply the proceeds of your redemption to purchase
shares of another Vanguard fund. All open Vanguard
funds accept exchange redemptions requested in
writing. Most Vanguard funds--other than the index-
oriented funds--also accept exchange redemptions
requested online or by telephone. See Other Rules You
Should Know for specifics.
WIRE REDEMPTIONS: When redeeming from a money market
fund, bond fund, or the Preferred Stock Fund,
you may instruct Vanguard to wire your redemption
proceeds to a previously designated bank account.
Wire redemptions are not available for Vanguard's
other funds, except by exchanging into a bond or
money market fund first. The wire redemption option
is not automatic ; you must establish it by
completing a special form or the appropriate section
of your account registration. Also, wire
redemptions must be requested in writing or by
telephone, not online. A $5 fee applies to wire
redemptions under $5,000.
Money Market Funds: For telephone requests accepted
at Vanguard by 10:30 a.m., Eastern time, the
redemption proceeds will arrive at your bank by the
close of business that same day. For other requests
accepted before 4 p.m., the redemption proceeds
will arrive at your bank by the close of business on
the following business day.
Bond Funds: For requests accepted at Vanguard by 4
p.m. Eastern time,the redemption proceeds will
arrive at your bank by the close of business on the
following business day.

<PAGE>

REDEMPTION RULES YOU SPECIAL ACCOUNTS. Special documentation may be
SHOULD KNOW required to redeem from certain types of accounts,
such as trust, corporate, non-profit, or retirement
accounts. Please call us before attempting to redeem
from these types of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves
the right to pay all or part of your
redemption in-kind--that is, in the form of
securities--if we believe that a cash redemption
would disrupt the fund's operation or performance.
Under these circumstances, Vanguard also reserves
the right to delay payment of your redemption
proceeds for up to seven days. By calling us before
you attempt to redeem a large dollar amount, you are
more likely to avoid in-kind or delayed payment of
your redemption.
RECENTLY PURCHASED SHARES. While you can redeem
shares at any time, proceeds will not be made
available to you until the Fund collects payment for
your purchase. This may take up to ten calendar
days for shares purchased by check or Vanguard Fund
Express.
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make
your redemption check payable to a different
person or send it to a different address. However,
this requires the written consent of all registered
account owners, which must be provided under
signature guarantees. You can obtain a signature
guarantee from most commercial and savings banks,
credit unions, trust companies, or member irms of a
U.S. stock exchange.
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation
number has been assigned (if applicable).
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone
payment of redemption proceeds for up to seven
calendar days at any time. In addition, Vanguard
funds can suspend redemptions and/or postpone payment
of redemption proceeds at times when the New York
Stock Exchange is closed or during emergency
circumstances, as determined by the U.S. Securities
and Exchange Commission.

<PAGE>

OTHER RULES YOU SHOULD KNOW

TELEPHONE TRANSACTIONS AUTOMATIC. In setting up your account, we'll
automatically enable you to do business with us by
regular telephone, unless you instruct us otherwise
in writing.
TELE-ACCOUNT. To conduct account transactions
through Vanguard's automated telephone service,
you must first obtain a personal identification
number (PIN). Call Tele- Account to obtain a PIN,
and allow 7 days before using this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right
to refuse a telephone request if the caller is unable
to provide the following information exactly as
registered on the account
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification
number.
- Personal Identification Number (PIN), if
applicable.
SUBJECT TO REVISION. We reserve the right to revise
or terminate Vanguard's telephone transaction service
at any time, without notice.
SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE
EXCHANGES. To discourage market-timing, Vanguard's
stock index funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone
exchanges (in or out),except for IRAs and certain
other retirement accounts.

VANGUARD.COM REGISTRATION. You can use your personal computer to
review your account holdings, to sell or exchange
shares of most Vanguard funds, and to perform other
transactions. To establish this service, you can
register online.
SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES.
To discourage market-timing, Vanguard's stock index
funds,Growth and Income Fund, and Balanced
Index Fund do not permit online exchanges (in or out)
, except for IRAs and certain other retirement
accounts.

WRITTEN INSTRUCTIONS "GOOD ORDER" REQUIRED. We reserve the right to reject
any written transaction instructions that are not in
"good order." This means that your instructions must
include:
- The fund name and account number.
- The amount of the transaction (in dollars or
shares).
- Signatures of all owners exactly as registered on
the account.
- Signature guarantees, if required for the
type of transaction.*
*For instance, signature guarantees must be
provided by all registered account shareholders
when redemption proceeds are to be sent to a
different person or address.

<PAGE>

RESPONSIBILITY FOR Vanguard will not be responsible for any account
FRAUD losses due to fraud, so long as we reasonably believe
that the person transacting on an account is
authorized to do so. Please take precautions to
protect yourself from fraud. Keep your account
information private and immediately review any
account state ments that we send to you.
Contact Vanguard immediately about any transactions
you believe to be unauthorized.

UNCASHED CHECKS Please cash your distribution or redemption checks
promptly. Vanguard will not pay interest on uncashed
checks.

LIMITS ON ACCOUNT Because excessive account transactions can
ACTIVITY disrupt management of a fund and increase the fund's
costs for all shareholders, Vanguard limits account
activity as follows:
- You may make no more than two substantive "round
trips" through a non-money market fund during any
12-month n period.
- Your round trips through a non-money market fund
must be at least 30 days apart.
- All funds may refuse share purchases at any time,
for any reason.
- Vanguard reserves the right to revise or
terminate the exchange privilege, limit the
amount of an exchange, or reject an exchange, at
any time, for any reason.
A "round trip" is a redemption from a fund followed
by a purchase back into the same fund. Also, a
"round trip" covers transactions accomplished by
any combination of methods, including transactions
conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar
amount that Vanguard detrmines, in its sole
discretion, could adversely affect the management
of the fund.

UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard
online, by telephone, or by Tele-Account, you can
send us your transaction request by regular or
express mail. See Contacting Vanguard for addresses.

INVESTING WITH You may purchase or sell Investor Shares of most
VANGUARD THROUGH OTHER Vanguard funds through a financial intermediary,
FIRMS such as a bank broker, or investment adviser. ADMIRAL
SHARES OF THE VANGUARD FUNDS GENERALLY ARE NOT
AVAILABLE THROUGH FINANCIAL INTERMEDIARIES.
If you invest with Vanguard through an
intermediary, please read that firm's program
materials carefully to learn of any special rules
that may apply. For example, special terms may
apply to additional service features, fees, or other
policies. Consult your intermediary to determine
when your order will be priced.

<PAGE>

LOW BALANCE ACCOUNTS All Vanguard funds reserve the right to close any
nonretirement account whose balance falls below the
minimum initial investment. Vanguard deducts a $10
fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for
Vanguard STAR Fund).The fee is waived if your total
Vanguard account assets are $50,000 or more.

FUND AND ACCOUNT UPDATES

PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to
help you keep track of your accounts throughout the
year. Each sum mary shows the market value of your
account at the close of the statement period,
as well as all distributions, purchases, sale,
and exchanges for the current calendar year.

AVERAGE COST REVIEW For most taxable accounts, average cost review
STATEMENTS statements will accompany the quarterly portfolio
summaries. These statements show the average cost
of shares that you redeemed during the current
calendar year, using the average cost single
category method.

CONFIRMATION STATEMENTS Each time you buy, sell, or exchange shares, we will
send you a statement confirming the trade date and
amount of your transaction.

TAX STATEMENTS We will send you annual tax statements to assist in
preparing your income tax returns. These
statements, which are generally mailed in January,
will report the previous year's dividend and
capital gains distributions, proceeds from the sale
of shares, and distributions from IRAs or other
retirement plans.

REPORTS You will receive financial reports about your funds
twice a year in February and August. These
comprehensive reports include an assessment of the
fund's performance (and a comparison to its industry
benchmark), an overview of the financial markets,
a report from the advisers, and the fund's financial
statements, which include a listing of the fund's
holdings.
To keep the funds' costs as low as possible (so that
you and other shareholders can keep more of the
funds' investment earnings), Vanguard attempts to
eliminate duplicate mailings to the same address.
When we find that two or more shareholders have the
same last name and address, we send just one fund
report to that address-instead of mailing separate
reports to each shareholder. If you want us to send
separate reports, however, you may notify our Client
Services Department.

<PAGE>

CONTACTING VANGUARD

ONLINE VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests n 24 hours per day, 7 days
per week

VANGUARD TELE-ACCOUNT - For automated fund and account information
1-800-662-6273 - For redemptions by check, exchange, or wire
(ON-BOARD) - Toll-free 24 hours per day, 7 days per week

INVESTOR INFORMATION - For fund and service information
1-800-662-7447 (SHIP) - For literature requests
(Text telephone at - Business hours only
1-800-952-3335)

CLIENT SERVICES - For account information
1-800-662-2739 (CREW) - For most account transactions
(Text telephone at - Business hours only
1-800-749-7273)

ADMIRAL SERVICE CENTER - For Admiral account information
1-800- - For most Admiral transactions
- Business hours only

INSTITUTIONAL DIVISION - For information and services for large
1-888-809-8102 institutional investors
- Business hours only

VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS-CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110

REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900

REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600

REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

FUND NUMBER Always use these fund numbers when contacting
Vanguard about Vanguard Balanced Index Fund - 02
(Investor Shares) and 502 (Admiral Shares).

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.

BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.

BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.

CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.

CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.

DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.

INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.

INVESTMENT GRADE
Description of a bond whose credit quality is considered by independent
bond-rating agencies to be sufficient to ensure timely payment of principal and
interest under current economic circumstances. Bonds rated in one of the four
highest categories are considered "investment grade."

MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.

NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform-- a particular stock or bond market index. Also known as
indexing.

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>

[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about
Vanguard Balanced Index Fund, the
following documents are available
free upon request:

ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.

The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.

To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:

THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

TELEPHONE:
1-800-662-7447 (SHIP)

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
WWW.VANGUARD.COM

If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:

CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)

TEXT TELEPHONE:
1-800-749-7273

INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Fund (including the SAI) at
the SEC's Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.

Fund's Investment Company Act
file number: 811-7023

P002N 102000

<PAGE>

VANGUARD(R)
BALANCED INDEX
FUND

Investor Shares
Participant Prospectus
October 2, 2000

This prospectus contains
financial data for the
Fund for the six
months ended
June 30, 2000.

[A MEMBER OF THE VANGUARD GROUP LOGO]

<PAGE>

VANGUARD BALANCED INDEX FUND
Participant Prospectus
October 2, 2000

A Balanced Mutual Fund

--------------------------------------------------------------------------------
CONTENTS

1 FUND PROFILE 13 DIVIDENDS, CAPITAL GAINS, AND TAXES

3 ADDITIONAL INFORMATION 14 SHARE PRICE

4 AN INTRODUCTION TO INDEX FUNDS 15 FINANCIAL HIGHLIGHTS

4 A WORD ABOUT RISK 17 INVESTING WITH VANGUARD

5 WHO SHOULD INVEST 18 ACCESSING FUND INFORMATION BY COMPUTER

5 PRIMARY INVESTMENT STRATEGIES GLOSSARY (inside back cover)

12 THE FUND AND VANGUARD

12 INVESTMENT ADVISER
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided ''Plain Talk(R)'' explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
-------------------------------------------------------------------------------

--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers three separate classes of shares: Investor Shares, Admiral
Shares and Institutional Shares. This prospectus offers the Fund's Investor
Shares and is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. ALL REFERENCES IN THIS PROSPECTUS TO
FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR
SHARES, UNLESS OTHERWISE NOTED.
-------------------------------------------------------------------------------

<PAGE>

FUND PROFILE

INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.

PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.

<PAGE>

--------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
--------------------------------------------------------------------------------
1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
--------------------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended June 30, 2000,
was 1.2%.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
--------------------------------------------------------------------------------
Vanguard Balanced Index Fund-
Investor Shares** 13.61% 19.13% 14.89%
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond Index -0.82 7.73 6.57
Balanced Composite Index+ 13.54 19.30 15.19
--------------------------------------------------------------------------------
*November 9, 1992.
**Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index and
40% Lehman Brothers Aggregate Bond Index.
--------------------------------------------------------------------------------

FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income or assets, are expressed as a percentage of the net
assets of the fund. Vanguard Balanced Index Fund's expense ratio in fiscal year
1999 was 0.20%, or $2 per $1,000 of average net assets. The average balanced
mutual fund had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
--------------------------------------------------------------------------------

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.

--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$20 $64 $113 $255
--------------------------------------------------------------------------------

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, Balanced
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
02
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 921931101

INCEPTION DATE TICKER SYMBOL
November 9, 1992 VBINX

NET ASSETS AS OF JUNE 30, 2000
$3.5 billion
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------

<PAGE>

AN INTRODUCTION TO INDEX FUNDS

WHY INVEST IN INDEX FUNDS?

================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

<PAGE>

WHO SHOULD INVEST

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.

The Fund has adopted the following policies, among others, to discourage short-
term trading:
- The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- Telephone and online exchanges generally are not accepted for non-IRA
accounts.
- There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- The Fund reserves the right to stop offering shares at any time.

PRIMARY INVESTMENT STRATEGIES

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of income and
capital. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, prepayment risk, and credit risk --faced by
investors in the Fund. The Fund's Board of Trustees, which
<PAGE>

oversees the management of the Fund, may change the Fund's investment objective
or strategies in the interest of shareholders, without a shareholder vote.

MARKET EXPOSURE

STOCKS

About 60% of the Fund's assets is invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.

--------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 billion. Vanguard
periodically reassesses these classifications.
--------------------------------------------------------------------------------

BONDS
About 40% of the Fund's assets is invested in bonds, in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
--------------------------------------------------------------------------------

Since the Fund invests only a portion of its assets in mortgage-backed
bonds, the risk to the Fund is limited.

[FLAG]THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND ISSUER
WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.

SECURITY SELECTION

INDEXING METHODS
In seeking to track a particular index, a fund may use one of two indexing
methods to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. For
example, if 5% of the S&P 500 Index were made up of the stock of a specific
company, a fund tracking that index would invest about 5% of its assets in that
company.
Other index funds may use a different selection process. Because it would
be impractical to buy and sell all of the securities represented by an index
(the Wilshire 5000 Index, for example, included more than 7,000 stocks as of
December 31, 1999), many funds tracking these larger indexes use a "sampling"
technique. Using a sophisticated computer program, these funds select securities
that will recreate their target indexes in terms of industry, size, and other
characteristics. For instance, if 10% of the Wilshire 5000 Index were made up of
utility stocks, the Balanced Index Fund would allocate about 10% of its stock
investment to the utility stocks of the index with similar characteristics.

the Index, which, taken together, are expected to perform similarly to the
Index. These securities are described further as follows:
- U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
- Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
- Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association (FNMA), often referred to as "Fannie
Mae," and the Federal Housing Authority (FHA). GNMA bonds are guaranteed by
the full faith and credit of the U.S. government as to the timely payment
of principal and interest; bonds issued by other government agencies are
not. (Note: The Fund may also invest in conventional mortgage-backed
securities, which are packaged by private corporations and are not
guaranteed by the U.S. government.)
- International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
- Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 8.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and to approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.
<PAGE>

TURNOVER RATE

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of March 31, 2000, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately 96%, according to Morningstar, Inc.
--------------------------------------------------------------------------------

OTHER INVESTMENT POLICIES AND RISKS

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------

THE FUND AND VANGUARD

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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INVESTMENT ADVISER

The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Quantitative Equity and Fixed
Income Groups. For the six months ended June 30, 2000, Vanguard served as
adviser for about $388.1 billion in assets. Vanguard manages the Fund on an
at-cost basis, subject to the control of the Trustees and officers of the Fund.
For the fiscal year ended June 30, 2000, the investment advisory expenses
represented an effective annual rate of approximately 0.01%.

The adviser is authorized to choose brokers-dealers to handle the purchase
and sale of the Fund's securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
<PAGE>

In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.

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PLAIN TALK ABOUT
THE FUND'S ADVISER

The individuals primarily responsible for overseeing the Fund's investments are:

DIVIDENDS, CAPITAL GAINS, AND TAXES

The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>

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PLAIN TALK ABOUT
DISTRIBUTIONS

As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
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SHARE PRICE

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,543 $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to Average
Net Assets 0.22%* 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 3.29%* 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate 20%* 29% 25% 18% 37%+ 16%
==========================================================================================================================
</TABLE>
+Turnover rate excluding in-kind redemptions was 30%.
*Annualized.

<PAGE>

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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six months ended June 30, 2000, with a net asset value
(price) of $20.22 per share. During the period, the Fund earned $0.33 per share
from investment income (interest and dividends). There was a decline of $0.09
per share from investments that had depreciated in value or that were sold for
lower prices than the Fund paid for them.

Shareholders received $0.31 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
period's income or capital gains.

"Standard & Poor's (R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>

INVESTING WITH VANGUARD

The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.

INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.

EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>

ACCESSING FUND INFORMATION BY COMPUTER

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VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
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