PAGE
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RULE 497(c)
File No. 33-59692
[LOGO]
RYDEX SERIES TRUST
PROSPECTUS
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
Rydex Series Trust (the "Trust") is a no-load mutual fund complex with nine
separate investment portfolios (the "Funds" or "Rydex Funds"), seven of
which Funds are described in this Prospectus. The Funds are principally
designed for professional money managers and investors who intend to invest
in the Funds as part of an asset-allocation or market-timing investment
strategy. Sales are made, without sales charge, at each Fund s per share
net asset value.
Except for the Rydex U.S. Government Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. Each of these Funds seeks investment
results that correspond over time to a specified benchmark. The Funds may
be used independently or in combination with each other as part of an
overall investment strategy. Additional Funds may be created from time to
time.
The following are the Funds and their benchmarks:
FUND BENCHMARK
The Nova Fund 150% of the performance of the S&P 500 Composite
Stock Price IndexTM
The Ursa Fund Inverse (opposite) of the S&P 500 Composite Stock
Price IndexTM
Rydex OTC Fund NASDAQ 100 IndexTM (NDX)
Rydex Precious Metals Philadelphia Stock Exchange Gold/Silver IndexTM
Fund (XAU)
Rydex U.S. Government 120% of the price movement of current Long Treasury
Bond Fund Bond
PAGE
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The Juno Fund Inverse (opposite) of the price movement of the
current Long Treasury Bond
The Trust also offers The Rydex U.S. Government Money Market Fund. This
Fund seeks to provide security of principal, high current income, and
liquidity by investing primarily in money market instruments which are
issued or guaranteed, as to principal and interest, by the U.S. Government,
its agencies or instrumentalities. The securities of the Rydex U.S.
Government Money Market Fund are not deposits or obligations of any bank,
and are not endorsed or guaranteed by any bank, and an investment in this
Fund is neither insured nor guaranteed by the United States Government.
The Rydex U.S. Government Money Market Fund seeks to maintain a constant
$1.00 net asset value per share, although this cannot be assured.
The Funds (other than the Rydex U.S. Government Money Market Fund) may
engage in certain aggressive investment techniques, which include engaging
in short sales and transactions in options and futures contracts. The Nova
Fund and the Rydex U.S. Government Bond Fund may use the speculative
technique known as leverage to increase funds available for investment (see
"Other Investment Policies"). Investors in the Nova Fund may experience
substantial losses during sustained periods of falling equity prices.
Investors in the Ursa Fund and the Juno Fund may experience substantial
losses during sustained periods of rising equity prices and rising bond
prices, respectively. Because of the inherent risks in any investment,
there can be no assurance that any Fund s investment objective will be
achieved.
None of the Funds alone constitutes a balanced investment plan, and certain
of the Funds involve special risks not traditionally associated with
investment companies. The nature of the Funds generally will result in
significant portfolio turnover which would likely cause higher expenses and
additional costs and increase the risk that a Fund will not qualify as a
regulated investment company under the Federal tax laws. The Trust is not
intended for investors whose principal objective is current income or
preservation of capital and may not be a suitable investment for persons
who intend to follow an "invest and hold" strategy. See "Special Risk
Considerations."
ADDITIONAL INFORMATION
The Trust also offers the Rydex Institutional Money Market Fund and,
beginning on or about December 1, 1996 (subject to obtaining all necessary
regulatory approvals), also will offer the Rydex High Yield Fund, each of
which series of the Trust is described in a separate prospectus.
Investors should read this Prospectus and retain it for future reference.
This Prospectus is designed to set forth concisely the information an
investor should know about the Trust before investing. A Statement of
Additional Information, dated November 1, 1996, containing additional
information about the Trust has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. A copy of this
PAGE
<PAGE>
Statement of Additional Information is available, without charge, upon
request to the Trust at the address above or by telephoning the Trust at
the telephone numbers above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
P A S S ED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 1, 1996.
PAGE
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY 4
FEES AND EXPENSES OF THE FUNDS 7
FINANCIAL HIGHLIGHTS OF THE FUNDS 9
INVESTMENT OBJECTIVES AND POLICIES 16
SPECIAL RISK CONSIDERATIONS 21
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES 22
PORTFOLIO TRANSACTIONS AND BROKERAGE 29
HOW TO INVEST IN THE FUNDS 29
REDEEMING AN INVESTMENT (WITHDRAWALS) 30
EXCHANGES 31
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES 32
DETERMINATION OF NET ASSET VALUE 32
TAX-SHELTERED RETIREMENT PLANS 34
TRANSACTION CHARGES 34
DIVIDENDS AND DISTRIBUTIONS 34
TAXES 34
MANAGEMENT OF THE TRUST 36
PERFORMANCE INFORMATION 38
GENERAL INFORMATION ABOUT THE TRUST 40
PROSPECTUS SUMMARY
THE RYDEX FUNDS
Each Fund has its own distinct investment objective. There is, of course,
no guarantee that any Fund will achieve its investment objective. The
investment objectives of the Funds are as follows:
<PAGE> 5<PAGE>
The Nova Fund. The Nova Fund s investment objective is to provide
investment returns that correspond to 150% of the performance of the
Standard & Poor s 500 Composite Stock Price IndexTM (the "S&P500 Index").
In attempting to achieve its objective, the Nova Fund expects that a
substantial portion of its assets usually will be devoted to investment
techniques including certain transactions in stock index futures contracts,
options on stock index futures contracts, and options on securities and
stock indexes. In contrast to returns on a mutual fund that seeks to
approximate the return of the S&P500 Index, the Nova Fund should increase
gains during periods when the prices of the securities in the S&P500 Index
are rising and increase losses to investors during periods when such prices
are declining. Investors in the Nova Fund could experience substantial
losses during sustained periods of falling equity prices.
The Ursa Fund. The Ursa Fund s investment objective is to provide
investment results that will inversely correlate to the performance of the
S&P500 Index. The Ursa Fund seeks to achieve this inverse correlation
result on each trading day. If the Ursa Fund is successful in meeting this
objective, the net asset value on Ursa Fund shares will increase for each
day in direct proportion to any decreases in the level of the S&P500 Index.
Conversely, the net asset value on Ursa Fund shares will decrease for each
day in direct proportion to any increases in the level of the S&P500 Index.
In seeking to achieve its objective, the Ursa Fund primarily engages in
short sales and certain transactions in stock index futures contracts,
options on stock index futures contracts, and option on securities and
stock indexes. The Ursa Fund involves special risks not traditionally
associated with investment companies. Investors in the Ursa Fund may
experience substantial losses during sustained periods of rising equity
prices.
The Rydex OTC Fund. The investment objective of the Rydex OTC Fund (the
"OTC Fund") is to provide investment results that correspond to a benchmark
for over-the-counter securities. The OTC Fund s current benchmark is the
NASDAQ 100 IndexTM. The OTC Fund does not aim to hold all of the 100
securities included on the NASDAQ 100 IndexTM. Instead, the OTC Fund
intends to hold representative securities included in the NASDAQ 100
IndexTM or other instruments which are expected to provide returns that
correspond to those of the NASDAQ 100 IndexTM. The OTC Fund may engage in
transactions on stock index futures contracts, options on stock index
futures contracts, and options on securities and stock indexes.
The Rydex Precious Metals Fund. The investment objective of the Rydex
Precious Metals Fund (the "Metals Fund") is to provide investment results
that correspond to a benchmark primarily for metals-related securities.
The Metals Fund s current benchmark is the Philadelphia Stock Exchange
Gold/Silver IndexTM (the "XAU Index"). To achieve its objective, the
Metals Fund invests in securities included in the XAU Index. In addition,
the Metals Fund may invest in other securities that are expected to perform
in a manner that will assist the Metals Fund s performance to track closely
the XAU Index. The Metals Fund may invest in securities of foreign
issuers. These securities present certain risks not present in domestic
<PAGE> 6<PAGE>
investments and expose the investor to general market conditions which
differ significantly from those in the United States.
The Rydex U.S. Government Bond Fund. The investment objective of the
Rydex U.S. Government Bond Fund (the "Bond Fund") is to provide investment
results that correspond to a benchmark for U.S. Government securities. The
Bond Fund s current benchmark is 120% of the price movement of the Current
Long Treasury Bond (the "Long Bond"), without consideration of interest
paid. In attempting to achieve its objective, the Bond Fund invests
primarily in obligations of the U.S. Treasury or obligations either issued
o r g u a r anteed, as to principal and interest, by agencies or
instrumentalities of the U.S. Government ("U.S. Government Securities").
The Bond Fund may engage in transactions in futures contracts and options
on futures contracts on U.S. Treasury bonds. The Bond Fund also may invest
in U.S. Treasury zero coupon bonds.
The Juno Fund. The Juno Fund s investment objective is to provide total
return before expenses and costs that will inversely correlate to the price
movements of a benchmark for U.S. Treasury debt instruments or futures
contract on a specified debt instrument. The Juno Fund seeks to achieve
this inverse correlation result on each trading day. The Long Bond is the
Juno Fund s current benchmark. In seeking its objective, the Juno Fund
will employ certain investment techniques including engaging in short sales
and transactions in futures contracts and options thereon. If the Juno
Fund is successful in meeting its objective, the total return on its shares
before expenses and costs will increase for each day proportionally to any
decreases in the price of the Long Bond. Conversely, the total return on
i t s shares before expenses and cost will decrease for each day
proportionally to any increases in the price of the Long Bond. Investors
in the Juno Fund may experience substantial losses during periods of
falling interest rates/rising bond prices.
The Rydex U.S. Government Money Market Fund. The investment objective of
the Rydex U.S. Government Money Market Fund (the "Money Market Fund") is to
provide security of principal, high current income, and liquidity. To
achieve its objective, the Money Market Fund invests primarily in money
market instruments which are issued or guaranteed, as to principal and
interest, by the U.S. Government, its agencies or instrumentalities, as
well as in repurchase agreements collateralized fully by U.S. Government
Securities.
A discussion of each Fund s investment objective(s) and policies is
provided below under "Investment Objectives and Policies" and "Investment
Techniques and Other Investment Policies." The Trust also offers shares in
the Rydex High Yield Fund and the Rydex Institutional Money Market Fund,
each of which series of the Trust is described in a separate prospectus.
SPECIAL RISK CONSIDERATIONS
The Trust expects that a substantial portion of the assets of the Funds
will be derived from professional money managers and investors who intend
to invest in the Funds as part of an asset-allocation or market-timing
<PAGE> 7<PAGE>
investment strategy. These investors are likely to redeem or exchange
their Fund shares frequently to take advantage of anticipated changes in
market conditions. The strategies employed by investors in the Funds may
r e s u lt in considerable assets moving in and out of the Funds.
Consequently, the Trust expects that the Funds will generally experience
significant portfolio turnover, which will likely cause higher expenses and
additional costs and increase the risk that the Fund will not qualify as a
"regulated investment company" under the Federal tax laws and may also
adversely affect the ability of the Fund to meet its investment objective.
For further information concerning the portfolio turnover of the Funds and
the Federal tax treatment of the Funds, see "Investment Objectives and
Policies" and "Taxes" in this Prospectus and "Investment Policies and
Techniques" and "Dividends, Distributions, and Taxes" in the Statement of
Additional Information.
While the Funds do not expect that the returns over a year will deviate
adversely from their respective current benchmarks by more than ten
percent, certain factors may affect their ability to achieve this
correlation. See "Special Risk Considerations" for a discussion of these
factors.
The Funds (other than the Money Market Fund) may engage in certain
aggressive investment techniques, which may include engaging in short sales
and transactions in futures contracts and options on securities, stock
indexes, and futures contracts. As discussed more fully under "Investment
Objectives and Policies" and "Investment Techniques and Other Investment
Policies," these techniques are specialized and involve risks that are not
traditionally associated with investment companies.
PURCHASES, REDEMPTIONS, AND
EXCHANGES OF TRUST SHARES
The shares of each Fund may be purchased and redeemed, without any
respective sales or redemption charge, at the net asset value per share of
the Fund next determined. Shares of any available Fund described in this
Prospectus may be exchanged at any time for shares of any other available
Fund, without any charge, on the basis of the relative net asset values
next computed. Because of the administrative expense of handling small
accounts, the Trust reserves the right to redeem involuntarily an
investor's account, including a retirement account, which falls below the
applicable minimum investment in total value in the Trust due to
redemptions. In addition, both a request for a partial redemption by an
investor whose account balance is below the minimum investment and a
request for a partial redemption by an investor that would bring the
account balance below the minimum investment will be treated as a request
by the investor for a complete redemption of that account. The Trust
reserves the right to modify its minimum investment requirements and the
corresponding amounts below which involuntary redemptions may be effected.
See "How To Invest In the Fund," "Redeeming An Investment (Withdrawals),"
and "Exchanges."
DIVIDENDS AND DISTRIBUTIONS
<PAGE> 8<PAGE>
Dividends from net investment income and any distributions of net realized
capital gains from each of the Funds will be distributed as described under
" D ividends and Distributions." All such distributions of a Fund
automatically will be reinvested without charge in additional shares of the
same Fund unless otherwise specified by a shareholder.
INVESTMENT ADVISER AND SERVICER
The investment adviser of each Fund is PADCO Advisors, Inc. (the
"Advisor"). PADCO Service Company, Inc. (the "Servicer") provides the
Funds with general administrative, shareholder, and registrar services.
Both the Advisor and the Servicer are located in Rockville, Maryland. See
"Management of the Trust."
TRANSFER AGENT AND CUSTODIAN
The Servicer also serves as the Trust s transfer and dividend disbursement
agent. Star Bank, N.A. serves as the custodian of each Fund s securities
and cash. See "Management of the Trust."
<PAGE> 9<PAGE>
FEES AND EXPENSES OF THE FUNDS
The following table illustrates all expenses and fees that a
shareholder of each Fund will incur:
<TABLE>
<CAPTION>
The Rydex
Precious
The Nova The Ursa The Rydex Metals
Fund Fund OTC Fund Fund
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Sales Load Imposed on None None None None
Purchases
Sales Load Imposed on None None None None
Reinvested Dividends
Deferred Sales Load None None None None
Redemption Fees None None None None
Exchange Fees None None None None
Annual Fund Operating
Expenses
Management Fees 0.75% 0.90% 0.75% 0.75%
12b-1 Fees None None None None
Other Expenses
Administrative Fees 0.25% 0.25% 0.20% 0.20%
Additional Expenses 0.31% 0.24% 0.38% 0.38%
Total Other Expenses 0.56% 0.49% 0.56% 0.58%
Total Fund Operating 1.31% 1.39% 1.33% 1.33%
Expenses*
The Rydex
The Rydex U.S.
U.S. Government
Government The Juno Money
Bond Fund Fund Market Fund
<PAGE> 10<PAGE>
<S> <C> <C> <C>
Shareholder Transaction
Expenses
Sales Load Imposed on None None None
Purchases
Sales Load Imposed on None None None
Reinvested Dividends
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating
Expenses
Management Fees 0.50% 0.90% 0.50%
12b-1 Fees None None None
Other Expenses
Administrative Fees 0.20% 0.25% 0.20%
Additional Expenses 0.56% 0.49% 0.29%
Total Other Expenses 0.76% 0.74% 0.49%
Total Fund Operating 1.26% 1.64% 0.99%
Expenses*
</TABLE>
* Retirement plans are charged an annual $15.00 maintenance
fee. See "Tax-Sheltered Retirement Plans."
<PAGE> 11<PAGE>
EXAMPLE
Assuming hypothetical investments of $1,000 in each of the
Funds, a five-percent annual return, and redemption at the end
of each time period, an investor in each of the Funds would
pay transaction and operating expenses at the end of each year
as follows:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 years
<S> <C> <C> <C> <C>
The Nova Fund $13.34 $41.52 $71.82 $157.90
The Ursa Fund $14.15 $44.00 $76.05 $169.86
Rydex OTC Fund $13.54 $42.14 $72.88 $160.14
Rydex Precious $13.54 $42.14 $72.88 $160.14
Metals Fund
Rydex U.S.
Government $12.84 $39.96 $69.16 $152.56
Bond Fund
The Juno Fund $16.68 $51.73 $89.17 $194.37
Rydex U.S.
Government Money $10.10 $31.53 $54.71 $121.30
Market Fund
</TABLE>
T h e same level of expenses would be incurred if the
investments were held throughout the period indicated.
The preceding table of fees and expenses is provided to assist
investors in understanding the various costs and expenses
which may be borne directly or indirectly by an investor in
each of the Funds. The percentages shown above are based on
actual expenses incurred by the Funds for the fiscal year
ended June 30, 1996. The five-percent assumed annual return is
for comparison purposes only. The actual return for a
particular Fund in future periods may be more or less
depending on market conditions, and the actual expenses an
investor incurs in future periods may be more or less than
those shown above and will depend on the amount invested and
on the actual growth rate of the particular Fund. For a more
complete discussion of the fees connected with an investment
in the Funds and the services provided to the Funds, see
"Management of the Trust" in this Prospectus and in the
Statement of Additional Information.
<PAGE> 12<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Funds, for
the periods identified, have been audited by Deloitte & Touche
LLP, independent certified public accountants, whose report
t h ereon appears in the Trust's 1996 Annual Report to
Shareholders and is incorporated by reference in the Statement
of Additional Information. This information should be read in
conjunction with the financial statements and related notes
thereto included in the Statement of Additional Information.
A copy of the Trust's 1996 Annual Report to Shareholders may
be obtained, without charge, by contacting the Trust at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852, or
by telephoning the Trust at 800-820-0888 or 301-468-8520.
<TABLE>
<CAPTION>
The Nova Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning
of Period $ 11.81 $ 9.77 $ 10.01
Net Investment Income
(Loss) 0.56 0.28 0.01
Net Realized and Unrealized
Gains (Losses) on
Securities 3.31 2.88 (0.25)
Net Increase (Decrease) in
Net Asset Value Resulting from Operations 3.87 3.16 (0.24)
Dividends to Shareholders 0.00 (0.29) 0.00
Distributions to
Shareholders
From Net Realized Capital
Gains 0.00 (0.83) 0.00
Net Increase (Decrease) in
Net Asset Value 3.87 2.04 (0.24)
Net Asset Value -- End of
Period $ 15.68 $ 11.81 $ 9.77
Total Investment Return 32.77% 32.65% (2.47)%
<PAGE> 13<PAGE>
Ratios to Average Net Assets
Expenses 1.31% 1.43% 1.73%**
Net Investment Income 3.14% 2.62% 1.05%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $ 224,541 $ 62,916 $ 77,914 (000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: July 12, 1993.
** Annualized for the period ending June 30, 1994
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Nova Fund typically holds most of its
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 14<PAGE>
<TABLE>
<CAPTION>
The Ursa Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning of Period $ 8.79 $ 10.54 $ 10.00
Net Investment Income (Loss) 0.30 0.35 0.01
Net Realized and Unrealized
Gains (Losses) on Securities (1.54) (1.78) 0.53
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations (1.24) (1.43) 0.54
Dividends to Shareholders 0.00 (0.32) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value (1.24) (1.75) 0.54
Net Asset Value -- End of Period $ 7.55 $ 8.79 $ 10.54
Total Investment Return (14.11)% (14.08)% 10.89%
Ratios to Average Net Assets
Expenses 1.39% 1.39% 1.67%**
Net Investment Income 3.38% 3.50% 1.43%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $192,553 $127,629 $110,899
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: January 7, 1994.
** Annualized for the period ending June 30, 1994
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Ursa Fund typically holds most of its
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 15<PAGE>
<TABLE>
<CAPTION>
The Rydex OTC Fund
For the For the
year Year For the
Ended Ended Period Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance: $ 12.22 $ 8.76 $ 10.00
Net Asset Value -- Beginning of
Period
Net Investment Income (Loss) 0.06 0.14 0.01
Net Realized and Unrealized
Gains (Losses) on Securities 3.24 4.17 (1.25)
Net Increase (Decrease) in Net Asset Value Resulting
from Operations 3.30 4.31 (1.24)
Dividends to Shareholders 0.00 (0.12) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains (0.36) (0.73) 0.00
Net Increase (Decrease) in
Net Asset Value 2.94 3.46 (1.24)
Net Asset Value -- End of Period $ 15.16 $ 12.22 $ 8.76
Total Investment Return 26.44% 49.00% (30.17)%
Ratios to Average Net Assets
Expenses 1.33% 1.41% 1.97%**
Net Investment Income 0.44% 1.34% 1.69%**
Supplementary Data: Portfolio Turnover Rate*** 2,578.56% 2,241.00% 1,171.00%
Net Assets, End of Period $ 48,716 $ 61,948 $ 30,695
(000's omitted)
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: February 14, 1994.
** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 16<PAGE>
</TABLE>
<TABLE>
<CAPTION>
The Rydex Precious Metals Fund
For the For the
Year Period
For the Year Ended Ended
Ended June 30, June 30,
June 30,1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning of
Period $ 8.73 $ 8.29 $ 10.00
Net Investment Income (Loss) 0.00 0.10 0.01
Net Realized and Unrealized
Gains (Losses) on Securities 0.32 0.43 (1.72)
Net Increase (Decrease) in Net Asset Value Resulting
from Operations 0.32 0.53 (1.71)
Dividends to Shareholders 0.00 (0.09) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value 0.32 0.44 (1.71)
Net Asset Value -- End of Period $ 9.05 $ 8.73 $ 8.29
Total Investment Return 3.67% 6.21% (29.27)%
Ratios to Average Net Assets
Expenses 1.33% 1.38% 2.06%**
Net Investment Income (0.01)% 1.15% 1.23%**
Supplementary Data: Portfolio Turnover Rate*** 1,036.37% 1,765.00% 2,728.00%
Average Commission Rate 1.51% -- --
Paid**** $ 36,574 $ 40,861 $ 1,526
Net Assets, End of Period
(000's omitted)
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: December 1, 1993.
** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
**** For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
<PAGE> 17<PAGE>
rate per share for purchases and sales on equity
securities. </TABLE>
<PAGE> 18<PAGE>
<TABLE>
<CAPTION>
The Rydex U.S. Government Bond
Fund
For the For the For the
Year Year Period
Ended Ended Ended
June June 30, June 30,
30,1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance: Net Asset Value -- Beginning of
Period $ 9.55 $ 8.24 $ 10.00
Net Investment Income (Loss) 0.46 0.39 0.02
Net Realized and Unrealized
Gains (Losses) on Securities (0.45) 1.17 (1.76)
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 0.01 1.56 (1.74)
Dividends to Shareholders (0.46) (0.25) (0.02)
Distributions to Shareholders
From Net Realized Capital
Gains
(0.13) 0.00 0.00
Net Increase (Decrease) in
Net Asset Value (0.58) 1.31 (1.76)
Net Asset Value -- End of Period $ 8.97 $ 9.55 $ 8.24
Total Investment Return (1.48)% 18.97% (32.63)%
Ratios to Average Net Assets
Expenses 1.26% 2.26% 3.05%**
Net Investment Income 4.73% 4.64% 3.39%**
Supplementary Data:
Portfolio Turnover Rate*** 780.30% 3,452.59% 1,290.00%
Net Assets, End of Period $ 18,331 $ 2,592 $ 1,564
(000's omitted)
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for the year.
* Commencement of Operations: January 3, 1994.
** Annualized for the period ended June 30, 1994.
<PAGE> 19<PAGE>
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one year.
</TABLE>
<PAGE> 20<PAGE>
<TABLE>
<CAPTION>
The Juno Fund
For the
Period
For the Year Ended
Ended June 30,
June 30,1996 1995*
<S> <C> <C>
Per Share Operating Performance:
Net Asset Value -- Beginning of
Period $ 9.08 $ 10.00
Net Investment Income (Loss) 0.34 0.14
Net Realized and Unrealized
Gains (Losses) on Securities 0.05 (1.06)
Net Increase (Decrease) in Net
Asset Value Resulting from Operations 0.39 (0.92)
Dividends to Shareholders 0.00 0.00
Distributions to Shareholders
From Net Realized Capital Gains 0.00 0.00
Net Increase (Decrease) in Net Asset Value 0.39 (0.92)
Net Asset Value -- End of Period $ 9.47 $ 9.08
Total Investment Return 4.30% (9.20)%
Ratios to Average Net Assets
Expenses 1.64% 1.50%**
Net Investment Income 3.63% 1.32%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00%
Net Assets, End of Period (000's $ 18,860 $ 4,301 omitted)
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: March 3, 1995.
** Annualized for the period ended June 30, 1995.
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Juno Fund typically holds most of its
investments in options and futures contracts which are deemed short-term securities.
</TABLE>
<PAGE> 21<PAGE>
<TABLE>
<CAPTION>
The Rydex U.S. Government
Money Market Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance: Net Asset Value -- Beginning of Period $ 1.00 $ 1.00 $ 1.00
Net Investment Income
(Loss) 0.04 0.04 0.01
Net Realized and Unrealized
Gains(Losses) on
Securities 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 0.04 0.04 0.01
Dividends to Shareholders (0.04) (0.04) (0.01)
Distributions to
Shareholders From Net
Realized Capital Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value 0.00 0.00 0.00
Net Asset Value End of Period $ 1.00 $ 1.00 $ 1.00
Total Investment Return 4.60% 4.43% 2.47%
Ratios to Average Net Assets 0.99% 0.89% 1.16%**
Expenses 4.18% 4.23% 2.34%**
Net Investment Income
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $ 153,925 $ 284,198 $ 88,107
(000's omitted)
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year. * Commencement of Operations: December 3, 1993.
** Annualized for the period ended June 30, 1994.
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 22<PAGE>
</TABLE>
<PAGE> 23<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
General
The Funds are principally designed for professional money managers and
investors who intend to follow an asset-allocation or market-timing
investment strategy. Except for the Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. These Funds seek investment results
that correspond over time to a specified benchmark. The Funds may be used
independently or in combination with each other as part of an overall
investment strategy. Additional Funds may be created from time to time.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with the respective benchmarks. Rather, the Advisor
primarily uses statistical and quantitative analysis to determine the
investments the Fund makes and techniques it employs. While the Advisor
attempts to minimize any "tracking error" (that statistical measure of the
difference between the investment results of a Fund and the performance of
its benchmark), certain factors will tend to cause the Fund's investment
results to vary from a perfect correlation to its benchmark. The Funds,
however, do not expect that their total returns will vary adversely from
their respective current benchmarks by more than ten percent over a year.
See "Special Risk Considerations." It is the policy of these Funds to
pursue their investment objectives regardless of market conditions, to
remain nearly fully invested and not to take defensive positions.
The investment objectives (including the benchmarks of the Nova and Ursa
Funds) and certain investment restrictions of the Funds are fundamental
policies and may not be changed without the affirmative vote of at least
the majority of the outstanding shares of that Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). All other
investment policies of the Funds not specified as fundamental (including
the benchmarks of the Funds other than Nova and Ursa Funds) may be changed
by the trustees of the Trust (the Trustees ) without the approval of
shareholders.
The Trustees may consider changing a Fund s benchmark (to the extent
permitted) if, for example, the current benchmark becomes unavailable; the
Trustees believe the current benchmark no longer serves the investment
needs of a majority of shareholders or another benchmark better serves
their needs; or the financial or economic environment makes it difficult
for the Fund s investment results to correspond sufficiently to its current
benchmark. If believed appropriate, the Trustees may specify a benchmark
for a Fund that is "leveraged" or proprietary. Of course, there can be no
assurance that a Fund will achieve its objective.
The Nova Fund
The investment objective of the Nova Fund is to provide investment returns
that correspond to 150% of the performance of the S&P500 Index. In
attempting to achieve its objective, the Nova Fund expects that a
substantial portion of its assets usually will be devoted to employing
certain investment techniques. These techniques include engaging in
certain transactions in stock index futures contracts, options on stock
index futures contracts, and options on securities and stock indexes.
Under the techniques in which the Nova Fund engages, the Nova Fund will
generally incur a loss if the price of the underlying security or index
decreases between the date of the employment of the technique and the date
<PAGE> 24<PAGE>
on which the Nova Fund terminates the position. The amount of any gain or
loss on an investment technique may be affected by any premium or amounts
in lieu of dividends or interest income the Nova Fund pays or receives as
the result of the transaction. The Nova Fund may also invest in shares of
individual securities which are expected to track the Nova Fund s
benchmark.
In contrast to returns on a mutual fund that seeks to approximate the
return of the S&P500 Index, the Nova Fund should increase gains to
investors during periods when the prices of the securities in the S&P500
Index are rising and increase losses to investors during periods when they
are declining. Investors in the Nova Fund could experience substantial
losses during sustained periods of falling equity prices.
The Ursa Fund
The Ursa Fund is designed to allow shareholders to hedge an existing
portfolio of securities or mutual fund shares or to speculate on
anticipated decreases in the S&P500 Index. The Ursa Fund's investment
objective is to provide investment results that will inversely correlate to
the performance of the S&P500 Index. The Ursa Fund seeks to achieve this
inverse correlation result on each trading day. While a close correlation
can be achieved on any single trading day, over time the cumulative
percentage increase or decrease in the net asset value of the shares of the
Ursa Fund may diverge significantly from the cumulative percentage decrease
or increase in the S&P500 Index due to a compounding effect.
If the Ursa Fund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the Ursa Fund would
increase for that day in direct proportion to any decrease in the level of
the S&P500 Index. Conversely, the net asset value of the shares of the
Ursa Fund would decrease for that day in direct proportion to any increase
in the level of the S&P500 Index for that day. For example, if the S&P500
Index were to decrease by 1% by the close of business on a particular
trading day, investors in the Ursa Fund would experience a gain in net
asset value of approximately 1% for that day. Conversely, if the S&P500
Index were to increase by 1% by the close of business on a particular
trading day, investors in the Ursa Fund would experience a loss in net
asset value of approximately 1% for that day.
Even if there is a perfect inverse correlation between the Ursa Fund and
the S&P500 Index on a daily basis, however, the symmetry between the
changes in the S&P500 Index and the changes in the value of shares in the
Ursa Fund can be significantly altered over time by a compounding effect.
Thus, if the Ursa Fund achieved a perfect inverse correlation with the
S&P500 Index on every trading day over an extended period, and if there
were a significant decrease in the level of the S&P500 Index during that
period, there would be a compounding effect with the result that the net
asset value of the shares of the Ursa Fund for that period should generally
increase by a percentage that is somewhat greater than the percentage of
decrease in the level of the S&P500 Index. Conversely, if a perfect
inverse correlation were maintained over an extended period and if there
were a significant increase in the level of the S&P500 Index over that
period, then there would be a compounding effect with the result that the
net asset value of the shares of the Ursa Fund for that period should
generally decrease by a percentage that is somewhat less than the
percentage increase in the level of the S&P500 Index for that period.
<PAGE> 25<PAGE>
The Ursa Fund intends to pursue its investment objective regardless of
market conditions and does not intend to take defensive positions in
anticipation of rising equity prices. Consequently, investors in the Ursa
Fund may experience substantial losses during sustained periods of rising
equity prices.
In pursuing its investment objective, the Ursa Fund generally does not
invest in traditional securities, such as common stock of operating
companies. Rather, the Ursa Fund employs certain investment techniques,
including engaging in short sales and in certain transactions in stock
index futures contracts, options on stock index futures contracts, and
options on securities and stock indexes. Under these techniques, the Ursa
Fund will generally incur a loss if the price of the underlying security or
index increases between the date of the employment of the technique and the
date on which the Ursa Fund terminates the position. The Ursa Fund will
generally realize a gain if the underlying security or index declines in
price between those dates. This result is the opposite of what one would
expect from a cash purchase of a long position in a security. The amount
of any gain or loss on an investment technique may be affected by any
premium or amounts in lieu of dividends or interest that the Ursa Fund pays
or receives as the result of the transaction.
The Rydex OTC Fund
The investment objective of the OTC Fund is to provide investment results
that correspond to a benchmark for over-the-counter securities. The OTC
Fund's current benchmark is the NASDAQ 100 Index.
The OTC Fund does not aim to hold all of the 100 securities included in the
NASDAQ 100 Index. Instead, the OTC Fund intends to hold representative
securities included in the NASDAQ 100 Index or other instruments which the
Advisor believes will provide returns that correspond to those of the
NASDAQ 100 IndexTM. The OTC Fund may engage in transactions on stock index
futures contracts, options on stock index futures contracts, and options on
securities and stock indexes.
Companies whose securities are traded on the over-the-counter ("OTC")
markets generally are smaller market-capitalization or newer companies than
those listed on the New York Stock Exchange (the "NYSE") or the American
Stock Exchange (the "AMEX"). OTC companies often have limited product
lines, or relatively new products or services, and may lack established
markets, depth of experienced management, or financial resources and the
ability to generate funds. The securities of these companies may have
limited marketability and may be more volatile in price than securities of
larger-capitalized or more well-known companies. Among the reasons for the
greater price volatility of securities of certain smaller OTC companies are
the less certain growth prospects of comparably smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
s e n s itivity of smaller-capitalized companies to changing economic
conditions than larger-capitalized, exchange-traded securities.
Conversely, because many of these OTC securities may be overlooked by
investors and undervalued in the marketplace, there is potential for
significant capital appreciation.
The Rydex Precious Metals Fund
The investment objective of the Metals Fund is to provide investment
results that correspond to a benchmark primarily for metals-related
securities. The Metals Fund s current benchmark is the XAU Index.
<PAGE> 26<PAGE>
Metals-related investments are considered speculative and are influenced by
a h ost of world-wide economic, financial, and political factors.
Historically, the prices of gold and precious metals have been subject to
wide price movements caused by political as well as economic factors, and,
accordingly, prices of equity securities of companies involved in the
precious metals-related industry have been volatile. Such fluctuation and
volatility may be due to changes in inflation or in expectations regarding
inflation in various countries, the availability of supplies of such
precious metals and minerals, changes in industrial and commercial demand,
metal and mineral sales by governments, central banks, or international
agencies, investment speculation, monetary and other economic policies of
various governments, and governmental restrictions on the private ownership
of certain precious metals and minerals. Such price volatility in precious
metals prices will have a similar effect on the Metals Fund's share prices.
The Fund may invest in other securities that are expected to perform in a
manner that will assist the Metals Fund s performance to closely track the
XAU Index.
The Metals Fund may invest in securities of foreign issuers. These
securities present certain risks not present in domestic investments and
expose the investor to general market conditions which differ significantly
from those in the United States. Securities of foreign issuers may be
affected by the strength of foreign currencies relative to the U.S. dollar
or by political or economic developments in foreign countries. Foreign
companies may not be subject to accounting standards or governmental
regulations comparable to those that affect United States companies, and
there may be less public information about the operations of foreign
companies. Foreign securities also may be subject to foreign government
taxes that could reduce the yield on such securities.
The Rydex U.S. Government Bond Fund
The investment objective of the Bond Fund is to provide investment results
that correspond to a benchmark for U.S. Government Securities. The Bond
Fund s current benchmark is 120% of the price movement of the Long Bond,
without consideration of interest paid.
In attempting to achieve this objective, the Bond Fund invests primarily in
U.S. Government Securities. U.S. Government Securities are obligations of
the U.S. Treasury or obligations either issued or guaranteed, as to
principal and interest, by agencies or instrumentalities of the U.S.
Government. The Bond Fund may engage in transactions in futures contracts
and options on futures contracts on U.S. Treasury bonds. The Bond Fund
also may invest in U.S. Treasury zero coupon bonds. While U.S. Government
Securities provide substantial protection against credit risk, investment
in those securities do not protect investors against price changes due to
changing interest rate levels and, as such, the share price of the Bond
Fund is not guaranteed and will fluctuate over time. Accordingly, the
return of the Bond Fund should move inversely with movements in prevailing
interest rates on the Long Bond. The Fund intends to adjust its portfolio
each time the Long Bond is issued (currently twice yearly) in an attempt to
track the price movement of the newly-issued Long Bond. See "The
Benchmarks."
The Juno Fund
The Juno Fund is designed to allow investors to hedge an existing portfolio
of securities or mutual fund shares against general increases in interest
rates or to speculate on anticipated decreases in the price of the Long
<PAGE> 27<PAGE>
Bond. The Juno Fund s investment objective is to provide total return
before expenses and costs that will inversely correlate to the price
movements of a benchmark debt instrument or futures contract on a specified
debt instrument. The Long Bond has been designated as the Juno Fund s
current benchmark.
In attempting to achieve its objective, the Fund intends to devote its
a s sets primarily to employing certain investment techniques. The
investment techniques that may be employed by the Fund include engaging in
short sales on U.S. Treasury bonds and engaging in transactions in futures
contracts on U.S. Treasury bonds and options on such contracts to produce
synthetic short positions. These techniques are highly specialized and
i n volve certain risks not traditionally associated with investment
companies. Under these techniques, the Fund will generally incur a loss if
the price of the underlying security or futures contract increases between
the date of the employment of the technique and the date on which the Fund
terminates the position. The Fund will generally realize a gain if the
underlying security or futures contract declines in price between those
dates. This result is the opposite of what one would expect from a cash
purchase of a long position in a security.
The Juno Fund seeks to achieve this inverse correlation result on each
trading day. While a close correlation can be achieved on any single
trading day, over time the cumulative percentage increase or decrease in
the Juno Fund's total return before expenses and costs may diverge
significantly from the cumulative percentage decrease or increase in the
price of the Long Bond due to a compounding effect. If the Juno Fund
achieved a perfect inverse correlation for any single trading day, the Juno
Fund's total return before expenses and costs would increase for that day
in direct proportion to any decrease in the price of the Long Bond.
Conversely, the Juno Fund's total return before expenses and costs would
decrease for that day in direct proportion to any increase in the price of
the Long Bond for that day. For example, if the price of the Long Bond
were to decrease by 1% by the close of business on a particular trading
day, investors in the Juno Fund would experience a gain in total return
before expenses and costs of approximately 1% for that day. Conversely, if
the price of the Long Bond were to increase by 1% by the close of business
on a particular trading day, investors in the Juno Fund would experience a
loss in total return before expenses and costs of approximately 1% for that
day.
Even if there is a perfect inverse correlation between the Juno Fund's
total return before expenses and costs and the price of the Long Bond on a
daily basis, however, the symmetry between the changes in the price of the
Long Bond and the changes in the Juno Fund's total return can be
significantly altered over time by a compounding effect. Thus, if the Juno
Fund achieved a perfect inverse correlation with the price of the Long Bond
on every trading day over an extended period, and if there were a
significant decrease in the price of the Long Bond during that period,
there would be a compounding effect with the result that the Juno Fund's
total return before expenses and costs for that period should generally
increase by a percentage that is somewhat greater than the percentage of
decrease in the price of the Long Bond. Conversely, if a perfect inverse
correlation were maintained over an extended period and if there were a
significant increase in the price of the Long Bond over that period, then
there would be a compounding effect with the result that the Juno Fund's
total return before expenses and costs for that period should generally
<PAGE> 28<PAGE>
decrease by a percentage that is somewhat less than the percentage increase
in the price of the Long Bond for that period.
For purposes of determining the Juno Fund's total return before expenses
and costs, costs include the Juno Fund s "carrying cost" in maintaining
short positions. When entering an actual or synthetic short position on
the Long Bond, the Juno Fund must effectively pay interest equal to
interest accrued on the underlying U.S. Treasury bond. The difference, if
any, between the interest effectively paid by the Juno Fund on its short
positions and any interest earned by the Juno Fund on its assets is the
Juno Fund s carrying cost.
The interest rate on a U.S. Treasury bond is set at the time the particular
bond is issued and does not change for the maturity of the bond so that the
interest paid on the bond is constant throughout the life of the bond. The
price at which a previously-issued U.S. Treasury bond can be bought and
sold in the open market, however, does change. The market value of U.S.
Treasury bonds rises when interest rates in general decrease and falls when
interest rates in general increase. Accordingly, if the Juno Fund is
successful in meeting its investment objective, the Fund s total return
should rise with increases in interest rates and fall with decreases in
interest rates.
The Rydex U.S. Government Money Market Fund
The investment objectives of the Money Market Fund are security of
principal, high current income, and liquidity. The Money Market Fund seeks
to achieve its objectives by investing in U.S. Government Securities,
including money market instruments which are issued or guaranteed, as to
p r i ncipal and interest, by the U.S. Government, its agencies or
instrumentalities, as well as in repurchase agreements collateralized fully
by U.S. Government Securities. An investment in the Money Market Fund is
neither insured nor guaranteed by the U.S. Government. The Money Market
Fund seeks to maintain a constant $1.00 net asset value per share, although
this cannot be assured.
The Money Market Fund may invest in securities that take the form of
participation interests in, and may be evidenced by deposit or safekeeping
receipts for, any of the foregoing securities. Participation interests are
p r o rata interests in U.S. Government Securities; and instruments
evidencing deposit or safekeeping are documentary receipts for such
original securities held in custody by others.
The Benchmarks
The S&P500 Index (SPX). Standard & Poor's Corporation ("S&P") chooses the
500 stocks comprising the S&P500 Index on the basis of market values and
industry diversification. Most of the stocks in the S&P500 Index are
issued by the 500 largest companies, in terms of the aggregate market value
of their outstanding stock, and such companies are generally listed on the
NYSE. Additional stocks that are not among the 500 largest market value
stocks are included in the S&P500 Index for diversification purposes. S&P
will not be a sponsor of, or in any other way affiliated with, the Funds.
The NASDAQ 100 IndexTM (NDX). The NASDAQ 100 IndexTM is a capitalization-
weighted index composed of 100 of the largest non-financial securities
listed on the NASDAQ Stock Market. The index was created in 1985.
<PAGE> 29<PAGE>
The XAU Index. The XAU Index is a capitalization-weighted index featuring
eleven widely-held securities in the gold and silver mining and production
industry or companies investing in such mining and production companies.
The XAU Index was set to an initial value of 100 in January 1979. The
following issuers are currently included in the XAU Index: ASA Limited;
Barrick Gold Corp.; Battle Mountain Gold Co.; Echo Bay Mines Limited; Hecla
Mining Co.; Homestake Mining Co.; Newmont Mining Corp.; Placer Dome Inc.;
Pegasus Gold, Inc.; TVX Gold, Inc.; and Santa Fe Pacific Gold Corp. While
the majority of these companies are based in North America, they generally
have operations in countries based outside North America.
The Long Bond. The Long Bond is the U.S. Treasury bond with the longest
maturity. Currently, the longest maturity of a U.S. Treasury bond is 30
years. At this time, the 30-year U.S. Treasury bond is issued twice
yearly. In the future, the U.S. Treasury may change the number of times
each year that the Long Bond is issued.
<PAGE> 30<PAGE>
SPECIAL RISK CONSIDERATIONS
Shareholders should consider the special factors discussed below that are
associated with the investment policies of the Funds in determining the
appropriateness of investing in the Funds.
Portfolio Turnover
The Trust anticipates that investors in the Funds, as part of an asset-
allocation or market-timing investment strategy, will frequently redeem
shares of a particular Fund, as well as exchange their shares of a
particular Fund for shares in other Funds pursuant to the exchange policy
of the Trust (see "Exchanges"), which would cause that Fund to experience
high portfolio turnover. Because each Fund's portfolio turnover rate to a
great extent will depend on the purchase, redemption, and exchange activity
of the Fund's investors, it is very difficult to estimate what the Fund's
actual turnover rate generally will be. Pursuant to the formula prescribed
b y the Securities and Exchange Commission (the "Commission"), the
portfolio turnover rate for each Fund is calculated without regard to
securities, including options and futures contracts, having a maturity of
less than one year. The Nova Fund, the Ursa Fund, and the Juno Fund
typically hold most of their investments in short-term options and futures
contracts, which, therefore, are excluded for purposes of computing
portfolio turnover.
Significant portfolio turnover will tend to increase the realization by a
Fund of gains (or losses) on securities that have been held by the Fund for
less than three months. Any such realized gains on securities that have
been held by a Fund for less than three months, and other factors related
to large cash flows into and out of the Fund, will increase the risk that,
in any given year, the Fund may fail to qualify as a regulated investment
company under Subchapter M of the U.S. Internal Revenue Code of 1986, as
amended (the "Code") (see "Taxes"). If a Fund should so fail to qualify
under the Code, the Fund's net investment income and net capital gain would
become subject to Federal income tax at corporate rates. The imposition of
such taxes would directly reduce the return to an investor from an
investment in the Fund. In addition, a higher portfolio turnover rate
would likely involve correspondingly greater brokerage commissions and
other expenses which would be borne by the Fund. Furthermore, a Fund's
portfolio turnover level may adversely affect the ability of the Fund to
achieve its investment objective.
Tracking Error
While the Funds do not expect that the returns over a year will deviate
adversely from their respective benchmarks by more than ten percent,
several factors may affect their ability to achieve this correlation.
Among these factors are: (1) Fund expenses, including brokerage (which may
be increased by high portfolio turnover); (2) less than all of the
securities in the benchmark being held by a Fund and securities not
included in the benchmark being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund, such as
futures contracts and options, and the performance of the underlying
securities in the cash market; (4) bid-ask spreads (the effect of which may
be increased by portfolio turnover); (5) a Fund holds instruments traded in
a market that has become illiquid or disrupted; (6) Fund share prices being
rounded to the nearest cent; (7) changes to the benchmark index that are
<PAGE> 31<PAGE>
not disseminated in advance; or (8) the need to conform a Fund s portfolio
holdings to comply with investment restrictions or policies or regulatory
or tax law requirements.
Aggressive Investment Techniques
Each of the Funds (other than the Money Market Fund) may engage in certain
aggressive investment techniques which may include engaging in short sales
and transactions in futures contracts and options on securities, securities
indexes, and futures contracts. The Trust expects that the Nova Fund, the
Ursa Fund, and the Juno Fund will primarily use these techniques in seeking
to achieve their objectives and that a significant portion (up to 100%) of
the assets of these Funds will be held in high-grade liquid debt in a
segregated account by these Funds as "cover" for these investment
techniques.
Participation in the options or futures markets by a Fund involves distinct
investment risks and transaction costs. Risks inherent in the use of
options, futures contracts, and options on futures contracts include: (1)
adverse changes in the value of such instruments; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the price of the underlying securities, index, or futures
contracts; (3) the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the
possible absence of a liquid secondary market for any particular instrument
at any time; and (5) the possible need to defer closing out certain
positions to avoid adverse tax consequences. For further information
regarding these investment techniques, see "Investment Techniques and Other
Investment Policies."
Early NASDAQ Closings
The normal close of trading of securities listed on the National
Association of Securities Dealers Automated Quotations (the "NASDAQ"),
which is operated by the National Association of Securities Dealers, Inc.
(the "NASD"), is 4:00 P.M. While an infrequent occurrence, the NASD has
closed trading on the NASDAQ as much as 15 minutes prior to the normal
close because of computer systems failures. Early closing of the NASDAQ
may result in a Fund being unable to sell (or buy) OTC securities traded on
the NASDAQ on that day. If the NASDAQ closes prior to the close of
business on a day when one or more of the Funds needs to execute a high
volume of trades late in a trading day, a Fund, in particular the OTC Fund,
might incur substantial trading losses.
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES
Futures Contracts and Options Thereupon
The Nova Fund and the OTC Fund may purchase stock index futures contracts
as a substitute for a comparable market position in the underlying
securities. The Ursa Fund may sell stock index futures contracts. The
Bond Fund may purchase futures contracts on U.S. Government Securities as a
substitute for a comparable market position in the cash market. The Juno
Fund may sell futures contracts on U.S. Government Securities. The
principal trading markets for S&P500 index futures contracts and U.S.
Treasury bond futures contracts are the Chicago Mercantile Exchange (the
"CME") and the Chicago Board of Trade (the "CBOT"), respectively.
<PAGE> 32<PAGE>
A futures contract obligates the seller to deliver (and the purchaser to
take delivery of) the specified commodity on the expiration date of the
contract. A stock index futures contract obligates the seller to deliver
(and the purchaser to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which
the agreement is made. No physical delivery of the underlying stocks in
the index is made.
The Nova Fund and the OTC Fund may purchase call options and write (sell)
put options, and the Ursa Fund may purchase put options and write call
options, on stock index futures contracts. The Bond Fund may purchase call
options and write put options on U.S. Government Securities futures
contracts and the Juno Fund may write call options and purchase put options
on futures contracts on U.S. Government Securities.
When a Fund purchases a put or call option on a futures contract, the Fund
pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
Fund receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the Fund the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a Fund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
Fund s loss from an unhedged short position in futures contracts or from
writing (selling) call options on futures contracts is potentially
unlimited. The Funds may engage in related closing transactions with
respect to options on futures contracts. The Funds will only engage in
transactions in futures contracts and options thereupon that are traded on
a United States exchange or board of trade. In addition to the uses set
forth hereunder, each Fund may also engage in futures and futures options
transactions in order to hedge or limit the exposure of its position, to
create a synthetic money market position, and for certain other tax-related
purposes. See "Taxes."
The Funds may purchase and sell futures contracts, index futures contracts,
and options thereon only to the extent that such activities would be
consistent with the requirements of Section 4.5 of the regulations under
the Commodity Exchange Act promulgated by the Commodity Futures Trading
Commission (the "CFTC Regulations"), under which each of these Funds would
be excluded from the definition of a "commodity pool operator." Under
Section 4.5 of the CFTC Regulations, a Fund may engage in futures
transactions, either for "bona fide hedging" purposes, as this term is
defined in the CFTC Regulations, or for non-hedging purposes to the extent
that the aggregate initial margins and option premiums required to
establish such non-hedging positions do not exceed 5% of the liquidation
value of the Fund s portfolio. In the case of an option on futures
contracts that is "in-the-money" at the time of purchase (i.e., the amount
by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market
value of the underlying security exceeds the exercise price of the call
option), the in-the-money amount may be excluded in calculating this 5%
limitation.
<PAGE> 33<PAGE>
When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a
Fund may maintain with its custodian bank (and mark-to-market on a daily
basis) a segregated account consisting of cash or high-quality liquid debt
instruments, including U.S. Government Securities or repurchase agreements
secured by U.S. Government Securities, that, when added to any amounts
deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities trading practices
and properly segregates assets, the segregated account will function as a
practical limit on the amount of leverage which the Fund may undertake and
on the potential increase in the speculative character of the Fund s
outstanding portfolio securities. Additionally, such segregated accounts
will generally assure the availability of adequate funds to meet the
obligations of the Fund arising from such investment activities.
A Fund may cover its long position in a futures contract by purchasing a
put option on the same futures contract with a strike price (i.e., an
exercise price) as high or higher than the price of the futures contract,
or, if the strike price of the put is less than the price of the futures
contract, the Fund will maintain in a segregated account cash or high-grade
liquid debt securities equal in value to the difference between the strike
price of the put and the price of the future. A Fund may also cover its
long position in a futures contract by taking a short position in the
instruments underlying the futures contract, or by taking positions in
i n s truments the prices of which are expected to move relatively
consistently with the futures contract. A Fund may cover its short
position in a futures contract by taking a long position in the instruments
underlying the futures contract, or by taking positions in instruments the
prices of which are expected to move relatively consistently with the
futures contract.
A Fund may cover its sale of a call option on a futures contract by taking
a long position in the underlying futures contract at a price less than or
equal to the strike price of the call option, or, if the long position in
the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, the Fund will maintain in a
segregated account cash or high-grade liquid debt securities equal in value
to the difference between the strike price of the call and the price of the
future. A Fund may also cover its sale of a call option by taking
positions in instruments the prices of which are expected to move
relatively consistently with the call option. A Fund may cover its sale of
a put option on a futures contract by taking a short position in the
underlying futures contract at a price greater than or equal to the strike
price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of
the written put, the Fund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between
the strike price of the put and the price of the future. A Fund may also
cover its sale of a put option by taking positions in instruments the
prices of which are expected to move relatively consistently with the put
option.
Although the Funds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation
<PAGE> - 34 -<PAGE>
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting a Fund to substantial losses. If trading is not possible, or a
Fund determines not to close a futures position in anticipation of adverse
price movements, the Fund will be required to make daily cash payments of
variation margin. The risk that the Fund will be unable to close out a
futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Index Options Transactions
The Nova Fund, the OTC Fund, and the Metals Fund may purchase call options
and write (sell) put options, and the Ursa Fund may purchase put options
and write call options, on stock indexes. All of the Funds may write and
purchase put and call options on stock indexes in order to hedge or limit
the exposure of their positions, to create synthetic money market
positions, and for certain other tax-related purposes. See "Taxes."
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right
to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option. The
amount of cash received, if any, will be the difference between the closing
price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer (seller) of the option is obligated,
in return for the premiums received from the purchaser of the option, to
make delivery of this amount to the purchaser. Unlike the options on
securities discussed below, all settlements of index options transactions
are in cash.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on
a narrower index such as the Philadelphia Stock Exchange Over-the-Counter
Index. Options currently are traded on the Chicago Board Options Exchange
(the "CBOE"), the AMEX, and other exchanges ("Exchanges"). Purchased over-
the-counter options and the cover for written over-the-counter options will
be subject to the respective Fund s 15% limitation on investment in
illiquid securities. See "Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or
written (sold) by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of
all investment companies advised by the same investment adviser are
combined for purposes of these limits. Pursuant to these limitations, an
Exchange may order the liquidation of positions and may impose other
sanctions or restrictions. These position limits may restrict the number
of listed options which a Fund may buy or sell; however, the Advisor
intends to comply with all limitations.
<PAGE> - 35 -<PAGE>
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the
underlying securities comprising the stock index selected and the risk that
there might not be a liquid secondary market for the option. Because the
value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether a Fund will realize a
gain or loss from the purchase or writing (sale) of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than upon movements in the price of a particular stock.
Whether a Fund will realize a profit or loss by the use of options on stock
indexes will depend on movements in the direction of the stock market
generally or of a particular industry or market segment. This requires
different skills and techniques than are required for predicting changes in
the price of individual stocks. A Fund will not enter into an option
position that exposes the Fund to an obligation to another party, unless
the Fund either (i) owns an offsetting position in securities or other
options and/or (ii) maintains with the Fund s custodian bank (and marks-to-
market on a daily basis) a segregated account consisting of cash, U.S.
Government Securities, or other liquid high-grade debt securities that,
when added to the premiums deposited with respect to the option, are equal
to the market value of the underlying stock index not otherwise covered.
Options on Securities The Nova Fund, the OTC Fund, and Metals Fund may buy
call options and write
(sell) put options on securities, and the Ursa Fund may buy put options and
write call options on securities. By buying a call option, a Fund has the
right, in return for a premium paid during the term of the option, to buy
the securities underlying the option at the exercise price. By writing
(selling) a call option and receiving a premium, a Fund becomes obligated
during the term of the option to deliver the securities underlying the
option at the exercise price if the option is exercised. By buying a put
option, a Fund has the right, in return for a premium paid during the term
of the option, to sell the securities underlying the option at the exercise
price. By writing a put option, a Fund becomes obligated during the term
of the option to purchase the securities underlying the option at the
exercise price. Options on securities written (sold) by the Funds will be
conducted on recognized securities exchanges.
When writing (selling) call options on securities, a Fund may cover its
position by owning the underlying security on which the option is written.
Alternatively, the Fund may cover its position by owning a call option on
the underlying security, on a share for share basis, which is deliverable
under the option contract at a price no higher than the exercise price of
the call option written by the Fund or, if higher, by owning such call
option and depositing and maintaining in a segregated account cash or
liquid high-grade debt securities equal in value to the difference between
the two exercise prices. In addition, a Fund may cover its position by
depositing and maintaining in a segregated account cash or liquid high-
grade debt securities equal in value to the exercise price of the call
option written by the Fund. When a Fund writes (sells) a put option, the
Fund will have and maintain on deposit with its custodian bank cash or
liquid high-grade debt securities having a value equal to the exercise
value of the option. The principal reason for a Fund to write (sell) call
options on stocks held by the Fund is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the
underlying securities alone.
<PAGE> - 36 -<PAGE>
If a Fund that writes (sells) an option wishes to terminate the Fund s
obligation, the Fund may effect a "closing purchase transaction." The Fund
accomplishes this by buying an option of the same series as the option
previously written by the Fund. The effect of the purchase is that the
writer s position will be canceled by the Options Clearing Corporation.
However, a writer (seller) may not effect a closing purchase transaction
after the writer has been notified of the exercise of an option. Likewise,
a Fund which is the holder of an option may liquidate its position by
effecting a "closing sale transaction." The Fund accomplishes this by
selling an option of the same series as the option previously purchased by
the Fund. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected. If any call or put option is not
exercised or sold, the option will become worthless on its expiration date.
A Fund will realize a gain (or a loss) on a closing purchase transaction
with respect to a call or a put option previously written (sold) by the
Fund if the premium, plus commission costs, paid by the Fund to purchase
the call or put option to close the transaction is less (or greater) than
the premium, less commission costs, received by the Fund on the sale of the
call or the put option. The Fund also will realize a gain if a call or put
option which the Fund has written lapses unexercised, because the Fund
would retain the premium.
A Fund will realize a gain (or a loss) on a closing sale transaction with
respect to a call or a put option previously purchased by the Fund if the
premium, less commission costs, received by the Fund on the sale of the
call or the put option to close the transaction is greater (or less) than
the premium, plus commission costs, paid by the Fund to purchase the call
or the put option. If a put or a call option which the Fund has purchased
e x pires out-of-the-money, the option will become worthless on the
expiration date, and the Fund will realize a loss in the amount of the
premium paid, plus commission costs.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance
can be given that a market will exist at all times for all outstanding
options purchased or sold by a Fund. If an options market were to become
unavailable, the Fund would be unable to realize its profits or limit its
losses until the Fund could exercise options it holds, and the Fund would
remain obligated until options it wrote were exercised or expired.
Because option premiums paid or received by a Fund are small in relation to
the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing
directly in common stocks.
Short Sales
The Ursa Fund and the Juno Fund also may engage in short sales transactions
under which the Fund sells a security it does not own. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest
which accrue during the period of the loan. To borrow the security, the
<PAGE> - 37 -<PAGE>
Fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by
the broker, to the extent necessary to meet the margin requirements, until
the short position is closed out.
Until the Ursa Fund or Juno Fund closes its short position or replaces the
borrowed security, the Fund will: (a) maintain a segregated account
containing cash or liquid high grade debt securities at such a level that
(i) the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold
short and (ii) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will not be less than the
market value of the security at the time the security was sold short; or
(b) otherwise cover the Fund s short position.
The Nova Fund, the OTC Fund, and the Metals Fund each may engage in short
sales if, at the time of the short sale, the Fund owns or has the right to
acquire an equal amount of the security being sold at no additional cost
("selling against the box"). These Funds may make a short sale when the
Fund wants to sell the security the Fund owns at a current attractive
price, but also wishes to defer recognition of a gain or loss for Federal
income tax purposes and for purposes of satisfying certain tests applicable
to regulated investment companies under the Internal Revenue Code.
U.S. Government Securities
The Bond Fund and the Money Market Fund may invest in U.S. Government
Securities in pursuit of their investment objectives. The Funds, except
for the Money Market Fund, may invest in U.S. Government Securities as
"cover" for the investment techniques these Funds employ as part of a cash
reserve or for liquidity purposes.
Yields on short-, intermediate-, and long-term U.S. Government Securities
are dependent on a variety of factors, including the general conditions of
the money and bond markets, the size of a particular offering, and the
maturity of the obligation. Debt securities with longer maturities tend to
produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market value of U.S. Government
Securities generally varies inversely with changes in market interest
rates. An increase in interest rates, therefore, would generally reduce
the market value of a Fund s portfolio investments in U.S. Government
Securities, while a decline in interest rates would generally increase the
market value of a Fund s portfolio investments in these securities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. Such agencies and instrumentalities may borrow funds from the
U.S. Treasury. However, no assurances can be given that the U.S.
Government will provide such financial support to the obligations of the
other U.S. Government agencies or instrumentalities in which a Fund
invests, since the U.S. Government is not obligated to do so. These other
agencies and instrumentalities are supported by either the issuer s right
to borrow, under certain circumstances, an amount limited to a specific
line of credit from the U.S. Treasury, the discretionary authority of the
U . S . Government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality itself.
<PAGE> - 38 -<PAGE>
U.S. Government Securities may be purchased at a discount. Such
securities, when held to maturity or retired, may include an element of
capital gain. Capital losses may be realized when such securities
purchased at a premium are held to maturity or are called or redeemed at a
price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
Repurchase Agreements
U.S. Government Securities include repurchase agreements secured by U.S.
Government Securities. Under a repurchase agreement, a Fund purchases a
debt security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or
a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon market interest rate during the purchaser s
holding period. While the maturities of the underlying securities in
repurchase transactions may be more than one year, the term of each
repurchase agreement will always be less than one year. A Fund will enter
into repurchase agreements only with member banks of the Federal Reserve
System or primary dealers of U.S. Government Securities. The Advisor will
monitor the creditworthiness of each of the firms which is a party to a
repurchase agreement with any of the Funds. In the event of a default or
bankruptcy by the seller, the Fund will liquidate those securities (whose
market value, including accrued interest, must be at least equal to 100% of
the dollar amount invested by the Fund in each repurchase agreement) held
under the applicable repurchase agreement, which securities constitute
collateral for the seller s obligation to pay. However, liquidation could
involve costs or delays and, to the extent proceeds from the sales of these
securities were less than the agreed-upon repurchase price, the Fund would
suffer a loss. A Fund also may experience difficulties and incur certain
costs in exercising its rights to the collateral and may lose the interest
the Fund expected to receive under the repurchase agreement. Repurchase
agreements usually are for short periods, such as one week or less, but may
be longer. It is the current policy of the Funds to treat repurchase
agreements that do not mature within seven days as illiquid for the
purposes of their investment policies.
Illiquid Securities
While none of the Funds anticipates doing so, each Fund may purchase
illiquid securities, including securities that are not readily marketable
and securities that are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which can be
offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act. A Fund will not invest more than 15% (10% with respect to
the Money Market Fund) of the Fund s net assets in illiquid securities.
Each Fund will adhere to a more restrictive limitation on the Fund s
investment in illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered for sale. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
Under the current guidelines of the Commission staff, illiquid securities
also are considered to include, among other securities, purchased over-the-
counter options, certain cover for over-the-counter options, repurchase
agreements with maturities in excess of seven days, and certain securities
whose disposition is restricted under the Federal securities laws. The
Fund may not be able to sell illiquid securities when the Advisor considers
it desirable to do so or may have to sell such securities at a price that
<PAGE> - 39 -<PAGE>
is lower than the price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses
than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on net asset value.
Cash Reserve
As a cash reserve or for liquidity purposes, each Fund may temporarily
invest all or part of the Fund s assets in cash or cash equivalents, which
include, but are not limited to, short-term money market instruments, U.S.
Government Securities, certificates of deposit, bankers acceptances, or
repurchase agreements secured by U.S. Government Securities.
Other Investment Policies
The Funds also may engage in certain other investment practices described
below, however none of the Funds presently intends to invest more than 5%
of the Fund's net assets in any of these practices. Each of the Funds may
purchase securities on a when-issued or delayed-delivery basis, and also
m a y lend portfolio securities to brokers, dealers, and financial
institutions. Each Fund may borrow money, and the Nova and Bond Funds also
may borrow money for investment purposes. Each of the Funds (other than
the Bond and Money Market Funds) also may invest in the securities of other
investment companies to the extent that such an investment would be
consistent with the requirements of Section 12(d)(1) of the 1940 Act. In
addition, the Bond and Juno Funds also may invest in U.S. Treasury zero
coupon securities, while each of the Ursa, Juno, and Money Market Funds
also may use reverse repurchase agreements as part of that Fund's
investment strategies. A more-detailed explanation of these investment
practices, including the risks associated with each practice, is included
in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
The Advisor determines which securities to purchase and sell for each Fund,
selects brokers and dealers to effect the transactions, and negotiates
commissions. The Advisor expects that the Funds may execute brokerage or
o t her agency transactions through registered broker-dealers, for a
commission, in conformity with the 1940 Act, the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder. In placing
orders for portfolio transactions, the Advisor s policy is to obtain the
most favorable price and efficient execution available. Brokerage
commissions are normally paid on exchange-traded securities transactions
and on options and futures transactions, as well as on common stock
transactions. In order to obtain the brokerage and research services
described below, a higher commission may sometimes be paid. The ability to
receive research services, however, may be a factor in the selection of one
dealer acting as a principal over another.
When selecting broker-dealers to execute portfolio transactions, the
Advisor considers many factors including the rate of commission or size of
the broker-dealer s "spread," the size and difficulty of the order, the
nature of the market for the security, the willingness of the broker-dealer
<PAGE> - 40 -<PAGE>
to position, the reliability, financial condition, general execution and
o p e r ational capabilities of the broker-dealer, and the research,
statistical and economic data furnished by the broker-dealer to the
Advisor. The Advisor uses these services in connection with all of the
Advisor s investment activities, including other investment accounts the
Advisor advises. Conversely, brokers or dealers which supply research may
be selected for execution of transactions for such other accounts, while
the data may be used by the Advisor in providing investment advisory
services to the Funds.
HOW TO INVEST IN THE FUNDS
For shareholders who have engaged a registered investment adviser with
discretionary authority over the shareholder s account, the minimum initial
investment in the Trust is $15,000. For all other shareholder accounts
("Self-Directed Accounts"), the minimum initial investment in the Trust is
$25,000. These minimums also apply to retirement plan accounts. The
T r u s t, at its discretion, may accept lesser amounts in certain
circumstances. The shares of each Fund are offered at the daily public
offering price, which is the net asset value per share (see "Determination
of Net Asset Value") next computed after receipt of the investor s order.
No sales charges are imposed on initial or subsequent investments in a
Fund. The Trust reserves the right to reject or refuse, at the Trust s
discretion, any order for the purchase of a Fund s shares in whole or in
part. There is no minimum amount for subsequent investments in a Fund.
Investments in the Funds may be made (i) through securities dealers who
have the responsibility to transmit orders promptly and who may charge a
processing fee or (ii) directly with the Trust by mail or by bank wire
transfer as follows:
By Mail: Fill out an application and make out a check payable to "Rydex
Series Trust." Mail the check along with the application to:
Rydex Series Trust
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
By Bank Wire Transfer: Request a wire transfer to:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Account Number: 48038-9030
Your Name Your Account Number or, if a new
account, Federal Tax I.D. Number
(e.g., Social Security Number)
After instructing your bank to transfer money by wire, please call the
Trust and inform the Trust as to the amount you have transferred and the
name of the bank sending the transfer. Your bank may charge a fee for such
services. If the purchase is canceled because your wire transfer is not
received, you may be liable for any loss that the Trust may incur.
<PAGE> - 41 -<PAGE>
I n the interest of economy and convenience, physical certificates
representing a Fund s shares are not issued. Shares of each Fund are
recorded on a register by the Trust s transfer agent.
REDEEMING AN INVESTMENT
(WITHDRAWALS)
General
An investor may withdraw all or any portion of his investment by redeeming
Fund shares at the next-determined net asset value per share after receipt
of the order. Redemptions may be made by letter or by telephone subject to
the procedures set forth below. The privilege to initiate redemption
transactions by telephone will be made available to Fund shareholders
automatically. Telephone redemptions will be sent only to the address of
record of the redeeming investor or to bank accounts specified by the
redeeming investor in his account application. The Trust charges $15 for
each wire transfer of redemption proceeds; this charge may be waived at the
discretion of the Trust. If any investor purchases shares of a Fund by
check, the purchaser may not wire out any proceeds of a redemption of such
shares for the 30 calendar days following the purchase.
The proceeds of non-telephone redemptions will be sent directly to the
investor s address of record. If the investor requests payment of
redemptions to a third party or to a location other than the investor s
address of record or a bank account specified in the investor s account
application, this request must be in writing and the investor s signature
must be guaranteed by a commercial bank; a broker, dealer, municipal
securities dealer, municipal securities broker, government securities
dealer, or government securities broker; a credit union; a national
securities exchange, registered securities association, or clearing agency;
or a savings association.
Each Fund will redeem its shares at a redemption price equal to the net
asset value of the shares as next computed following the receipt of a
request for redemption. There is no redemption charge. Payment for the
redemption price will be made within seven days after the Trust s receipt
of the request for redemption. For investments that have been made by
check, payment on withdrawal requests may be delayed until the Trust s
transfer agent is reasonably satisfied that the purchase payment has been
collected by the Trust (which may require up to 10 business days). An
investor may avoid a delay in receiving redemption proceeds by purchasing
shares with a certified check.
With respect to each Fund, the right of redemption may be suspended, or the
date of payment postponed: (i) for any period during which the NYSE, the
Federal Reserve Bank of New York (the New York Fed ), the NASDAQ, the CME,
or the CBOT, as appropriate, is closed (other than customary weekend or
holiday closings) or trading on the NYSE, the NASDAQ, the CME, or the CBOT,
as appropriate, is restricted; (ii) for any period during which an
emergency exists so that disposal of the Fund s investments or the
determination of its net asset value is not reasonably practicable; or
(iii) for such other periods as the Commission, by order, may permit for
protection of the Fund s investors.
Because of the administrative expense of handling small accounts, the Trust
reserves the right to redeem involuntarily an investor s account, including
a retirement account, which falls below the applicable minimum investment
<PAGE> - 42 -<PAGE>
in total value in the Trust due to redemptions. The involuntary redemption
of a retirement account may have an adverse tax effect. In addition, both
a request for a partial redemption by an investor whose account balance is
below the minimum investment and a request for a partial redemption by an
investor that would bring the account balance below the minimum investment
will be treated as a request by the investor for a complete redemption of
that account. The Trust reserves the right to modify its minimum
i n v estment requirements and the corresponding amounts below which
involuntary redemptions may be effected.
Draft Checks
With respect to shares of the Money Market Fund, investors may elect to
redeem such shares by draft check (minimum check - $500) made payable to
the order of any person or institution. Upon the Trust s receipt of a
completed signature card, investors will be supplied with draft checks
which are drawn on the Money Market Fund s account and are paid through the
Money Market Fund s custodian, Star Bank, N.A. The Trust reserves the
right to change or suspend this checking service. There is a $25 charge
for each stop payment request on the draft checks. Investors are subject
to the same rules and regulations that the banks apply to checking
accounts. An investor s Money Market Fund account may not be closed by
draft check.
EXCHANGES
Shares of any Rydex Fund may be exchanged, without any charge, for shares
of any other Rydex Fund on the basis of the respective net asset values of
the shares involved. Exchanges with respect to Self-Directed Accounts must
be for at least the lesser of $1,000 or 100% of the account value for the
Fund from which the transfer is made. The Trust currently is composed of
nine separate Rydex Funds, seven of which Funds, The Nova Fund, The Ursa
Fund, The Rydex OTC Fund (the OTC Fund ), The Rydex Precious Metals Fund
(the Metals Fund ), The Rydex U.S. Government Bond Fund, The Juno Fund,
and The Rydex U.S. Government Money Market Fund (the Money Market Fund ),
are described in this Prospectus. The eighth and ninth series of the
Trust, The Rydex High Yield Fund (the High Yield Fund ) and The Rydex
Institutional Money Market Fund (the "Institutional Fund"), are each
described in a separate prospectus; other separate Rydex Funds may be added
in the future. The minimum initial investment in the Institutional Fund
for all shareholder accounts, including retirement plan accounts, is
$2,000,000, and an exchange into the Institutional Fund is permitted only
if the Institutional Fund s minimum investment of $2,000,000 is satisfied.
Exchanges may be made by letter or by telephone subject to the procedures
set forth below.
To implement an exchange, shareholders should provide the following
information: account name, account number, taxpayer identification number,
number of or percentage of shares or dollar value of shares to be
exchanged, and the names of the Rydex Funds involved in the exchange
transaction. Exchanges may be made only if such exchanges are between
identically registered accounts. Shareholders contemplating such an
exchange for shares of a Rydex Fund not described in this Prospectus should
obtain and review the prospectus of the Rydex Fund to which the investment
is to be transferred. The exchange privilege is available only in states
where the exchange legally may be made and may be modified or discontinued
at any time. Shares of the Money Market Fund received in an exchange for
<PAGE> - 43 -<PAGE>
shares of the OTC Fund or the Metals Fund are issued on the third business
day following the day on which the Rydex Fund receives the exchange
request.
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES
Written requests for redemptions and exchanges should be sent to the Rydex
Series Trust, 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852, and should be signed by the record owner or owners. Telephone
redemption and exchange requests with respect to the Rydex Funds may be
made by calling (800) 820-0888 or (301) 468-8520, on any day the Trust is
open for business. Such requests may be made only between 8:30 A.M.,
Eastern Time, and the times indicated below (all times are Eastern Time).
For exchanges, the earlier of the times indicated below for the Funds whose
shares are being exchanged applies.
The Nova, Ursa, and Rydex
OTC Funds . . . . . . 3:45 P.M.
The Rydex Precious Metals
Fund . . . . . . . . . 3:30 P.M.
The Rydex U.S. Government
Bond and Juno Funds . 2:45 P.M.
The Rydex High Yield Fund 2:15 P.M.
Telephone redemption and exchange orders will be accepted only during the
period indicated above. If the primary exchange or market on which a Fund
t r a nsacts business closes early, the above cut-off time will be
approximately fifteen minutes (thirty minutes, in the case of the Precious
Metals Fund, and forty-five minutes in the case of the High Yield Fund)
prior to the close of such exchange or market. Telephone redemption and
exchange privileges may be terminated or modified by the Trust at any time.
When acting on instructions believed to be genuine, the Trust will not be
liable for any loss resulting from a fraudulent telephone transaction
request and the investor would bear the risk of any such loss. The Trust
will employ reasonable procedures to confirm that telephone instructions
are genuine; and if the Trust does not employ such procedures, then the
Trust may be liable for any losses due to unauthorized or fraudulent
instructions. The Trust follows specific procedures for transactions
initiated by telephone, including, among others, requiring some form of
personal identification prior to acting upon instructions received by
telephone, providing written confirmation not later than five business days
after such transactions, and/or tape recording of telephone instructions.
Investors also should be aware that telephone redemptions or exchanges may
be difficult to implement in a timely manner during periods of drastic
economic or market changes. If such conditions occur, redemption or
exchange orders can be made by mail.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Nova Fund, the Ursa Fund, the
Metals Fund, and the OTC Fund is determined each day on which the NYSE is
open for business as of the close of normal trading on the NYSE (currently
4:00 P.M., Eastern Time). The net asset value of the shares of the High
Yield Fund, the Money Market Fund, and the Institutional Fund is determined
each day on which both the NYSE and the New York Fed are open for business.
<PAGE> - 44 -<PAGE>
Currently, the NYSE and the New York Fed are closed on weekends, and the
following holiday closings have been scheduled for 1997: (i) New Year's
Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Good Friday,
Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day, and
Christmas Day; and (ii) the preceding Friday when any of those holidays
falls on a Saturday or the subsequent Monday when any of these holidays
falls on a Sunday. The High Yield Fund determines its net asset value at
3:00 P.M., Eastern Time, and the Money Market Fund and the Institutional
Fund each determines its net asset value at 1:00 P.M., Eastern Time, on
such days. The net asset value of the shares of the Bond Fund and the Juno
Fund is determined each day on which the CBOT is open for trading futures
contracts on U.S. Treasury bonds as of the close of normal trading on the
CBOT (normally 3:00 P.M., Eastern Time). Currently, the CBOT is closed on
weekends and on the following holidays: (i) New Year s Day, Martin Luther
King, Jr. Day, President s Day, Memorial Day, July Fourth, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day; and (ii)
the preceding Friday when any one of those holidays falls on a Saturday or
the subsequent Monday when any one of those holidays falls on a Sunday. To
the extent that portfolio securities of a Fund are traded in other markets
on days when the Fund s principal trading market(s) is closed, the Fund s
net asset value may be affected on days when investors do not have access
to the Fund to purchase or redeem shares. Although the Trust expects the
same holiday schedules to be observed in the future, the NYSE, the CBOT,
and the New York Fed each may modify its holiday schedule at any time.
The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund s shares. The net asset value per share of a
Fund is calculated by dividing the market value of the Fund s securities
plus the values of its other assets, less all liabilities, by the number of
outstanding shares of the Fund. If market quotations are not readily
available, a security will be valued at fair value by the Board of Trustees
or by the Advisor using methods established or ratified by the Board of
Trustees.
The Money Market Fund will utilize the amortized cost method in valuing
that Fund s portfolio securities, which method involves valuing a security
at its cost adjusted by a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the
market value of the instrument. The purpose of this method of calculation
is to facilitate the maintenance of a constant net asset value per share
for the Money Market Fund of $1.00. However, there is no assurance that
the $1.00 net asset value will be maintained. For further information
regarding the amortized cost method for valuing the Money Market Fund s
portfolio securities, see "Determination of Net Asset Value" in the
Statement of Additional Information.
For purposes of determining net asset value per share of a Fund, options
and futures contracts will be valued 15 minutes after the 4:00 P.M.,
Eastern Time, close of trading on the NYSE, except that U.S. Treasury bond
options and futures contracts traded on the CBOT will be valued at 3:00
P.M., Eastern Time, the close of trading of that exchange. Options on
securities and indices purchased by a Fund generally are valued at their
last bid price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the average of the last bid price as
obtained from two or more dealers unless there is only one dealer, in which
case that dealer s price is used. The value of a futures contract equals
the unrealized gain or loss on the contract that is determined by marking
<PAGE> - 45 -<PAGE>
the contract to the current settlement price for a like contract acquired
on the day on which the futures contract is being valued. The value of
options on futures contracts is determined based upon the current
settlement price for a like option acquired on the day on which the option
is being valued. A settlement price may not be used for the foregoing
purposes if the market makes a limit move with respect to a particular
commodity.
OTC securities held by a Fund shall be valued at the last sales price or,
if no sales price is reported, the mean of the last bid and asked price is
used. The portfolio securities of a Fund that are listed on national
exchanges or foreign stock exchanges are taken at the last sales price of
such securities on such exchange; if no sales price is reported, the mean
of the last bid and asked price is used. For valuation purposes, all
assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the mean between the bid and the
offered quotations of such currencies against U.S. dollars as last quoted
by any recognized dealer. If such quotations are not available, the rate
of exchange will be determined in good faith by the Trustees. Dividend
income and other distributions are recorded on the ex-dividend date, except
for certain dividends from foreign securities which are recorded as soon as
the Trust is informed after the ex-dividend date.
llliquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at
their respective fair value as determined in good faith by, or under
procedures established by, the Trustees, which procedures may include the
delegation of certain responsibilities regarding valuation to the Advisor
or the officers of the Trust. The officers of the Trust report, as
necessary, to the Trustees regarding portfolio valuation determination.
The Trustees, from time to time, will review these methods of valuation and
will recommend changes which may be necessary to assure that the
investments of the Funds are valued at fair value.
TAX-SHELTERED RETIREMENT PLANS
Tax-sheltered retirement plans of the following types will be available to
investors:
Individual Retirement Accounts (IRAs)
Keogh Accounts - Defined Contribution
Plans (Profit-Sharing Plans)
Keogh Accounts - Money Purchase Plans
Pension Plans)
Internal Revenue Code Section 403(b) Plans
Retirement plans are charged an annual $15.00 maintenance fee. Additional
information regarding these accounts, including the annual maintenance fee,
may be obtained by contacting the Trust.
TRANSACTION CHARGES
In addition to charges described elsewhere in this Prospectus, the Trust
also may make a charge of $25 for items returned for insufficient or
uncollectible funds.
<PAGE> - 46 -<PAGE>
DIVIDENDS AND DISTRIBUTIONS
General
All income dividends and capital gains distributions of each Fund
automatically will be reinvested in additional shares of the Fund at the
net asset value calculated on the ex-dividend date, unless an investor has
requested otherwise from the Trust in writing. Dividends and distributions
of a Fund are taxable to the shareholders of the Fund, as discussed below
under "Taxes," whether such dividends and distributions are reinvested in
additional shares of the Fund or are received in cash. Statements of
account will be sent to the Fund shareholders at least quarterly.
The Nova Fund; The Ursa Fund; The Rydex OTC Fund; The Rydex Precious Metals
Fund; The Juno Fund
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, and the Juno
Fund each intend to distribute annually any net investment income and net
realized capital gains to shareholders. The Trustees, however, may declare
a special distribution for any of these Funds if the Trustees believe that
such a distribution would be in the best interests of the shareholders of
that Fund.
The Rydex U.S. Government Bond Fund
The Bond Fund intends (i) to declare dividends of ordinary income for
shares of the Bond Fund on a daily basis, and to distribute such dividends
to shareholders of the Bond Fund on a monthly basis, and (ii) to distribute
annually any long-term capital gains to the shareholders of the Bond Fund.
The Rydex U.S. Government Money Market Fund
The Money Market Fund ordinarily (i) declares dividends of net investment
income (and net short-term capital gains, if any) for shares of the Money
Market Fund on a daily basis and (ii) distributes such dividends to
shareholders of the Money Market Fund on a monthly basis. The Trustees,
however, may revise this dividend and distribution policy of the Money
Market Fund, postpone the payment of dividends thereunder, or take any
other action necessary with respect thereto in order to facilitate, to the
extent possible, the maintenance by the Money Market Fund of a constant net
asset value per share of $1.00.
TAXES
The Internal Revenue Code provides that each investment portfolio of a
series investment company is to be treated as a separate corporation.
Accordingly, each of the Funds will seek to qualify for treatment as a
regulated investment company (a "RIC") under Subchapter M of the Code.
Because of the nature of the investment strategies and the expected
turnover of the portfolios of the Funds, there can be no assurance that a
Fund will qualify for such treatment. If a Fund qualifies as a RIC and
satisfies the distribution requirements under the Code for any taxable
year, the Fund itself will not be subject to income tax on the ordinary
income and capital gains it has distributed to its shareholders for that
year.
To qualify as a RIC under the Code, a Fund must satisfy certain
requirements, including the requirements that the Fund receive at least 90%
of the Fund s gross income each year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition
of securities or foreign currencies, or other income derived with respect
<PAGE> - 47 -<PAGE>
to the Fund s investments in stock, securities, and foreign currencies (the
"90% Test"), and that the Fund derive less than 30% of the Fund s gross
income from the sale or other disposition of any of the following
instruments which have been held for less than three months (the "30%
Test"): (i) stock or securities; (ii) certain options, futures, or forward
contracts; or (iii) foreign currencies (or certain options, futures, or
forward contracts on such foreign currencies). Provided that a Fund (i) is
a RIC and (ii) distributes at least 90% of the Fund s net investment income
(including, for this purpose, net realized short-term capital gains), the
Fund itself will not be subject to Federal income taxes to the extent the
Fund s net investment income and the Fund s net realized long- and short-
term capital gains, if any, are distributed to the shareholders of that
Fund. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains.
Satisfaction of the 90% Test will impose limitations on the investment
strategies that may be pursued by any of the Funds, and in particular by
the Metals Fund. Income from investments in precious metals and minerals
will not be qualifying income for purposes of the 90% Test. Therefore, the
Metals Fund will seek to limit its investment transactions in precious
metals and minerals so as to avoid a violation of the 90% Test.
In addition, because of the anticipated frequency of redemptions and
exchanges of the shares of the Funds, each of the Funds, other than the
Money Market Fund, will have greater difficulty than other mutual funds in
satisfying the 30% Test. The Trust expects that investors in the Funds, as
part of their market-timing investment strategy, are likely to redeem or
exchange their shares in the Funds frequently to take advantage of
anticipated changes in market conditions. Such redemptions or exchanges
are likely to require a Fund to sell securities to meet the Fund s payment
obligations. The larger the volume of such redemptions or exchanges, the
more difficult it will be for the Fund to satisfy the 30% Test. To
minimize the risk of failing the 30% Test, each of the Funds intends to
satisfy obligations in connection with redemptions and exchanges first by
using available cash or borrowing facilities and by selling securities that
have been held for at least three months or as to which there will be a
loss or the smallest gain. If a Fund also must sell securities that have
been held for less than three months, then, to the extent possible, the
Fund will seek to conduct such sales in a manner that will allow such sales
to qualify for a special provision in the Code that excludes from the 30%
Test any gains resulting from sales made as a result of "abnormal
redemptions." To the reduce the risk of failing the 30% Test, the Funds
(other than the Money Market Fund) also may engage in other investment
techniques, including engaging in transactions in futures contracts and
options on futures contracts and indexes on an unrestricted basis (subject
to the investment policies of the Funds and Commission regulations).
Notwithstanding these actions, there can be no assurance that a Fund will
be able to satisfy the 30% Test. For additional information concerning
this special Code provision, see "Dividends, Distributions, and Taxes" in
the Statement of Additional Information.
If the Trust determines that a Fund will not qualify as a RIC under
Subchapter M of the Internal Revenue Code, the Trust will establish
procedures for that Fund to reflect the anticipated tax liability in the
Fund s net asset value. To the extent that management of a Fund determines
that Federal income taxes will more likely than not be payable by the Fund
<PAGE> - 48 -<PAGE>
with respect to the Fund s current tax year, the Fund intends to make a
good-faith estimate of the potential tax liability of the Fund and to make
an accrual for tax expenses. Thereafter, the Fund would make a daily
determination whether it is appropriate for the Fund to continue to accrue
for a tax expense and, if so, to make a good-faith estimate of the Fund s
potential tax liability. Any amount by which the accrual is reduced, or
the entire amount of the accrual if the Fund determines that the accrual is
no longer appropriate, will be reclassified as income to the Fund.
Under current law, dividends derived from interest and dividends received
by a Fund, together with distributions of any short-term capital gains, if
any, are taxable to the shareholders of the Fund, as ordinary income at
Federal income tax rates of up to 39.6%, whether or not such dividends and
distributions are reinvested in shares of such Fund or are received in
cash.
Under current law, distributions of net long-term gains, if any, realized
by a Fund and designated as capital gains distributions will be taxed to
the shareholders of that Fund as long-term capital gains regardless of the
length of time the shares of that Fund have been held. Currently, long-
term capital gains of individual investors are taxed at rates of up to 28%.
Statements as to the Federal tax status of shareholders dividends and
distributions will be mailed annually. Shareholders should consult their
tax advisors concerning the tax status of the Funds dividends in their own
states and localities.
Ordinary dividends paid to corporate or individual residents of foreign
countries generally are subject to a 30% withholding tax. The rate of
withholding tax may be reduced if the United States has an income tax
treaty with the foreign country where the recipient resides. Capital gains
distributions received by foreign investors should, in most cases, be
exempt from U.S. tax. A foreign investor will be required to provide the
Fund with supporting documentation in order for the Fund to apply a reduced
rate or exemption from U.S. withholding tax.
Shareholders are required by law to certify that their tax identification
number is correct and that they are not subject to back-up withholding. In
the absence of this certification, the Trust is required to withhold taxes
at the rate of 31% on dividends, capital gains distributions, and
redemptions. Shareholders who are non-resident aliens may be subject to a
withholding tax on dividends earned.
MANAGEMENT OF THE TRUST
Investment Adviser
The Trust is provided investment advice and management services by PADCO
Advisors, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The
Advisor was incorporated in the State of Maryland on February 5, 1993.
Albert P. Viragh, Jr., the Chairman of the Board and the President of the
Advisor, owns a controlling interest in the Advisor. From 1985 until the
incorporation of the Advisor, Mr. Viragh was a Vice President of Money
Management Associates ("MMA"), a Maryland-based registered investment
<PAGE> - 49 -<PAGE>
adviser. From 1992 to June 1993, Mr. Viragh was the portfolio manager of
The Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc., an
investment company managed by MMA. From 1989 to 1992, Mr. Viragh was the
Vice President of Sales and Marketing for The Rushmore Fund, Inc. Mr.
Viragh received his bachelor s degree in Business Administration from
Spring Hill College, of Mobile, Alabama, in 1964.
The portfolio manager for the Nova Fund and the Juno Fund is Thomas
Michael, who joined the Advisor in March 1994. From 1992 to February 1994,
Mr. Michael was a financial markets analyst at Cedar Street Investment
Management Co., of Chicago, Illinois, an institutional consulting firm
specializing in developing hedging and speculative strategies in stock
index futures contracts and U.S. Treasury bond futures contracts. From
1989 to 1991, Mr. Michael was the Director of Research for Chronometrics,
Inc., of Chicago, Illinois, a registered commodity trading advisor and was
responsible for managing the firm s proprietary, on-line trading model for
twelve financial futures contracts. Mr. Michael received his bachelor of
arts degree in Geology from Colgate University, of Hamilton, New York, in
1974.
The portfolio manager for the OTC Fund and the Bond Fund is Terry Apple,
who joined the Advisor in January 1994. From 1992 to December 1993, Mr.
Apple was employed by MMA and was the Director of Investments for The
Rushmore Funds, Inc. From 1985 to 1991, Mr. Apple was a Vice President and
the Director of Technical Research for Cale Futures, Inc. ("Cale"), of
Hilton Head, South Carolina, a registered commodity trading advisor, and
managed Multitech Partners, a commodity pool advised by Cale. Mr. Apple
received his bachelor s degree in Business Administration from Baylor
University, of Waco, Texas, in 1964.
The portfolio manager of the Ursa Fund, the Metals Fund, and the Money
Market Fund is Michael P. Byrum. Prior to joining the PADCO Advisors, Inc.
organization in July 1993, Mr. Byrum worked for one year as an investor
representative with MMA. Mr. Byrum s responsibilities at MMA included
brokerage solicitation and investor relations. Mr. Byrum received his
bachelor s degree in Business Administration from Miami University, of
Oxford, Ohio, in 1992.
Under an investment advisory agreement between the Trust and the Advisor,
dated May 14, 1993, and as most recently amended on September 25, 1996, the
Funds each pay the Advisor a fee at an annualized rate, based on the
average daily net assets for each respective Fund, of 0.75% for the Nova
Fund, the OTC Fund, and the Metals Fund, 0.90% for the Ursa Fund and the
Juno Fund, and 0.50% for the Bond Fund and the Money Market Fund.
The Advisor manages the investment and the reinvestment of the assets of
each of the Funds, in accordance with the investment objectives, policies,
and limitations of the Fund, subject to the general supervision and control
of the Trustees and the officers of the Trust. The Advisor bears all costs
associated with providing these advisory services and the expenses of the
Trustees who are affiliated persons of the Advisor. The Advisor, from its
own resources, including profits from advisory fees received from the
Funds, provided such fees are legitimate and not excessive, also may make
payments to broker-dealers and other financial institutions for their
expenses in connection with the distribution of Fund shares, and otherwise
currently pays all distribution costs for Fund shares.
<PAGE> - 50 -<PAGE>
Servicer
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Funds by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995, and as most recently amended on September 25, 1996. Under this
service agreement, the Funds each pay the Servicer a fee at an annualized
rate, based on the average daily net assets for each respective Fund, of
0.25% for the Nova Fund, Ursa Fund, and the Juno Fund and 0.20% for the
other Funds.
The Servicer provides the Trust and the Funds with all required general
administrative services, including, without limitation, office space,
equipment, and personnel; clerical and general back office services;
bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust and the Funds under Federal
and state securities laws. The Servicer also maintains the shareholder
account records for the Trust and the Funds, distributes dividends and
distributions payable by the Funds, and produces statements with respect to
account activity for the Funds and their shareholders. The Servicer pays
all fees and expenses that are directly related to the services provided by
the Servicer to the Trust; each Fund reimburses the Servicer for all fees
and expenses incurred by the Servicer which are not directly related to the
services the Servicer provides to the Fund under the service agreement.
Costs and Expenses
Each Fund bears all expenses of its operations other than those assumed by
the Advisor or the Servicer. Fund expenses include: the management fee;
t h e servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; securities valuation expenses; fidelity bonds and
other insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-
interested Trustees fees and expenses. For the period from July 1, 1995
through June 30, 1996, the total expenses paid by the Nova Fund, the Ursa
Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the
Money Market Fund were approximately 1.31%, 1.39%, 1.33%, 1.33%, 1.26%,
1.64%, and 0.99% of the respective Fund s average net assets.
PERFORMANCE INFORMATION
Total Return Calculations
From time to time, each of the Funds (other than the Money Market Fund) may
advertise the total return of the Fund for prior periods. Any such
advertisement would include at least average annual total return quotations
for one, five, and ten-year periods, or for the life of the Fund. Other
total return quotations, aggregate or average, over other time periods for
the Fund also may be included.
<PAGE> - 51 -<PAGE>
The total return of a Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from
the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net
asset value and that all income dividends or capital gains distributions
during the period are reinvested in shares of the Fund at net asset value.
Total return is based on historical earnings and asset value fluctuations
and is not intended to indicate future performance. No adjustments are
made to reflect any income taxes payable by shareholders on dividends and
distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the
period that would equal the initial amount invested to the ending
redeemable value. A more-detailed description of the method by which the
total return of a Fund is calculated is contained in the Statement of
Additional Information under "Calculation of Return Quotations."
Yield Calculations
In addition to total return information, the Bond Fund may also advertise
its current "yield." Yield figures are based on historical earnings and
are not intended to indicate future performance. Yield is determined by
analyzing the Bond Fund s net income per share for a thirty-day (or one-
month) period (which period will be stated in the advertisement), and
dividing by the maximum offering price per share on the last day of the
period. A "bond equivalent" annualization method is used to reflect a
semi-annual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the Commission to facilitate comparison with
yields quoted by other investment companies. Net income computed for this
formula differs from net income reported by the Bond Fund in accordance
with generally accepted accounting principles and from net income computed
for Federal income tax reporting purposes. Thus, the yield computed for a
period may be greater or lesser than the Bond Fund s then-current dividend
rate.
The Bond Fund s yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and
as a function of the type of securities owned by the Bond Fund, portfolio
maturity, and the Bond Fund s expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Bond Fund s shares, the Bond Fund s investment policies, and
the risks of investing in shares of the Bond Fund. The investment return
and principal value of an investment in the Bond Fund will fluctuate so
that an investor s shares, when redeemed, may be worth more or less than
the original cost of such shares.
From time to time, the Money Market Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the Money
Market Fund refers to the income generated by an investment in the Money
Market Fund over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of
<PAGE> - 52 -<PAGE>
income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of
the investment. The "effective yield" is calculated similarly, but, when
annualized, the income earned by an investment in the Money Market Fund is
assumed to be reinvested. The "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this assumed
reinvestment. A description of the respective methods by which the yield
of the Bond Fund and the current and effective yields of the Money Market
Fund are calculated is contained in the Statement of Additional Information
under "Information on Computation of Yield."
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Bond Fund s or the Money Market Fund s shares with bank
deposits, savings accounts, and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders of the Bond Fund and the Money Market Fund should remember
that yield generally is a function of the kind and quality of the
instrument held in portfolio, portfolio maturity, operating expenses, and
market conditions.
Comparisons of Investment Performance
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a Fund, comparisons of the performance
information of the Fund for a given period to the performance of
recognized, unmanaged indexes for the same period may be made. Such
indexes include, but are not limited to, ones provided by Dow Jones &
Company, Standard & Poor s Corporation, Lipper Analytical Services, Inc.,
Shearson Lehman Brothers, National Association of Securities Dealers, Inc.,
The Frank Russell Company, Value Line Investment Survey, the American Stock
E x c hange, the Philadelphia Stock Exchange, Morgan Stanley Capital
International, Wilshire Associates, the Financial Times-Stock Exchange, and
the Nikkei Stock Average and Deutcher Aktienindex, all of which are
unmanaged market indicators. Such comparisons can be a useful measure of
the quality of a Fund s investment performance. In particular, performance
information for the Nova Fund and the Ursa Fund may be compared to various
unmanaged indexes, including, but not limited to, the S&P500 Index or the
Dow Jones Industrial Average; performance information for the OTC Fund may
be compared to various unmanaged indexes, including, but not limited to its
current benchmark, the NASDAQ 100 IndexTM; performance information for the
Metals Fund may be compared to various unmanaged indexes, including, but
not limited to its current benchmark, the XAU Index; and performance
information for the Bond Fund and the Juno Fund may be compared to various
unmanaged indexes, including, but not limited to, the Shearson Lehman
Government (LT) Index.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appearing in
publications such as Money, Forbes, Kiplinger s Magazine, Personal
Investor, Morningstar, Inc., and similar sources which utilize information
c o mpiled (i) internally, (ii) by Lipper Analytical Services, Inc.
("Lipper"), or (iii) by other recognized analytical services, may be used
in sales literature. The total return of each Fund (other than the Money
Market Fund) also may be compared to the performances of broad groups of
comparable mutual funds with similar investment goals, as such performance
is tracked and published by such independent organizations as Lipper and
CDA Investment Technologies, Inc., among others. The Lipper ranking and
comparison, which may be used by the Trust in performance reports, will be
<PAGE> - 53 -<PAGE>
drawn from the "Capital Appreciation Funds" grouping for each of the Nova
Fund and the Ursa Fund, from the "Small Company Growth Funds" grouping for
the OTC Fund, from the "Precious Metals Funds" grouping for the Metals
Fund, and from the "Bond Funds" grouping for the Bond Fund and the Juno
Fund. In addition, the broad-based Lipper groupings may be used for
comparison to any of the Funds. Additional information concerning the
comparison of the investment performances of the Funds is contained in the
Statement of Additional Information under "Performance Information."
Further information about the performance of the Funds will be contained in
the Trust s annual reports to shareholders, which may be obtained without
charge by writing to the Trust at the address or telephoning the Trust at
telephone number set forth on the cover page of this Prospectus.
GENERAL INFORMATION ABOUT THE
TRUST
Organization and Description of Shares of Beneficial Interest
The Trust is a registered open-end investment company under the 1940 Act.
The Trust was organized as a Delaware business trust on February 10, 1993,
and has present authorized capital of unlimited shares of beneficial
interest of no par value which may be issued in more than one class.
Currently, the Trust has issued shares of nine separate classes: The Nova
Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund,
The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield
Fund, The Rydex U.S. Government Money Market Fund, and The Rydex
Institutional Money Market Fund. Other separate classes may be added in
the future.
All shares of the Funds are freely transferable. The Fund shares do not
have preemptive rights or cumulative voting rights, and none of the shares
have any preference to conversion, exchange, dividends, retirements,
liquidation, redemption, or any other feature. Fund shares have equal
voting rights, except that, in a matter affecting a particular series in
the Trust, only shares of that series may be entitled to vote on the
matter. Shareholder inquiries can be made by telephone (at 800-820-0888 or
301-468-8520) or by mail (to 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852).
Under the Delaware General Corporation Law, a registered investment company
is not required to hold an annual shareholders meeting if the 1940 Act
does not require such a meeting. Generally, there will not be annual
meetings of Trust shareholders. Trust shareholders may remove Trustees of
the Trust from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the
outstanding shares of the Trust, the Trust will call a meeting of Trust
shareholders for the purpose of voting upon the question of removal of a
Trustee or Trustees of the Trust and will assist in communications with
other Trust shareholders.
Unlike the stockholder of a corporation, shareholders of a business trust
such as the Trust could be held personally liable, under certain
circumstances, for the obligations of the business trust. The Trust s
Declaration of Trust, however, disclaims liability of the shareholders of
the Trust, the Trustees, or the officers of the Trust for acts or
obligations of the Trust which are binding only on the assets and property
of the Trust. The Declaration of Trust provides for indemnification out of
<PAGE> - 54 -<PAGE>
Trust property for all loss and expense of any Trust shareholder held
personally liable for the obligations of the Trust. The risk of a Trust
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would not be able to
meet the Trust s obligations and this risk, thus, should be considered
remote.
Classification of the Funds
Each of the Funds (other than the Money Market Fund) is a "non-diversified"
series of the Trust. A Fund is considered "non-diversified" because a
relatively-high percentage of the Fund s assets may be invested in the
securities of a limited number of issuers, primarily within the same
industry or economic sector. That Fund s portfolio securities, therefore,
may be more susceptible to any single economic, political, or regulatory
occurrence than the portfolio securities of a diversified investment
company.
A Fund s classification as a "non-diversified" investment company means
that the proportion of the Fund s assets that may be invested in the
securities of a single issuer is not limited by the 1940 Act. Each Fund,
however, intends to seek to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code, which requires that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of
the Fund s total assets (a diversified investment company would be so
limited with respect to 75% of such market value) be invested in cash, U.S.
Government Securities, the securities of other regulated investment
companies, and other securities, with such securities of any one issuer
limited for the purposes of this calculation to an amount not greater than
5% of the value of Fund s total assets and 10% of the outstanding voting
securities of any one issuer, and (ii) not more than 25% of the value of
the Fund s total assets be invested in the securities of any one issuer
(other than U.S. Government Securities or the securities of other regulated
investment companies).
Trustees and Officers
The Trust has a Board of Trustees which is responsible for the general
supervision of the Trust s business. The day-to-day operations of the
Trust are the responsibility of the Trust s officers.
Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are
the auditors of and the independent public accountants for the Trust and
each of the Funds.
Custodian Pursuant to a separate custody agreement entered into by the
Trust, Star
Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202, serves as custodian for the Trust and the Funds.
Under the terms of this custody agreement, the Custodian holds the
portfolio securities of each Fund and keeps all necessary related accounts
and records.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
<PAGE> - 55 -<PAGE>
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE TRUST IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE> - 56 -<PAGE>
RULE 497(c)
File No. 33-59692
[Logo]
RYDEX SERIES TRUST PROSPECTUS
RYDEX INSTITUTIONAL
MONEY MARKET FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
INVESTMENT OBJECTIVE AND POLICIES
The Rydex Institutional Money Market Fund (the "Fund") is a diversified
series of the Rydex Series Trust, an open-end management investment company
(the "Trust"). The investment objectives of the Fund are security of
principal, high current income, and liquidity consistent with preservation
of capital. In attempting to achieve its objectives, the Fund will invest
primarily in money market instruments which are issued or guaranteed, as to
p r i ncipal and interest, by the U.S. Government, its agencies or
instrumentalities, as well as in repurchase agreements secured by such
securities and in bank money market instruments and commercial paper. The
Fund is part of the Rydex Group of Funds, which is designed for
professional money managers and knowledgeable investors who intend to
invest in the Rydex Group of Funds as part of an asset-allocation or
market-timing investment strategy.
The securities of the Fund are not deposits or obligations of any bank, and
are not endorsed or guaranteed by any bank, and an investment in the Fund
is neither insured nor guaranteed by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
Government. The Fund seeks to maintain a constant $1.00 net asset value
per share, although this cannot be assured.
ADDITIONAL INFORMATION
Investors should read this Prospectus and retain it for future reference.
This Prospectus is designed to set forth concisely the information an
investor should know before investing in the Fund. A Statement of
Additional Information, dated November 1, 1996, containing additional
information about the Fund and the Trust has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. A copy of
this Statement of Additional Information is available, without charge, upon
request to the Trust at the address above or by telephoning the Trust at
the telephone numbers above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The date of this Prospectus is November 1, 1996.
<PAGE> - 2 -<PAGE>
TABLE OF CONTENTS
Page
FEES AND EXPENSES OF THE FUND 3
FINANCIAL HIGHLIGHTS OF THE FUND 4
THE RYDEX FUNDS 5
INVESTMENT OBJECTIVES AND POLICIES 5
HOW TO INVEST IN THE FUND 8
REDEEMING AN INVESTMENT (WITHDRAWALS) 9
EXCHANGES 10
PROCEDURES FOR REDEMPTIONS AND EXCHANGES 10
DETERMINATION OF NET ASSET VALUE 11
TAX-SHELTERED RETIREMENT PLANS 11
DIVIDENDS AND DISTRIBUTIONS 11
TAXES 12
MANAGEMENT OF THE TRUST 13
DISTRIBUTION PLAN 14
PERFORMANCE INFORMATION 15
GENERAL INFORMATION ABOUT THE TRUST 15
APPENDIX A 17
<PAGE> - 3 -<PAGE>
FEES AND EXPENSES OF THE FUND
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur:
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
Sales Load Imposed on Purchases None
S a les Load Imposed on Reinvested None
Dividends
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.55%
12b-1 Fees 0.25%
Other Expenses:
Administrative Fees 0.20%
Additional Expenses 0.15%*
Total Fund Operating Expenses** 1.15%
* Additional expenses are based on estimated amounts for the current
fiscal year.
** The Fund s investment adviser has guaranteed that the ratio of expenses,
including investment management fees, to average net assets shall not
exceed 1.20%. Any expenses in excess of this amount will be absorbed by
the adviser.
</TABLE>
Example
Assuming a hypothetical investment of $1,000, a five-percent annual return,
and redemption at the end of each time period, an investor in the Fund
would pay transaction and operating expenses at the end of each year as
follows:
1 YEAR 3 YEARS
<PAGE> - 4 -<PAGE>
$11 $33
The same level of expenses would be incurred if the investment were held
throughout the period indicated.
The preceding table is provided to assist the investor in understanding the
various costs and expenses which may be borne directly or indirectly by an
investor in the Fund. The percentages shown above are based on the
estimate by the Fund's investment adviser of the expenses to be incurred by
the Fund during the Fund's current fiscal year. The five-percent assumed
annual return is for comparison purposes only. The actual return for the
Fund in future periods may be more or less depending on market conditions,
and the actual expenses an investor incurs in future periods may be more or
less than those shown above and will depend on the amount invested and on
the actual growth rate of the Fund. For a more complete discussion of the
fees connected with an investment in the Fund, including any fees that may
be charged by securities dealers, banks, and other financial institutions
in connection with wire transfers, and the services to be provided to the
Fund, see "How to Invest in the Fund," "Management of the Fund," and
"Distribution Plan" in this Prospectus.
<PAGE> - 5 -<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUND
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Fund for the period
July 11, 1996 to September 30, 1996 are unaudited.
<TABLE>
<CAPTION>
For the Period
Ended
September 30,
1996*
(Unaudited)
<S> <C>
Per Share Operating Performance:
Net Asset Value -- Beginning of Period $ 1.00
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gains
(Losses) on Securities 0.00
Net Increase (Decrease) in Net Asset Value
Resulting from Operations 0.00
Dividends to Shareholders (0.01)
Distributions to Shareholders From Net
Realized Capital Gains
0.00
Net Increase (Decrease) in Net Asset Value 0.00
Net Asset Value End of Period $ 1.00
Total Investment Return 4.28%**
Ratios to Average Net Assets
Expenses 1.24%**
Net Investment Income 4.22%**
Supplementary Data: Portfolio Turnover Rate*** 0.00%
Net Assets, End of Period (000's omitted) $30,781
The per share data of the Financial Highlights table is calculated
using the daily shares
outstanding average for the period.
* Commencement of Operations: July 11, 1996.
** Annualized for the period ended September 30, 1996.
*** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
</TABLE>
<PAGE> - 6 -<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including the Fund, The Nova Fund, The
Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex
U.S. Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money
Market Fund, and, beginning on or about December 1, 1996 (subject to
obtaining all necessary regulatory approvals), the Rydex High Yield Fund
(collectively, the "Rydex Funds"); other separate Rydex Funds may be added
in the future. The Rydex Funds are principally designed for professional
money managers and investors who intend to follow an asset-allocation or
market-timing investment strategy. Except for the Fund and the Rydex U.S.
Government Money Market Fund, each Rydex Fund is intended to provide
investment exposure with respect to a particular segment of the securities
markets. These Rydex Funds seek investment results that correspond over
time to a specified benchmark. The Rydex Funds may be used independently
or in combination with each other as part of an overall investment
strategy.
Shares of any Rydex Fund may be exchanged, without any charge, for shares
of any other Rydex Fund on the basis of the respective net asset values of
the shares involved; provided, that, in connection with exchanges for
shares of a Fund, certain minimum investment levels are maintained. The
Trust reserves the right to modify its minimum investment requirements (see
"Exchanges"). Copies of the separate Prospectuses and Statements of
Additional Information for the Rydex Funds other than the Fund are
available, without charge, upon request to the Trust at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the
Trust at (800) 820-0888 or (301) 468-8520.
INVESTMENT OBJECTIVES AND POLICIES
General
The investment objectives of the Fund are security of principal, high
current income, and liquidity consistent with preservation of capital.
Although there is no assurance that the Fund's objectives will be achieved,
the Fund will seek to achieve its objectives by investing primarily in
money market instruments which are issued or guaranteed, as to principal
and interest, by the U.S. Government, its agencies or instrumentalities
("U.S. Government Securities"), as well as in repurchase agreements secured
by U.S. Government Securities and in bank money market instruments and
commercial paper. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government. The Fund seeks to maintain a constant
$1.00 net asset value per share, although this cannot be assured.
The Fund will invest in short-term U.S. Government Securities, including
U.S. Treasury bills, U.S. Treasury notes, and U.S. Treasury bonds that
mature within one year. All securities purchased by the Fund are held by
the Trust's custodian bank. U.S. Treasury securities are backed by the
full faith and credit of the U.S. Government. Repurchase agreements
i n vested in the Fund are fully collateralized by U.S. Government
<PAGE> - 7 -<PAGE>
Securities, but the value of the underlying collateral may be affected by
sharp fluctuations in short-term interest rates.
The investment objectives of the Fund are fundamental and may not be
changed without the approval of at least a majority of the shareholders, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
All other investment policies of the Fund not specified as fundamental may
be changed without the approval of shareholders.
The Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. All securities in which the Fund invests will have remaining
maturities of 397 days or less on the date of purchase, will be denominated
in U.S. dollars, and will have been determined to be of high quality by
n a t ionally-recognized statistical rating organizations ("NSROs") or
determined to be of comparable quality if not so rated.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government include a variety of
U.S. Treasury securities, which differ only in their interest rates,
maturities, and dates of issuance. U.S. Treasury bills have initial
maturities of one year or less. U.S. Treasury notes have initial
maturities of one to ten years, and U.S. Treasury bonds generally have
initial maturities of greater than ten years at the date of issuance. U.S.
Treasury securities are backed by the full faith and credit of the United
States. Yields on short-, intermediate-, and long-term U.S. Government
Securities are dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular
offering, and the maturity of the obligation. Debt securities with longer
maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market value of U.S.
Government Securities generally varies inversely with changes in market
interest rates. An increase in interest rates, therefore, would generally
reduce the market value of the Fund s portfolio investments in U.S.
Government Securities, while a decline in interest rates would generally
increase the market value of the Fund s portfolio investments in these
securities.
Certain U.S. Government Securities are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not limited to,
obligations of U.S. Government agencies or instrumentalities such as the
Federal National Mortgage Association, the Government National Mortgage
Association, the Small Business Administration, the Export-Import Bank, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal
Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley
Authority, the Export-Import Bank of the United States, the Commodity
Credit Corporation, the Federal Financing Bank, the Student Loan Marketing
Association, and the National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
<PAGE> - 8 -<PAGE>
Treasury. Such agencies and instrumentalities may borrow funds from the
U.S. Treasury. However, no assurances can be given that the U.S.
Government will provide such financial support to the obligations of the
other U.S. Government agencies or instrumentalities in which the Fund
invests, since the U.S. Government is not obligated to do so. These other
agencies and instrumentalities are supported by either the issuer s right
to borrow, under certain circumstances, an amount limited to a specific
line of credit from the U.S. Treasury, the discretionary authority of the
U . S . Government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality itself.
The Fund may also invest in securities which are not backed by the full
faith and credit of the United States. In these instances, such
obligations may be supported by the right of the issuer to borrow from the
U.S. Treasury, while still others are supported only by the credit of the
instrumentality. Securities not backed by the full faith and credit of the
United States may be backed, in part, by a line of credit with the U.S.
Treasury (such as securities of the Federal National Mortgage Association),
or the Fund must look to the agency issuing or guaranteeing the obligation
for ultimate repayment (such as securities of the Federal Farm Credit
System), in which case the Fund may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does
not meet its commitments.
U.S. Government Securities may be purchased at a discount. Such
securities, when held to maturity or retired, may include an element of
capital gain. Capital losses may be realized when such securities
purchased at a premium are held to maturity or are called or redeemed at a
price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
The Fund also may invest in securities that take the form of participation
interests in, and may be evidenced by deposit or safekeeping receipts for,
any of the foregoing securities. Participation interests are pro rata
interests in U.S. Government Securities such as interests in pools of
mortgages sold by the Government National Mortgage Association; instruments
evidencing deposit or safekeeping are documentary receipts for such
original securities held in custody by others.
Repurchase Agreements
The Fund may also invest in repurchase agreements secured by U.S.
Government Securities. Under a repurchase agreement, the Fund purchases a
debt security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price (thereby determining the
yield during the purchaser's holding period) and date, normally one day or
a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon market interest rate during the purchaser s
holding period. While the maturities of the underlying securities in
repurchase transactions may be more than one year, the term of each
repurchase agreement will always be less than one year. The Fund will
enter into repurchase agreements only with member banks of the Federal
Reserve System or primary dealers of U.S. Government Securities. The
<PAGE> - 9 -<PAGE>
Fund's investment adviser will monitor the creditworthiness of each of the
firms which is a party to a repurchase agreement with the Fund. In the
event of a default or bankruptcy by the seller, the Fund will liquidate
those securities (whose market value, including accrued interest, must be
at least equal to 100% of the dollar amount invested by the Fund in each
repurchase agreement) held under the applicable repurchase agreement, which
securities constitute collateral for the seller s obligation to pay.
However, liquidation could involve costs or delays and, to the extent
proceeds from the sales of these securities were less than the agreed-upon
repurchase price, the Fund would suffer a loss. The Fund also may
experience difficulties and incur certain costs in exercising its rights to
the collateral and may lose the interest the Fund expected to receive under
the repurchase agreement. Repurchase agreements usually are for short
periods, such as one week or less, but may be longer. It is the current
policy of the Fund to treat repurchase agreements that do not mature within
seven days as illiquid for the purposes of the Fund's investment policies.
The Fund will not enter into repurchase agreements of more than seven days
duration if more than 10% of the market value of the Fund's net assets
would be so invested together with any other investment the Fund may hold
for which market quotations are not readily available.
Other Investment Policies and Risk Considerations
Bank Money Market Instruments. The Fund also may purchase bank money
market instruments, including certificates of deposit, time deposits,
bankers' acceptances, and other short-term obligations issued by U.S. banks
which are members of the Federal Reserve System. Certificates of deposit
are negotiable certificates evidencing the obligation of a bank to repay
funds deposited with the bank for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time (in no event longer than seven days) at a
stated interest rate. Time deposits which may be held by the Fund will not
benefit from insurance from the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the Federal Deposit Insurance
Corporation. Investments in time deposits and certificates of deposits are
limited to domestic banks that have total assets in excess of one billion
dollars. Bankers' acceptances are credit instruments evidencing the
obligation of a bank to a draft drawn on the bank by a customer of the
bank. These credit instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity.
Other short-term bank obligations in which the Fund may invest include
uninsured, direct obligations of a bank that bear fixed, floating, or
variable interest rates.
Commercial Paper. The Fund also may invest in commercial paper, including
corporate notes. These instruments are short-term obligations issued by
banks and corporations that have maturities ranging from two to 270 days.
Each commercial paper instrument may be backed only by the credit of the
issuer or may be backed by some form of credit enhancement, typically in
the form of a guarantee by a commercial bank. Investments in commercial
paper and other short-term promissory notes issued by corporations
<PAGE> - 10 -<PAGE>
(including variable and floating rate instruments) must be rated at the
time of purchase "A-2" or better by Standard & Poor's Ratings Group
( " S & P"), "Prime-2" or better by Moody's Investors Service, Inc.
("Moody's"), "F-2" or better by Fitch Investors Service, Inc. ("Fitch"),
"Duff 2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or "A2" or
better by IBCA, Inc., or, if not rated by S&P, Moody's, Fitch, Duff, or
IBCA, Inc., must be determined by PADCO Advisors, Inc. (the "Advisor"), the
Trust's investment adviser, to be of comparable quality pursuant to
guidelines approved by the trustees of the Trust (the Trustees ). Please
refer to Appendix A to this Prospectus for more detailed information
concerning commercial paper ratings.
The Fund also may make limited investments in guaranteed investment
contracts ("GICs") issued by United States insurance companies. The Fund
will purchase a GIC only when the Advisor has determined, under guidelines
established by the Trustees of the Trust, that the GIC presents minimal
credit risks to the Fund and is of comparable quality to instruments that
are rated "high quality" by certain nationally-recognized statistical
rating organizations.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis (i.e., delivery and
payment can take place a month or more after the date of the transaction).
These securities are subject to market fluctuation and no interest accrues
to the purchaser during this period. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction and thereafter reflect the
value, each day, of such security in determining its net asset value. The
Fund will not purchase securities on a when-issued or delayed delivery
basis if, as a result, more than 10% of the Fund's net assets would be so
invested. The Fund will maintain, in a segregated account, cash or liquid
securities having a value equal to or greater than the Fund's purchase
commitments.
Portfolio Transactions
When selecting broker-dealers to execute portfolio transactions, the
Advisor considers many factors, including the size of the broker-dealer s
"spread," the size and difficulty of the order, the nature of the market
for the security, the willingness of the broker-dealer to position, and the
r e liability, financial condition, general execution and operational
capabilities of the broker-dealer.
HOW TO INVEST IN THE FUND
The minimum initial investment in the Fund for all shareholder accounts,
including retirement plan accounts, is $2,000,000. The Trust, at its
d i s cretion, may accept lesser amounts than these minimum initial
investments in certain circumstances. There is no minimum amount for
subsequent investments.
The shares of the Fund are offered at the daily public offering price,
which is the net asset value per share (see "Determination of Net Asset
<PAGE> - 11 -<PAGE>
Value") next computed after receipt of the investor s order. No sales
charges are imposed on initial or subsequent investments. The Trust
reserves the right to reject or refuse, at the Trust s discretion, any
order for the purchase of the Fund s shares in whole or in part. There is
no minimum amount for subsequent investments.
Investments in the Fund may be made (i) through securities dealers who have
the responsibility to transmit orders promptly and who may charge a
processing fee or (ii) directly with the Trust by bank wire transfer as
follows:
By Bank Wire Transfer: Request a wire transfer to:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Account Number: 48038-9030
Your Name
Your Account Number or, if a new
account, Federal Tax I.D. Number
(e.g., Social Security Number)
After instructing your bank to transfer money by wire, please call the
Trust and inform the Trust as to the amount you have transferred and the
name of the bank sending the transfer. Your bank may charge a fee for such
services. If the purchase is canceled because your wire transfer is not
received, you may be liable for any loss that the Trust may incur.
Shares of the Fund are sold at a price based on the net asset value next
calculated after receipt of a purchase order in good form, as described
below. If a purchase order is received by the Fund at or prior to 1:00
P.M., Eastern Time, on any business day, the purchase of Fund shares is
executed at the offering price determined as of 1:00 P.M., Eastern Time,
that day. If the purchase order is received after 1:00 P.M., Eastern Time,
the purchase of Fund shares will be effected on the next business day.
(See "Procedures for Redemptions and Exchanges.")
I n the interest of economy and convenience, physical certificates
representing the Fund s shares are not issued. Shares of the Fund are
recorded on a register by the Trust s transfer agent.
REDEEMING AN INVESTMENT
(WITHDRAWALS)
An investor may withdraw all or any portion of his investment by redeeming
Fund shares at the next-determined net asset value per share after receipt
of the order. Redemptions may be made by letter or by telephone subject to
the procedures set forth below. The privilege to initiate redemption
transactions by telephone will be made available to Fund shareholders
automatically. Telephone redemptions will be sent only to the address of
record of the redeeming investor or to bank accounts specified by the
redeeming investor in his account application.
<PAGE> - 12 -<PAGE>
The proceeds of non-telephone redemptions will be sent directly to the
investor s address of record. If the investor requests payment of
redemptions to a third party or to a location other than the investor s
address of record or a bank account specified in the investor s account
application, this request must be in writing and the investor s signature
must be guaranteed by a commercial bank; a broker, dealer, municipal
securities dealer, municipal securities broker, government securities
dealer, or government securities broker; a credit union; a national
securities exchange, registered securities association, or clearing agency;
or a savings association.
The Fund will redeem its shares at a redemption price equal to the net
asset value of the shares as next computed following the receipt of a
request for redemption. There is no redemption charge. Payment for the
redemption price will be made within seven days after the Trust s receipt
of the request for redemption.
With respect to the Fund, the right of redemption may be suspended, or the
date of payment postponed: (i) for any period during which the Federal
Reserve Bank of New York (the "New York Fed") or the New York Stock
Exchange (the "NYSE") is closed (other than customary weekend or holiday
closings) or trading on the NYSE is restricted; (ii) for any period during
which an emergency exists so that disposal of the Fund s investments or the
determination of its net asset value is not reasonably practicable; or
(iii) for such other periods as the Securities and Exchange Commission (the
"Commission"), by order, may permit for protection of the Fund s investors.
On any day that the New York Fed or the NYSE closes early, the principal
government securities markets close early (such as on days in advance of
holidays generally observed by participants in such markets), or as
permitted by the Commission, the right is reserved to advance the time on
that day by which purchase and redemption orders must be received. (See
"Determination of Net Asset Value.")
EXCHANGES
Shares of any Rydex Fund may be exchanged, without any charge, for shares
of any other Rydex Fund on the basis of the respective net asset values
next determined of the shares involved; provided that, in connection with
exchanges for shares of a Rydex Fund, certain minimum investment levels are
maintained. An exchange of other Rydex Fund shares for shares of the Fund
is permitted only if the $2,000,000 minimum investment in the Fund is
satisfied. The Trust reserves the right to modify its minimum investment
requirements. The Trust currently is composed of nine separate series, The
Nova Fund, The Ursa Fund, The Rydex OTC Fund (the "OTC Fund"), The Rydex
Precious Metals Fund (the "Metals Fund"), The Rydex U.S. Government Bond
Fund (the "Bond Fund"), The Juno Fund, The Rydex High Yield Fund (the High
Yield Fund ), The Rydex U.S. Government Money Market Fund (the "Money
Market Fund"), and the Rydex Institutional Money Market Fund (the series
described in this Prospectus); other separate Rydex Funds may be added in
the future. Exchanges may be made by letter or by telephone subject to the
procedures set forth below.
<PAGE> - 13 -<PAGE>
To implement an exchange, shareholders should provide the following
information: account name, account number, taxpayer identification number,
number of or percentage of shares or dollar value of shares to be
exchanged, and the names of the Rydex Funds involved in the exchange
transaction. Exchanges may be made only if such exchanges are between
identically registered accounts. Shareholders contemplating such an
exchange for shares of a Rydex Fund not described in this Prospectus should
obtain and review the prospectus of the Rydex Fund to which the investment
is to be transferred. The exchange privilege is available only in states
where the exchange legally may be made and may be modified or discontinued
at any time. Shares of the Money Market Fund received in an exchange for
shares of the OTC Fund or the Metals Fund are issued on the third business
day following the day on which the Rydex Fund receives the exchange
request.
PROCEDURES FOR REDEMPTIONS AND EXCHANGES
Written requests for redemptions and exchanges should be sent to Rydex
Series Trust, 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852, and should be signed by the record owner or owners. Telephone
redemption and exchange requests with respect to the Rydex Funds may be
made by calling (800) 820-0888 or (301) 468-8520, on any day the Trust is
open for business. Such requests may be made only between 8:30 A.M.,
Eastern Time, and the times indicated below (all times are Eastern Time).
For exchanges, the earlier of the times indicated below for the Rydex Funds
whose shares are being exchanged applies.
The Nova, Ursa, and Rydex
OTC Funds . . . . . . 3:45 P.M.
The Rydex Precious Metals
Fund . . . . . . . . . 3:30 P.M.
The Rydex U.S. Government
Bond and Juno Funds . 2:45 P.M.
The Rydex High Yield Fund 2:15 P.M.
Telephone redemption and exchange orders will be accepted only during the
period indicated above. If the primary exchange or market on which the
Rydex Fund transacts business closes early, the above cut-off time will be
approximately fifteen minutes (thirty minutes, in the case of the Metals
Fund, and forty-five minutes in the case of the High Yield Fund) prior to
the close of such exchange or market. Telephone redemption and exchange
privileges may be terminated or modified by the Trust at any time.
When acting on instructions believed to be genuine, the Trust will not be
liable for any loss resulting from a fraudulent telephone transaction
request and the investor would bear the risk of any such loss. The Trust
will employ reasonable procedures to confirm that telephone instructions
are genuine; and if the Trust does not employ such procedures, then the
Trust may be liable for any losses due to unauthorized or fraudulent
instructions. The Trust follows specific procedures for transactions
initiated by telephone, including, among others, requiring some form of
personal identification prior to acting upon instructions received by
<PAGE> - 14 -<PAGE>
telephone, providing written confirmation not later than five business days
after such transactions, and/or tape recording of telephone instructions.
Investors also should be aware that telephone redemptions or exchanges may
be difficult to implement in a timely manner during periods of drastic
economic or market changes. If such conditions occur, redemption or
exchange orders can be made by mail.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined each day on which
both the NYSE and the New York Fed are open for business at 1:00 P.M.,
Eastern Time. Currently, the NYSE and the New York Fed are closed on
weekends, and the following holiday closings have been scheduled for 1997:
(i) New Year's Day, Martin Luther King Jr.'s Birthday, Washington's
Birthday, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day,
Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any
of those holidays falls on a Saturday or the subsequent Monday when any one
of those holidays falls on a Sunday. To the extent that portfolio
securities of the Fund are traded in other markets on days when the New
York Fed or the NYSE is closed, the Fund's net asset value may be affected
on days when investors do not have access to the Fund to purchase or redeem
shares. Although the Trust expects the same holiday schedule to be
observed in the future, the New York Fed and the NYSE each may modify its
holiday schedule at any time. The net asset value of the Fund serves as
the basis for the purchase and redemption price of the Fund's shares.
The Fund will utilize the amortized cost method in valuing its portfolio
securities, which method involves valuing a security at its cost adjusted
by a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value
of the instrument. The purpose of this method of calculation is to
facilitate the maintenance of a constant net asset value per share for the
Fund of $1.00. However, there is no assurance that the $1.00 net asset
value will be maintained. For further information regarding the amortized
cost method for valuing the Fund s portfolio securities, see "Determination
of Net Asset Value" in the Statement of Additional Information.
TAX-SHELTERED RETIREMENT PLANS
Tax-sheltered retirement plans of the following types will be available to
investors:
Individual Retirement Accounts (IRAs)
Keogh Accounts - Defined Contribution
Plans (Profit-Sharing
Plans)
Keogh Accounts - Money Purchase Plans Pension Plans)
Internal Revenue Code Section 403(b) Plans
Additional information regarding these accounts may be obtained by
contacting the Trust.
DIVIDENDS AND DISTRIBUTIONS
<PAGE> - 15 -<PAGE>
A l l income dividends and capital gains distributions of the Fund
automatically will be reinvested in additional shares of the Fund at the
net asset value calculated on the ex-dividend date, unless an investor has
requested otherwise from the Trust in writing. Dividends and distributions
of the Fund are taxable to the shareholders of the Fund, as discussed below
under "Taxes," whether such dividends and distributions are reinvested in
additional shares of the Fund or are received in cash. Statements of
account will be sent to the Fund shareholders at least quarterly.
The Fund ordinarily (i) declares dividends of net investment income (and
net short-term capital gains, if any) for shares of the Fund on a daily
basis and (ii) distributes such dividends to shareholders of the Fund on a
monthly basis. The Trustees, however, may revise this dividend and
distribution policy of the Fund, postpone the payment of dividends
thereunder, or take any other action necessary with respect thereto in
order to facilitate, to the extent possible, the maintenance by the Fund of
a constant net asset value per share of $1.00.
TAXES
The U.S. Internal Revenue Code of 1986, as amended (the "Code"), provides
that each investment portfolio of a series investment company is to be
treated as a separate corporation. Accordingly, the Fund will seek to
qualify for treatment as a regulated investment company (a "RIC") under
Subchapter M of the Code. So long as the Fund qualifies as a RIC and
satisfies the distribution requirements under the Code for any taxable
year, the Fund itself will not be subject to income tax on the ordinary
income and capital gains it has distributed to its shareholders for that
year.
To qualify as a RIC under the Code, the Fund must satisfy certain
requirements, including the requirements that the Fund receive at least 90%
of the Fund s gross income each year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition
of securities or foreign currencies, or other income derived with respect
to the Fund s investments in stock, securities, and foreign currencies (the
"90% Test"), and that the Fund derive less than 30% of the Fund s gross
income from the sale or other disposition of any of the following
instruments which have been held for less than three months (the "30%
Test"): (i) stock or securities; (ii) certain options, futures, or forward
contracts; or (iii) foreign currencies (or certain options, futures, or
forward contracts on such foreign currencies). Provided that the Fund (i)
is a RIC and (ii) distributes at least 90% of the Fund s net investment
income (including, for this purpose, net realized short-term capital
gains), the Fund itself will not be subject to Federal income taxes to the
extent the Fund s net investment income and the Fund s net realized short-
term capital gains, if any, are distributed to the shareholders of that
Fund. To avoid an excise tax on its undistributed income, the Fund
generally must distribute at least 98% of its income.
<PAGE> - 16 -<PAGE>
Under current law, dividends derived from interest and dividends received
by the Fund, together with distributions of any short-term capital gains,
if any, are taxable to the shareholders of the Fund, as ordinary income at
Federal income tax rates of up to 39.6%, whether or not such dividends and
distributions are reinvested in shares of the Fund or are received in cash.
Ordinary dividends paid to corporate or individual residents of foreign
countries generally are subject to a 30% withholding tax. The rate of
withholding tax may be reduced if the United States has an income tax
treaty with the foreign country where the recipient resides. Capital gains
distributions received by foreign investors should, in most cases, be
exempt from U.S. tax. A foreign investor will be required to provide the
Fund with supporting documentation in order for the Fund to apply a reduced
rate or exemption from U.S. withholding tax.
Shareholders are required by law to certify that their tax identification
number is correct and that they are not subject to back-up withholding. In
the absence of this certification, the Fund is required to withhold taxes
at the rate of 31% on dividends, capital gains distributions, and
redemptions. Shareholders who are non-resident aliens may be subject to a
withholding tax on dividends earned. For further information regarding the
taxation of dividends and distributions from the Fund and the tax treatment
of shareholders of the Fund, see "Dividends, Distributions, and Taxes," in
the Statement of Additional Information.
Shareholders are urged to consult their own tax advisors regarding specific
questions as to Federal, state or local taxes.
MANAGEMENT OF THE TRUST
Investment Adviser
The Trust is provided investment advice and management services by PADCO
Advisors, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The
Advisor was incorporated in the State of Maryland on February 5, 1993.
Albert P. Viragh, Jr., the Chairman of the Board and the President of the
Advisor, owns a controlling interest in the Advisor. The portfolio manager
of the Fund is Michael P. Byrum. Prior to joining the PADCO Advisors, Inc.
organization in July 1993, Mr. Byrum worked for one year as an investor
representative with Money Management Associates ("MMA"), a Maryland-based
registered investment adviser. Mr. Byrum s responsibilities at MMA
included brokerage solicitation and investor relations. Mr. Byrum received
his bachelor s degree in Business Administration from Miami University, of
Oxford, Ohio, in 1992.
Under an investment advisory agreement between the Trust and the Advisor,
dated May 14, 1993, and as most recently amended on September 25, 1996, the
Fund pays the Advisor a fee at an annualized rate of 0.55% of the average
daily net assets of the Fund.
The Advisor manages the investment and the reinvestment of the assets of
the Fund, in accordance with the investment objectives, policies, and
<PAGE> - 17 -<PAGE>
limitations of the Fund, subject to the general supervision and control of
the Trustees and the officers of the Trust. The Advisor bears all costs
associated with providing these advisory services and the expenses of the
Trustees who are affiliated persons of the Advisor. The Advisor, from its
own resources, including profits from advisory fees received from the Fund,
provided such fees are legitimate and not excessive, also may make payments
to broker-dealers and other financial institutions for their expenses in
connection with the distribution of Fund shares, which payments, to the
extent made by the Advisor, may be in addition to those payments made
pursuant to a plan of distribution for the Fund adopted by the Trust
pursuant to Rule 12b-1 under the 1940 Act (the " Distribution Plan"). See
"Distribution Plan."
Servicer
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Fund by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995, and as most recently amended on September 25, 1996. Under this
service agreement, the Fund pays the Servicer a fee at an annualized rate
of 0.20% of the average daily net assets of the Fund.
The Servicer provides the Trust and the Fund with all required general
administrative services, including, without limitation, office space,
equipment, and personnel; clerical and general back office services;
bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust and the Fund under Federal
and state securities laws. The Servicer also maintains the shareholder
account records for the Trust and the Fund, distributes dividends and
distributions payable by the Fund, and produces statements with respect to
account activity for the Fund and the shareholders of the Fund. The
Servicer pays all fees and expenses that are directly related to the
services provided by the Servicer to the Trust; the Fund reimburses the
Servicer for all fees and expenses incurred by the Servicer which are not
directly related to the services the Servicer provides to the Fund under
the service agreement.
Distributor
Pursuant to the Distribution Plan for the Fund adopted by the Trust
pursuant to Rule 12b-1 under the 1940 Act, the Fund is provided certain
distribution services by PADCO Financial Services, Inc., 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Distributor"),
subject to the general supervision and control of the Trustees and the
officers of the Trust. Under the Distribution Plan, dated March 8, 1996,
the Fund reimburses the Distributor for a portion of the Distributor's
costs incurred in distributing the shares of the Fund at an annualized rate
not to exceed 0.25% of the average daily net assets of the Fund. See
"Distribution Plan."
<PAGE> - 18 -<PAGE>
Costs and Expenses
The Fund bears all expenses of its operations other than those assumed by
the Advisor, the Servicer, or the Distributor. Fund expenses include: the
management fee; the servicing fee (including administrative, transfer
agent, and shareholder servicing fees); payments to be made by the Fund to
the Distributor under the Distribution Plan; custodian and accounting fees
and expenses; legal and auditing fees; securities valuation expenses;
fidelity bonds and other insurance premiums; expenses of preparing and
printing prospectuses, confirmations, proxy statements, and shareholder
reports and notices; registration fees and expenses; proxy and annual
meeting expenses, if any (to the extent that these expenses are not covered
by payments made by the Fund under the Distribution Plan); all Federal,
state, and local taxes (including, without limitation, stamp, excise,
income, and franchise taxes); organizational costs; and non-interested
Trustees fees and expenses.
The Advisor has agreed to limit the operating expenses of the Fund so that
the ratio of expenses, including investment management fees, to average net
assets on an annual basis for the Fund shall not exceed 1.20%. Any
expenses incurred by the Fund in excess of this amount will be absorbed by
the Advisor. For the period of July 11, 1996 through September 30, 1996,
the total expenses of the Fund were 1.24% of the Fund s average net assets
(annualized).
The Advisor has advanced the organizational expenses of the Fund. These
costs, which are approximately $40,000, will be reimbursed by the Fund, and
the Fund will amortize these costs over a five-year period from the date
the Fund commences operations.
DISTRIBUTION PLAN
The Trust finances activities which are primarily intended to result in the
sale of Fund shares and has adopted the Distribution Plan for the Fund
pursuant to Rule 12b-1 under the 1940 Act. The Trust's Distribution Plan
for the Fund provides that the Fund will pay the Distributor monthly up to
a maximum of 0.25% per annum of the Fund's daily net assets for expenses
actually incurred by the Distributor during that month in the distribution
and promotion of the Fund's shares, including the printing of certain
reports used for sales purposes, expenses for preparation and printing of
s a les literature, and related expenses, including any maintenance,
distribution, or service fees paid to securities dealers or brokers,
administrators, investment advisers, institutions, including bank trust
d e partments, and other persons ("Recipients") who have executed a
d i s t ribution or service agreement with the Distributor. As of
September 30, 1996, the Fund had total net assets of approximately $30.8
million and the Distributor s aggregated uncovered distribution charges
for the Fund (i.e., the expenses actually incurred by the Distributor less
amounts received by the Distributor pursuant to the Distribution Plan)
were $3,089.
<PAGE> - 19 -<PAGE>
The Glass-Steagall Act generally prohibits Federal and state chartered or
supervised banks from engaging in the business of underwriting, selling, or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been clearly defined by the courts or
appropriate regulatory agencies, the Distributor believes that the Glass-
Steagall Act should not preclude a bank from performing shareholder support
services or servicing and recordkeeping functions. The Distributor intends
to engage banks only to perform such functions. Changes in Federal or
state statutes and regulations pertaining to the permissible activities of
banks and their affiliates or subsidiaries, as well as further judicial or
administrative decisions or interpretations, however, could prevent a bank
from continuing to perform all or a part of the contemplated services. If
a bank were prohibited from so acting, the Trustees would consider what
actions, if any, would be necessary to continue to provide such efficient
and effective shareholder services. In such event, changes in the
operation of the Fund might occur, including possible termination of any
automatic investment or redemption or other services then provided by the
bank. It is not expected that shareholders of the Fund would suffer any
adverse financial consequences as a result of any of these occurrences. In
addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
state law.
The Fund may execute portfolio transactions with, and purchase securities
issued by, depository institutions that receive payments under the
Distribution Plan. No preference for the instruments of such depository
institutions will be shown in the selection of investments. For further
information regarding the Distribution Plan, see "Distribution Plan" in
the Statement of Additional Information.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its current "yield" and
"effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the Fund
refers to the income generated by an investment in the Fund over a seven-
day period (which period will be stated in the advertisement). This income
is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-
week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly, but, when annualized, the income earned by
an investment in the Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. A description of the respective
methods by which the yield and effective yield of the Fund are calculated
is contained in the Statement of Additional Information under "Information
on Computation of Yield."
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund s shares with bank deposits, savings accounts, and
similar investment alternatives which often provide an agreed or guaranteed
<PAGE> - 20 -<PAGE>
fixed yield for a stated period of time. Shareholders of the Fund should
remember that yield generally is a function of the kind and quality of the
instrument held in portfolio, portfolio maturity, operating expenses, and
market conditions.
GENERAL INFORMATION ABOUT THE TRUST
Organization and Description of Shares of Beneficial Interest
The Trust is a registered open-end investment company under the 1940 Act.
The Trust was organized as a Delaware business trust on February 10, 1993,
and has present authorized capital of unlimited shares of beneficial
interest of no par value which may be issued in more than one class.
Currently, the Trust has issued shares of nine separate classes: The Nova
Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund,
The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield
Fund, The Rydex U.S. Government Money Market Fund, and The Rydex
Institutional Money Market Fund. Other separate classes may be added in
the future.
All shares of the Rydex Funds are freely transferable. The Rydex Fund
shares do not have preemptive rights or cumulative voting rights, and none
of the shares have any preference to conversion, exchange, dividends,
retirements, liquidation, redemption, or any other feature. Rydex Fund
shares have equal voting rights, except that, in a matter affecting a
particular series in the Trust, only shares of that series may be entitled
to vote on the matter. Shareholder inquiries can be made by telephone (at
800-820-0888 or 301-468-8520) or by mail (to 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852).
Under the Delaware General Corporation Law, a registered investment company
is not required to hold an annual shareholders meeting if the 1940 Act
does not require such a meeting. Generally, there will not be annual
meetings of Trust shareholders. Trust shareholders may remove Trustees of
the Trust from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the
outstanding shares of the Trust, the Trust will call a meeting of Trust
shareholders for the purpose of voting upon the question of removal of a
Trustee or Trustees of the Trust and will assist in communications with
other Trust shareholders.
Unlike the stockholder of a corporation, shareholders of a business trust
such as the Trust could be held personally liable, under certain
circumstances, for the obligations of the business trust. The Trust s
Declaration of Trust, however, disclaims liability of the shareholders of
the Trust, the Trustees, or the officers of the Trust for acts or
obligations of the Trust which are binding only on the assets and property
of the Trust. The Declaration of Trust provides for indemnification out of
Trust property for all loss and expense of any Trust shareholder held
personally liable for the obligations of the Trust. The risk of a Trust
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would not be able to
<PAGE> - 21 -<PAGE>
meet the Trust s obligations and this risk, thus, should be considered
remote.
As of the date of this Prospectus, no officer or Trustee of the Trust owned
any of the Fund shares.
Trustees and Officers
The Trust has a Board of Trustees which is responsible for the general
supervision of the Trust s business. The day-to-day operations of the
Trust are the responsibility of the Trust s officers.
Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are
the auditors of and the independent public accountants for the Trust and
the Fund.
Custodian
Pursuant to a separate custody agreement entered into by the Trust, Star
Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202, serves as custodian for the Trust and the Fund.
Under the terms of this custody agreement, the Custodian holds the
portfolio securities of the Fund and keeps all necessary related accounts
and records.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE,
IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR PRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST IN ANY
JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> - 22 -<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors Service, Inc.
("Moody's"), is based upon Moody's evaluation of many factors including:
(1) the management of the issuer; (2) the issuer's industry or industries
and the speculative-type risks which may be inherent in certain areas; (3)
the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of
earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issue; and (8)
recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations. Relative differences in these factors determine whether
the issuer's commercial paper is rated "Prime-1," "Prime-2," or "Prime-3"
by Moody's.
"Prime-1" indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions
in well-established industries; (2) high rates of return on funds employed;
(3) conservative capitalization structures with moderate reliance on debt
and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well-
established access to a range of financial markets and assured sources of
alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of short-term
promissory obligations. This repayment capacity normally will be evidenced
by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is
maintained.
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group ("S&P") has
the following characteristics: (1) liquidity ratios adequate to meet cash
requirements; (2) long-term senior debt is rated "A" or better; (3) the
issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances; (5) typically, the issuer's industry is well-
established and the issuer has a strong position within the industry; and
(6) the reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated "A-1," "A-2," or "A-3."
<PAGE> A-1<PAGE>
A-1 -- This designation rating indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 -- The capacity for timely payment on issues with this
designation rating is strong; however, the relative degree of safety is not
as high as for issues designated "A-1."
Fitch Investors Service, Inc.
Commercial paper rated by Fitch Investors Service, Inc. ("Fitch"),
reflects Fitch's current appraisal of the degree of assurance of timely
payment of such debt. An appraisal results in the rating of an issuer's
paper as "F-1," "F-2," "F-3," or "F-4."
F-1 -- This designation rating indicates that the commercial paper is
regarded as having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this designation rating
reflect an assurance of timely payment only slightly less in degree than
those issues rated "F-1."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co. ("Duff") are
consistent with the rating criteria utilized by money market participants.
The ratings apply to all obligations with maturities of under one year,
including commercial paper, the uninsured portion of certificates of
d e p osit, unsecured bank loans, master notes, bankers acceptances,
irrevocable letters of credit, and current maturities of long-term debt.
Asset-backed commercial paper is also rated according to this scale.
An emphasis of Duff's short-term ratings is placed on "liquidity,"
which is defined as not only cash from operations, but also access to
alternative sources of funds including trade credit, bank lines, and the
capital markets. An important consideration is the level of an obligor's
reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff's short-term ratings is the
refinement of the traditional "1" category. The majority of short-term
debt issuers carry the highest rating, yet quality differences exist within
that tier. As a consequence, Duff has incorporated gradations of "1+" (one
plus) and "1-" (one minus) to assist investors in recognizing those
differences.
Duff 1+ -- This designation rating indicates the highest certainty of
timely payment. Short-term liquidity, including internal operating factors
<PAGE> A-2<PAGE>
and/or access to alternative sources of funds, is outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
Duff 1 -- This designation rating indicates a very high certainty of
timely payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
Duff 1- -- This designation rating indicates a high certainty of
timely payment. Liquidity factors are strong and supported by good
fundamental protection factors. Risk factors are very small.
Duff 2 -- This designation rating indicates a good certainty of
timely payment. Liquidity factors and company fundamental are sound.
Although ongoing funding needs may enlarge total financing requirements,
access capital markets is good. Risk factors are small.
IBCA, Inc.
In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the
companies for discussions with senior management. These meetings are
fundamental to the preparation of individual reports and ratings. To keep
abreast of any changes that may affect assessments, analysts maintain
contact throughout the year with the management of the companies that the
analysts cover.
IBCA's analysts speak the languages of the countries that the
analysts cover, which is essential to maximize the value of their meetings
with management and to analyze properly a company's written materials.
IBCA's analysts also have a thorough knowledge of the laws and accounting
practices that govern the operations and reporting of companies within the
various countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, these data are taken into account by IBCA when
assigning IBCA's ratings. Before dispatch to subscribers, a draft of the
report is submitted to each company to permit the correction of any factual
errors and to enable the clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all
ratings and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following these committee
meetings, IBCA ratings are issued directly to subscribers. At the same
time, the company is informed of the ratings as a matter of courtesy, but
not for discussion.
A1+ -- This designation rating indicates obligations supported by the
highest capacity for timely repayment.
A1 -- This designation rating indicates obligations supported by a
very strong capacity for timely repayment.
<PAGE> A-3<PAGE>
A2 -- This designation rating indicates obligations supported by a
strong capacity for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic, or financial
conditions.
<PAGE> A-4<PAGE>
RULE 497(c)
File No. 33-59692
STATEMENT OF ADDITIONAL INFORMATION
RYDEX SERIES TRUST
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
(800) 820-0888
(301) 468-8520
The Rydex Series Trust (the "Trust") is a no-load mutual fund with nine
separate investment portfolios (the "Funds" or "Rydex Funds"), seven of
which Funds are described in this Statement of Additional Information. The
Funds are principally designed for professional money managers and
investors who intend to invest in the Funds as part of an asset-allocation
or market-timing investment strategy. Sales are made, without sales
charge, at each Fund s per share net asset value.
Except for the Rydex U.S. Government Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. Each of these Funds seeks investment
results that correspond over time to a specified benchmark. The Funds may
be used independently or in combination with each other as part of an
overall investment strategy. Additional Funds may be created from time to
time.
The following are the Funds and their benchmarks:
FUND BENCHMARK
The Nova Fund 150% of the performance of the S&P 500 Composite
Stock Price IndexTM
The Ursa Fund Inverse (opposite) of the S&P 500 Composite Stock
Price IndexTM
Rydex OTC Fund NASDAQ 100 IndexTM (NDX)
Rydex Precious Metals Philadelphia Stock Exchange Gold/Silver IndexTM
Fund (XAU)
Rydex U.S. Government 120% of the price movement of current Long Treasury
Bond Fund Bond
The Juno Fund Inverse (opposite) of the price movement of the
current Long Treasury Bond
The Trust also offers The Rydex U.S. Government Money Market Fund. This
Fund seeks to provide security of principal, high current income, and
liquidity by investing primarily in money market instruments which are
issued or guaranteed, as to principal and interest, by the U.S. Government,<PAGE>
its agencies or instrumentalities. The securities of the Rydex U.S.
Government Money Market Fund are not deposits or obligations of any bank,
and are not endorsed or guaranteed by any bank, and an investment in this
Fund is neither insured nor guaranteed by the United States Government.
The Rydex U.S. Government Money Market Fund seeks to maintain a constant
$1.00 net asset value per share, although this cannot be assured.
The Funds (other than the Rydex U.S. Government Money Market Fund) may
engage in certain aggressive investment techniques, which include engaging
in short sales and transactions in options and futures contracts. The Nova
Fund and the Rydex U.S. Government Bond Fund also may use the speculative
technique known as leverage to increase funds available for investment.
See "Borrowing." Investors in the Nova Fund may experience substantial
losses during sustained periods of falling equity prices, while investors
in the Ursa Fund and the Juno Fund may experience substantial losses during
sustained periods of rising equity prices and declining interest rates
respectively. Because of the inherent risks in any investment, there can
be no assurance that any Fund s investment objective will be achieved.
None of the Funds alone constitutes a balanced investment plan, and certain
of the Funds involve special risks not traditionally associated with
investment companies. The nature of the Funds generally will result in
significant portfolio turnover which would likely cause higher expenses and
additional costs and increase the risk that the Fund will not qualify as a
regulated investment company under the Federal tax laws. The Trust is not
intended for investors whose principal objective is current income or
preservation of capital and may not be a suitable investment for persons
who intend to follow an "invest and hold" strategy. See "Special Risk
Considerations in the Trust s Prospectus.
The Trust also offers The Rydex Institutional Money Market Fund and,
beginning on or about December 1, 1996 (subject to obtaining all necessary
regulatory approvals), also will offer The Rydex High Yield Fund, each of
which series of the Trust is described in a separate prospectus and a
separate statement of additional information.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Trust's Prospectus, dated November 1, 1996. A
copy of the Trust s Prospectus is available, without charge, upon request
to the Trust at the address above or by telephoning the Trust at the
telephone numbers above.
The date of this Statement of Additional Information is November 1, 1996.
<PAGE> 2<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS 4
INVESTMENT POLICIES AND TECHNIQUES 4
INVESTMENT RESTRICTIONS 9
PORTFOLIO TRANSACTIONS AND BROKERAGE 13
MANAGEMENT OF THE TRUST 14
PRINCIPAL HOLDERS OF SECURITIES 18
DETERMINATION OF NET ASSET VALUE 21
PERFORMANCE INFORMATION 23
CALCULATION OF RETURN QUOTATIONS 24
INFORMATION ON COMPUTATION OF YIELD 25
DIVIDENDS, DISTRIBUTIONS, AND TAXES 26
AUDITORS AND CUSTODIAN 30
FINANCIAL STATEMENTS 30
<PAGE> 3<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including The Nova Fund, The Ursa Fund,
The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S.
Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money Market
Fund, The Rydex Institutional Money Market Fund, and, beginning on or about
December 1, 1996 (subject to obtaining all regulatory approvals), The Rydex
High Yield Fund (collectively, the "Funds"); other separate Funds may be
added in the future. The Funds are principally designed for professional
money managers and investors who intend to follow an asset-allocation or
market-timing investment strategy. Except for the Rydex U.S. Government
Money Market Fund and the Rydex Institutional Money Market Fund, each Fund
is intended to provide investment exposure with respect to a particular
segment of the securities markets. These Funds seek investment results
that correspond over time to a specified benchmark. The Funds may be used
independently or in combination with each other as part of an overall
investment strategy.
Shares of any Fund may be exchanged, without any charge, for shares of any
other Fund on the basis of the respective net asset values of the shares
involved; provided, that, in connection with exchanges for shares of the
Fund, certain minimum investment levels are maintained (see "Exchanges").
Copies of the separate Prospectus and Statement of Additional Information
for each of the Rydex High Yield Fund and the Rydex Institutional Money
Market Fund are available, without charge, upon request to the Trust at
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by
telephoning the Trust at (800) 820-0888 or (301) 468-8520.
INVESTMENT POLICIES AND TECHNIQUES
General
Reference is made to the sections entitled "Investment Objectives and
Policies" and "Investment Techniques and Other Investment Policies" in the
Trust's Prospectus for a discussion of the investment objectives and
policies of the Funds. In addition, set forth below is further information
relating to the Funds. Portfolio management is provided to each Fund by
t h e Trust's investment adviser, PADCO Advisors, Inc., a Maryland
corporation with offices at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Advisor").
The investment strategies of the Funds discussed below, and as discussed in
the Trust's Prospectus, may be used by a Fund if, in the opinion of the
Advisor, these strategies will be advantageous to the Fund. The Fund is
free to reduce or eliminate the Fund's activity in any of those areas
without changing the Fund's fundamental investment policies. There is no
assurance that any of these strategies or any other strategies and methods
of investment available to a Fund will result in the achievement of the
Fund's objectives.
Options Transactions
<PAGE> 4<PAGE>
Options on Securities. The Nova Fund, The Rydex OTC Fund (the "OTC
Fund"), and the Rydex Precious Metals Fund (the "Metals Fund") may buy call
options and write (sell) put options on securities, and the Ursa Fund may
buy put options and write call options on securities for the purpose of
realizing the Fund's investment objective. By writing a call option on
securities, a Fund becomes obligated during the term of the option to sell
the securities underlying the option at the exercise price if the option is
exercised. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised.
During the term of the option, the writer may be assigned an exercise
notice by the broker-dealer through whom the option was sold. The exercise
notice would require the writer to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option covering the same underlying security
and having the same exercise price and expiration date as the one
previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option, the writer of
a call option is required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options Clearing
Corporation (the "OCC"), an institution created to interpose itself between
buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction.
Options on Security Indexes. The Nova Fund, the OTC Fund, and the Metals
Fund may purchase call options and write put options, and the Ursa Fund may
purchase put options and write call options, on stock indexes listed on
national securities exchanges or traded in the over-the-counter market as
an investment vehicle for the purpose of realizing the Fund's investment
objective.
Options on indexes are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash
equal to the difference between the closing price of the securities index
and the exercise price of the option. When a Fund writes a covered option
on an index, the Fund will be required to deposit and maintain with a
custodian cash or high-grade, liquid short-term debt securities equal in
value to the aggregate exercise price of a put or call option pursuant to
the requirements and the rules of the applicable exchange. If, at the
close of business on any day, the market value of the deposited securities
falls below the contract price, the Fund will deposit with the custodian
cash or high-grade, liquid short-term debt securities equal in value to the
deficiency.
<PAGE> 5<PAGE>
Foreign Securities
The Metals Fund may invest in issuers located outside the United States.
These purchases may be made by purchasing American Depository Receipts
("ADRs"), "ordinary shares," or "New York shares" in the United States.
A D Rs are dollar-denominated receipts representing interests in the
securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by United States banks and
trust companies which evidence ownership of underlying securities issued by
a foreign corporation. Generally, ADRs in registered form are designed for
use in domestic securities markets and are traded on exchanges or over-the-
counter in the United States. Ordinary shares are shares of foreign
issuers that are traded abroad and on a United States exchange. New York
shares are shares that a foreign issuer has allocated for trading in the
United States. ADRs, ordinary shares, and New York shares all may be
purchased with and sold for U.S. dollars, which protects the Metals Fund
from the foreign settlement risks described below.
Investing in foreign companies may involve risks not typically associated
with investing in United States companies. The value of securities
denominated in foreign currencies, and of dividends from such securities,
can change significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets generally have
less trading volume and less liquidity than United States markets, and
prices in some foreign markets can be very volatile. Many foreign
countries lack uniform accounting and disclosure standards comparable to
those that apply to United States companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial
condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees,
generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of United States investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on United States investment, or on the ability to
repatriate assets or to convert currency into U.S. dollars. There may be a
greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a
risk of local political, economic, or social instability, military action
or unrest, or adverse diplomatic developments.
At the present time, there are five major producers and processors of gold
bullion and other precious metals and minerals. In order of magnitude,
these producers and processors are: the Republic of South Africa, the
former republics of the former Soviet Union, Canada, the United States, and
Australia. Political and economic conditions in several of these countries
may have a direct effect on the mining, distribution, and price of precious
metals and minerals, and on the sales of central bank gold holdings,
particularly in the case of South Africa and the former republics of the
<PAGE> 6<PAGE>
former Soviet Union. South African mining stocks represent a special risk
in view of the history of political unrest in that country. Besides that
factor, various government bodies such as the South African Ministry of
Mines and the Reserve Bank of South Africa exercise regulatory authority
over mining activity and the sale of gold. The policies of these South
African government bodies in the future could be detrimental to the Metals
Fund's objectives.
U.S. Government Securities
The Rydex U. S. Government Bond Fund (the "Bond Fund") invests primarily in
U.S. Government Securities, and each of the other Funds also may invest in
U . S. Government Securities. The Juno Fund may enter into short
t r ansactions on U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which are backed by the full faith and
credit of the U.S. Treasury and which differ only in their interest rates,
maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities
of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. Government Securities
are issued or guaranteed by agencies or instrumentalities of the U.S.
Government including, but not limited to, obligations of U.S. Government
agencies or instrumentalities such as the Federal National Mortgage
Association, the Government National Mortgage Association, the Small
Business Administration, the Federal Farm Credit Administration, the
Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank
for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit
Banks, the Tennessee Valley Authority, the Export-Import Bank of the United
States, the Commodity Credit Corporation, the Federal Financing Bank, the
S t udent Loan Marketing Association, and the National Credit Union
Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the
U.S. Government to purchase certain obligations of the Federal agency,
while other obligations issued by or guaranteed by Federal agencies, such
as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. Government
provides financial support to such U.S. Government-sponsored Federal
agencies, no assurance can be given that the U.S. Government will always do
so, since the U.S. Government is not so obligated by law. U.S. Treasury
notes and bonds typically pay coupon interest semi-annually and repay the
principal at maturity. The Bond Fund will invest in such U.S. Government
Securities only when the Advisor is satisfied that the credit risk with
respect to the issuer is minimal.
Repurchase Agreements
<PAGE> 7<PAGE>
As discussed in the Trust's Prospectus, each of the Funds may enter into
repurchase agreements with financial institutions. The Funds each follow
certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions
o n l y with large, well-capitalized and well-established financial
institutions whose condition will be continually monitored by the Advisor.
In addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, a Fund will seek
to liquidate such collateral. However, the exercising of each Fund's right
to liquidate such collateral could involve certain costs or delays and, to
the extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a
loss. It is the current policy of each of the Funds, other than The Rydex
U.S. Government Money Market Fund (the "Money Market Fund"), not to invest
in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% (10% with respect to the Money Market Fund) of the
Fund's total assets. The investments of each of the Funds in repurchase
agreements, at times, may be substantial when, in the view of the Advisor,
liquidity or other considerations so warrant.
Zero Coupon Bonds
The Bond Fund and the Juno Fund may invest in U.S. Treasury zero-coupon
bonds. These securities are U.S. Treasury bonds which have been stripped
of their unmatured interest coupons, the coupons themselves, and receipts
or certificates representing interests in such stripped debt obligations
and coupons. Interest is not paid in cash during the term of these
securities, but is accrued and paid at maturity. Such obligations have
greater price volatility than coupon obligations and other normal interest-
paying securities, and the value of zero coupon securities reacts more
quickly to changes in interest rates than do coupon bonds. Since dividend
income is accrued throughout the term of the zero coupon obligation, but is
not actually received until maturity, the Fund may have to sell other
securities to pay said accrued dividends prior to maturity of the zero
coupon obligation. Unlike regular U.S. Treasury bonds which pay semi-
annual interest, U.S. Treasury zero coupon bonds do not generate semi-
annual coupon payments. Instead, zero coupon bonds are purchased at a
substantial discount from the maturity value of such securities, the
discount reflecting the current value of the deferred interest; this
discount is amortized as interest income over the life of the security, and
is taxable even though there is no cash return until maturity. Zero coupon
U.S. Treasury issues originally were created by government bond dealers who
bought U.S. Treasury bonds and issued receipts representing an ownership
interest in the interest coupons or in the principal portion of the bonds.
Subsequently, the U.S. Treasury began directly issuing zero coupon bonds
with the introduction of "Separate Trading of Registered Interest and
Principal of Securities" (or "STRIPS"). While zero coupon bonds eliminate
the reinvestment risk of regular coupon issues, that is, the risk of
subsequently investing the periodic interest payments at a lower rate than
that of the security held, zero coupon bonds fluctuate much more sharply
<PAGE> 8<PAGE>
than regular coupon-bearing bonds. Thus, when interest rates rise, the
value of zero coupon bonds will decrease to a greater extent than will the
value of regular bonds having the same interest rate.
Reverse Repurchase Agreements
The Ursa Fund, the Juno Fund, and the Money Market Fund may use reverse
repurchase agreements as part of that Fund's investment strategy. Reverse
repurchase agreements involve sales by a Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at
a later date at a fixed price. Generally, the effect of such a transaction
is that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while the Fund will be able to keep the interest income
associated with those portfolio securities. Such transactions are
advantageous only if the interest cost to the Fund of the reverse
repurchase transaction is less than the cost of obtaining the cash
otherwise. Opportunities to achieve this advantage may not always be
available, and the Funds intend to use the reverse repurchase technique
only when this will be to the Fund's advantage to do so. Each Fund will
establish a segregated account with the Trust's custodian bank in which the
Fund will maintain cash or cash equivalents or other portfolio securities
equal in value to the Fund's obligations in respect of reverse repurchase
agreements.
Borrowing
The Nova Fund and the Bond Fund may borrow money, including borrowing for
investment purposes. Borrowing for investment is known as leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique which increases investment risk, but also increases
investment opportunity. Since substantially all of a Fund s assets will
fluctuate in value, whereas the interest obligations on borrowings may be
fixed, the net asset value per share of the Fund will increase more when
the Fund s portfolio assets increase in value and decrease more when the
Fund s portfolio assets decrease in value than would otherwise be the case.
Moreover, interest costs on borrowings may fluctuate with changing market
rates of interest and may partially offset or exceed the returns on the
borrowed funds. Under adverse conditions, the Nova Fund and the Bond Fund
might have to sell portfolio securities to meet interest or principal
payments at a time investment considerations would not favor such sales.
The Nova Fund and the Bond Fund intend to use leverage during periods when
the Advisor believes that the respective Fund s investment objective would
be furthered.
Each Fund may borrow money to facilitate management of the Fund s portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such
borrowing is not for investment purposes and will be repaid by the
borrowing Fund promptly.
As required by the Investment Company Act of 1940, as amended (the 1940
Act ), a Fund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive
<PAGE> 9<PAGE>
of borrowings) of 300% of all amounts borrowed. If, at any time, the value
of the Fund s assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the
amount of the Fund s borrowings to the extent necessary to meet this 300%
coverage. Maintenance of this percentage limitation may result in the sale
of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money from
a bank as a temporary measure for extraordinary or emergency purposes in
amounts not in excess of 5% of the value of the Fund s total assets. This
borrowing is not subject to the foregoing 300% asset coverage requirement.
The Funds are authorized to pledge portfolio securities as the Advisor
deems appropriate in connection with any borrowings.
Lending of Portfolio Securities
Subject to the investment restrictions set forth below, each of the Funds
m a y lend portfolio securities to brokers, dealers, and financial
institutions, provided that cash equal to at least 100% of the market value
of the securities loaned is deposited by the borrower with the Fund and is
maintained each business day in a segregated account pursuant to applicable
regulations. While such securities are on loan, the borrower will pay the
lending Fund any income accruing thereon, and the Fund may invest the cash
collateral in portfolio securities, thereby earning additional income. A
Fund will not lend its portfolio securities if such loans are not permitted
by the laws or regulations of any state in which the Fund's shares are
qualified for sale, and the Funds will not lend more than 33 % of the value
of the Fund's total assets, except that the Money Market Fund will not lend
more than 10% of the value of the Money Market Fund's total assets. Loans
would be subject to termination by the lending Fund on four business days'
notice, or by the borrower on one day's notice. Borrowed securities must
be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan
inures to the lending Fund and that Fund's shareholders. A lending Fund
may pay reasonable finders, borrowers, administrative, and custodial fees
in connection with a loan.
When-Issued and Delayed-Delivery Securities
Each Fund, from time to time, in the ordinary course of business, may
purchase securities on a when-issued or delayed-delivery basis (i.e.,
delivery and payment can take place between a month and 120 days after the
date of the transaction). These securities are subject to market
fluctuation and no interest accrues to the purchaser during this period.
At the time a Fund makes the commitment to purchase securities on a when-
issued or delayed-delivery basis, the Fund will record the transaction and
thereafter reflect the value of the securities, each day, of such security
in determining the Fund's net asset value. A Fund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more
than 15% (10% with respect to the Money Market Fund) of the Fund s net
assets would be so invested. At the time of delivery of the securities,
the value of the securities may be more or less than the purchase price.
<PAGE> 10<PAGE>
The Fund will also establish a segregated account with the Fund's custodian
bank in which the Fund will maintain cash or liquid securities equal to or
greater in value than the Fund s purchase commitments for such when-issued
or delayed-delivery securities. The Trust does not believe that a Fund's
net asset value or income will be adversely affected by the Fund's purchase
of securities on a when-issued or delayed delivery basis.
Investments in Other Investment Companies
The Funds (other than the Bond Fund and the Money Market Fund) may invest
in the securities of other investment companies to the extent that such an
investment would be consistent with the requirements of Section 12(d)(1) of
the 1940 Act. A Fund, therefore, may invest in the securities of another
investment company (the "acquired company") provided that the Fund,
immediately after such purchase or acquisition, does not own in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the
Fund; or (iii) securities issued by the acquired company and all other
investment companies (other than Treasury stock of the Fund) having an
aggregate value in excess of 10% of the value of the total assets of the
Fund. The Bond Fund and the Money Market Fund may invest in the securities
of other investment companies only as part of a merger, reorganization, or
acquisition, subject to the requirements of the 1940 Act.
If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund s shareholders will indirectly bear the Fund s
proportionate share of the fees and expenses paid by such other investment
company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Fund s own investment adviser and the
other expenses that the Fund bears directly in connection with the Fund s
own operations.
The foregoing strategies, and those discussed in the Trust s Prospectus
under the heading "Investment Objectives and Policies," may subject a Fund
to the effects of interest rate fluctuations to a greater extent than would
occur if such strategies were not used. While these strategies may be used
by a Fund if, in the opinion of the Advisor, these strategies will be
advantageous to the Fund, the Fund will be free to reduce or eliminate its
activity in any of those areas without changing its fundamental investment
policies. Certain provisions of the Internal Revenue Code, related
regulations, and rulings of the Internal Revenue Service may also have the
effect of reducing the extent to which the previously-cited techniques may
be used by a Fund, either individually or in combination. Furthermore,
there is no assurance that any of these strategies or any other strategies
and methods of investment available to a Fund will result in the
achievement of the Fund s objectives.
Illiquid Securities
<PAGE> 11<PAGE>
While none of the Funds anticipates doing so, each Fund may purchase
illiquid securities, including securities that are not readily marketable
and securities that are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which can be
offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act. A Fund will not invest more than 15% (10% with respect to
the Money Market Fund) of the Fund s net assets in illiquid securities.
Each Fund will adhere to a more restrictive limitation on the Fund s
investment in illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered for sale. The
term illiquid securities for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
Under the current guidelines of the staff of the Securities and Exchange
Commission (the Commission ), illiquid securities also are considered to
include, among other securities, purchased over-the-counter options,
certain cover for over-the-counter options, repurchase agreements with
m a turities in excess of seven days, and certain securities whose
disposition is restricted under the Federal securities laws. The Fund may
not be able to sell illiquid securities when the Advisor considers it
desirable to do so or may have to sell such securities at a price that is
lower than the price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses
than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result
of the promulgation of Rule 144A under the 1933 Act, which provides a safe
harbor from 1933 Act registration requirements for qualifying sales to
institutional investors. When Rule 144A restricted securities present an
attractive investment opportunity and other meet selection criteria, a Fund
may make such investments. Whether or not such securities are illiquid
depends on the market that exists for the particular security. The
Commission staff has taken the position that the liquidity of Rule 144A
restricted securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration of the
readily-available trading markets and the review of any contractual
restrictions. The staff also has acknowledged that, while a board of
trustees retains ultimate responsibility, the trustees may delegate this
function to an investment adviser. The trustees of the Trust (the
Trustees ) have delegated this responsibility for determining the
liquidity of Rule 144A restricted securities which may be invested in by a
Fund to the Advisor. It is not possible to predict with assurance exactly
how the market for Rule 144A restricted securities or any other security
will develop. A security which when purchased enjoyed a fair degree of
marketability may subsequently become illiquid and, accordingly, a security
which was deemed to be liquid at the time of acquisition may subsequently
become illiquid. In such event, appropriate remedies will be considered to
minimize the effect on the Fund s liquidity.
<PAGE> 12<PAGE>
Portfolio Turnover
As discussed in the Trust's prospectus, the Trust anticipates that
investors in the Funds, as part of a market-timing or asset allocation
investment strategy, will frequently exchange shares of the Funds for
shares in other Funds pursuant to the exchange policy of the Trust as well
as frequently redeem shares of the Funds (see "Exchanges" in the Trust's
Prospectus). The nature of the Funds has caused the Funds to experience
substantial portfolio turnover. Because each Fund's portfolio turnover
rate to a great extent will depend on the purchase, redemption, and
exchange activity of the Fund's investors, it is very difficult to estimate
what the Fund's actual turnover rate will be in the future. However, the
Trust expects that the portfolio turnover experienced the Funds will
continue to be substantial.
"Portfolio Turnover Rate" is defined under the rules of the Securities and
Exchange Commission as the value of the securities purchased or securities
sold, excluding all securities whose maturities at time of acquisition were
one year or less, divided by the average monthly value of such securities
owned during the year. Based on this definition, instruments with
remaining maturities of less than one year are excluded from the
calculation of portfolio turnover rate. Instruments excluded from the
calculation of portfolio turnover generally would include the futures
contracts and option contracts in which the Funds invest since such
contracts generally have a remaining maturity of less than one year. All
instruments held by a Fund during a specified period may have a remaining
maturity of less than one year in which case the portfolio turnover rate
for that period, under the definition, would be equal to zero. However,
because of the nature of Funds as described above, the actual portfolio
turnover of the Funds has been and it is anticipated that their actual
portfolio turnover in the future will be unusually high.
INVESTMENT RESTRICTIONS
As described in the section of the Trust's Prospectus entitled "Investment
Objectives and Policies," each of the Funds has adopted certain investment
restrictions as fundamental policies which cannot be changed without the
approval of the holders of a "majority" of the outstanding shares of the
Fund, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of
the series present at a meeting of shareholders, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding shares of the series.
(All policies of a Fund not specifically identified in this Statement of
Additional Information or the Trust's Prospectus as fundamental may be
changed without a vote of the shareholders of the Fund.) For purposes of
the following limitations, all percentage limitations apply immediately
after a purchase or initial investment. Any subsequent change in a
particular percentage resulting from fluctuations in value does not require
the elimination of any security from a Fund's portfolio.
<PAGE> 13<PAGE>
The following restrictions are applicable to the Nova Fund, the Ursa Fund,
the OTC Fund, the Metals Fund, the Bond Fund, and the Juno Fund:
A Fund shall not:
1. Lend any security or make any other loan if, as a result, more
than 33 % of the value of the Fund's total assets would be
lent to other parties, except (i) through the purchase of a
portion of an issue of debt securities in accordance with the
Fund's investment objective, policies, and limitations, or
(ii) by engaging in repurchase agreements with respect to
portfolio securities, or (iii) through the loans of portfolio
securities provided the borrower maintains collateral equal to
at least 100% of the value of the borrowed security and
marked-to-market daily.
2. Underwrite securities of any other issuer.
3. Purchase, hold, or deal in real estate or oil and gas
interests, although the Fund may purchase and sell securities
that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell
real estate acquired for the Fund as a result of the ownership
of securities.
4. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act) (including the amount of senior
securities issued but excluding liabilities and indebtedness
not constituting senior securities), except that the Fund may
issue senior securities in connection with transactions in
options, futures, options on futures, and other similar
investments, and except as otherwise permitted herein and in
Investment Restriction Nos. 5, 7, 8, 9, 10, 11, 13, and 14, as
applicable to the Fund.
5. Pledge, mortgage, or hypothecate the Fund's assets, except to
the extent necessary to secure permitted borrowings and to the
extent related to the deposit of assets in escrow in
connection with (i) the writing of covered put and call
options, (ii) the purchase of securities on a forward-
commitment or delayed-delivery basis, and (iii) collateral and
initial or variation margin arrangements with respect to
currency transactions, options, futures contracts, including
those relating to indexes, and options on futures contracts or
indexes.
The following restrictions are applicable to the Nova Fund, the Ursa Fund,
the OTC Fund, the Bond Fund, and the Juno Fund:
A Fund shall not:
<PAGE> 14<PAGE>
6. Invest in commodities except that the Fund may purchase and
s e l l futures contracts, including those relating to
securities, currencies, indexes, and options on futures
contracts or indexes and currencies underlying or related to
any such futures contracts, and purchase and sell currencies
(and options thereon) or securities on a forward-commitment or
delayed-delivery basis.
7. Invest 25% or more of the value of the Fund's total assets in
the securities of one or more issuers conducting their
principal business activities in the same industry. This
limitation does not apply to investments or obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restriction is applicable to the Ursa Fund, the OTC Fund, the
Metals Fund, and the Money Market Fund:
A Fund shall not:
8. B o r row money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in amounts
not in excess of 5% of the value of the Fund's total assets
from a bank or (ii) in an amount up to one-third of the value
of the Fund's total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling
portfolio instruments. This provision is not for investment
leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous.
The following restriction is applicable to the Nova Fund, the OTC Fund, and
the Metals Fund:
A Fund shall not:
9. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The deposit or payment by the Fund of initial or variation
margin in connection with futures or options transactions is
not considered to be a securities purchase on margin. The
Fund may engage in short sales if, at the time of the short
sale, the Fund owns or has the right to acquire an equal
amount of the security being sold at no additional cost
("selling against the box").
The following restriction is applicable to the Nova Fund and the Bond Fund:
A Fund shall not:
<PAGE> 15<PAGE>
10. Borrow money, except the Fund may borrow money (i) from a bank
in an amount not in excess of 33 % of the total value of the
Fund's assets (including the amount borrowed) less the Fund's
liabilities (not including the Fund's borrowings), and (ii)
for temporary purposes in an amount not in excess of 5% of the
total value of the Fund's assets.
The following restriction is applicable to the Ursa Fund and the Juno Fund:
A Fund shall not:
11. Make short sales of portfolio securities or maintain a short
position unless at all times when a short position is open (i)
the Fund maintains a segregated account with the Fund's
custodian to cover the short position in accordance with the
position of the Securities and Exchange Commission or (ii) the
Fund owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short.
The following restrictions are applicable to the Metals Fund:
The Metals Fund shall not:
12. Purchase and sell commodities or commodities contracts, but
this shall not prevent the Metals Fund from: (a) trading in
futures contracts and options on futures contracts; or (b)
investing in precious-metals and precious minerals.
13. Invest 25% or more of the value of the Metals Fund's total
assets in the securities of one or more issuers conducting
their principal business activities in the same industry;
except that the Metals Fund will invest 25% or more of the
value of the Metals Fund's total assets in the securities in
the metals-related and minerals-related industries. This
limitation does not apply to investments or obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restriction is applicable to the Bond Fund:
The Bond Fund shall not:
14. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The deposit or payment by the Bond Fund of initial or
variation margin in connection with futures or options
transactions is not considered to be a securities purchase on
margin.
The following restrictions are applicable to the Money Market Fund:
<PAGE> 16<PAGE>
The Money Market Fund shall not:
15. Make loans to others except through the purchase of qualified
debt obligations, loans of portfolio securities and entry into
repurchase agreements.
16. Lend the Money Market Fund's portfolio securities in excess of
15% of the Money Market Fund's total assets. Any loans of the
M o ney Market Fund's portfolio securities will be made
according to guidelines established by the Board of Trustees
of the Trust, including maintenance of cash collateral of the
borrower equal at all times to the current market value of the
securities loaned.
17. Issue senior securities, except as permitted by the Money
Market Fund's investment objectives and policies.
18. Write or purchase put or call options.
19. Invest in securities of other investment companies, except as
these securities may be acquired as part of a merger,
c o nsolidation, acquisition of assets, or plan of
reorganization.
20. Mortgage, pledge, or hypothecate the Money Market Fund's
assets except to secure permitted borrowings. In those cases,
the Money Market Fund may mortgage, pledge, or hypothecate
assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of
the Money Market Fund at the time of the borrowing.
21. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The following restriction is applicable to the Juno Fund:
The Juno Fund shall not:
22. B o r row money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in amounts
not in excess of 5% of the value of the Fund's total assets
from a bank or (ii) in an amount up to one-third of the value
of the Fund's total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling
portfolio instruments. This provision is not for investment
leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous. The Juno Fund shall not make purchases while
borrowing in excess of 5% of the value of its total assets.
For purposes of this limitation, Fund assets invested in
<PAGE> 17<PAGE>
reverse repurchase agreements are included in the amounts
borrowed.
Furthermore, the Trustees have adopted additional investment restrictions
for each Fund. These restrictions are not fundamental investment policies,
but rather are operating policies of each Fund, as indicated, and may be
changed by the Trustees without Fund shareholder approval. With respect to
each of the Funds, except as otherwise indicated, these additional
investment restrictions adopted by the Trustees, to date, are as follows:
1. The Fund will not invest in warrants.
2. The Fund will not invest in real estate limited partnerships.
3. The Fund will not invest in mineral leases; except that the
Metals Fund may invest in mineral leases although the Metals
Fund does not presently intend to invest in such leases.
In addition, none of the Funds presently intends:
1. To lend the Fund's assets. If, in the future, a Fund does
lend its assets, the Fund will adhere to all limitations on
the Fund's ability to lend its assets as required by the
securities laws of those jurisdictions where shares of the
Fund are registered for sale.
2. To enter into currency transactions; except that the Metals
Fund may enter into currency transactions although the Metals
F u n d does not presently intend to enter into such
transactions.
3. To purchase illiquid securities. If in the future, a Fund
does purchase illiquid securities, the Fund will not invest
more than 15% of its net assets in illiquid securities; except
that the Money Market Fund will not invest more than 10% of
its net assets in illiquid securities. Each Fund will adhere
to a more restrictive limitation on the Fund's investment in
illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered
for sale.
4. T o purchase and sell real property (including limited
partnership interests), to purchase and sell securities that
are secured by real estate or interests therein, to purchase
mortgage-related securities, or to hold and sell real estate
acquired for the Fund as a result of the ownership of
securities.
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in the investment's percentage of the value of
the Fund's total assets resulting from a change in such values or assets
will not constitute a violation of the percentage restriction.
<PAGE> 18<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is
responsible for decisions to buy and sell securities for each of the Funds,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Advisor expects that the
Funds may execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder
The Advisor may serve as an investment manager to a number of clients,
including other investment companies. It is the practice of the Advisor to
cause purchase and sale transactions to be allocated among the Funds and
others whose assets the Advisor manages in such manner as the Advisor deems
equitable. The main factors considered by the Advisor in making such
allocations among the Funds and other client accounts of the Advisor are
the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held, and the
opinions of the person(s) responsible, if any, for managing the portfolios
of the Funds and the other client accounts.
The policy of each Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining
the most favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are effected on a
stock exchange, each Fund's policy is to pay commissions which are
considered fair and reasonable without necessarily determining that the
lowest possible commissions are paid in all circumstances. Each Fund
believes that a requirement always to seek the lowest possible commission
cost could impede effective portfolio management and preclude the Fund and
the Advisor from obtaining a high quality of brokerage and research
services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience
and knowledge regarding commissions generally charged by various brokers
and on its judgment in evaluating the brokerage and research services
received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, as in most cases an exact dollar
value for those services is not ascertainable.
Purchases and sales of U.S. Government securities are normally transacted
t h rough issuers, underwriters or major dealers in U.S. Government
Securities acting as principals. Such transactions are made on a net basis
and do not involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriters; transactions with dealers normally
reflect the spread between bid and asked prices.
In seeking to implement a Fund's policies, the Advisor effects transactions
with those brokers and dealers who the Advisor believes provide the most
favorable prices and are capable of providing efficient executions. If the
<PAGE> 19<PAGE>
Advisor believes such prices and executions are obtainable from more than
one broker or dealer, the Advisor may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Advisor. Such services may
include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. If
the broker-dealer providing these additional services is acting as a
principal for its own account, no commissions would be payable. If the
broker-dealer is not a principal, a higher commission may be justified, at
the determination of the Advisor, for the additional services.
The information and services received by the Advisor from brokers and
dealers may be of benefit to the Advisor in the management of accounts of
some of the Advisor's other clients and may not in all cases benefit a Fund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or
services otherwise performed by the Advisor and thereby reduce the
A d v i s or's expenses, this information and these services are of
indeterminable value and the management fee paid to the Advisor is not
reduced by any amount that may be attributable to the value of such
information and services.
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund commenced operations on July 12,
1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3,
1994, March 3, 1995, and December 3, 1993, respectively. For the period
from inception to June 30, 1994, total brokerage commissions paid by the
Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and
the Money Market Fund amounted to $150,696, $197,412, $23,577, $381,380,
$6,324, and $0, respectively. For the period from July 1, 1994 (or
inception, if later) to June 30, 1995, total brokerage commissions paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund amounted to $268,283, $494,223,
$35,421, $550,858, $2,390, $14,999, and $0, respectively. For the period
from July 1, 1995 to June 30, 1996, total brokerage commissions paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
The Juno Fund, and the Money Market Fund amounted to $293,000, $669,000,
$673,000, $35,000, $11,000, $23,000, and $0, respectively.
MANAGEMENT OF THE TRUST
The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities
of the Trust's officers. The names and addresses (and ages) of the
Trustees and the officers of the Trust and the officers of the Advisor,
together with information as to their principal business occupations during
the past five years, are set forth below. Fees and expenses for non-
interested Trustees will be paid by the Trust.
Trustees
<PAGE> 20<PAGE>
*Albert P. Viragh, Jr. (55)
Chairman of the Board of Trustees and President of the Trust;
Chairman of the Board, President, and Treasurer of PADCO Advisors,
Inc., investment adviser to the Trust, 1993 to present; Chairman of
the Board, President, and Treasurer of PADCO Service Company, Inc.,
shareholder and transfer agent servicer to the Trust, 1993 to
present; Chairman of the Board of Managers of the Rydex Advisor
Variable Annuity Account (the Separate Account ), a separate
account of Great American Reserve Insurance Company, 1996 to
present; Chairman of the Board, President, and Treasurer of PADCO
Advisors II, Inc., investment adviser to the Separate Account, 1996
to present; Chairman of the Board, President, and Treasurer of PADCO
Financial Services, Inc., a registered broker-dealer firm, and the
Rydex Institutional Money Market Fund s principal underwriter, 1996
to present; Vice President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (51)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
J. Kenneth Dalton (55)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Mortgage Banking Consultant and Investor, The Dalton Group,
April 1995 to present; President, CRAM Mortgage Group, Inc. 1966 to
April 1995. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Roger Somers (52)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; President, Arrow Limousine, 1963 to present. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Officers
Timothy P. Hagan (54)
Treasurer and Vice President of the Trust; Vice President of PADCO
Advisors, Inc., investment adviser to the Trust, 1993 to present;
Treasurer and Vice President of the Separate Account, 1996 to
present; Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Employee of PADCO
Service Company, Inc., shareholder and transfer agent servicer to
the Trust, 1993 to present; President and Director of Rushmore
<PAGE> 21<PAGE>
Services, Inc., a registered transfer agent, 1981 to 1993. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Robert M. Steele (38)
Secretary and Vice President of the Trust; Vice President of PADCO
Advisors, Inc., investment adviser to the Trust, 1994 to present;
Secretary and Vice President of the Separate Account, 1996 to
present; Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Vice President of
The Boston Company, Inc., an institutional money management firm,
1987 to 1994. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Michael P. Byrum (26)
Assistant Secretary of the Trust; Employee of PADCO Advisors, Inc.,
1993 to present; portfolio manager of The Ursa Fund (since 1996),
The Rydex Precious Metals Fund (since 1993), The Rydex U.S.
G o v e rnment Money Market Fund (since 1993), and The Rydex
Institutional Money Market Fund (since 1996), each a series of the
Trust; Assistant Secretary of the Separate Account, 1996 to present;
Employee of PADCO Advisors II, Inc., investment adviser to the
S e parate Account; Investment Representative, Money Management
Associates, a registered investment adviser, 1992 to 1993; Student,
Miami University, of Oxford, Ohio (B.A., Business Administration,
1992). Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
__________________________
* This Trustee is deemed to be an "interested person" of the Trust,
within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as
this person is affiliated with the Advisor, as described herein.
Under an investment advisory agreement with the Advisor, dated May 14,
1993, and amended on November 2, 1993, and also amended on December 13,
1994, March 8, 1996, and September 25, 1996, the Advisor serves as the
investment adviser for each series of the Trust and provides investment
advice to the Funds and oversees the day-to-day operations of the Funds,
subject to direction and control by the Trustees and the officers of the
Trust. The Trust currently is composed of nine separate series, the Nova
Fund, the Ursa Fund, the Rydex OTC Fund, the Rydex Precious Metals Fund,
the Rydex U.S. Government Bond Fund, the Juno Fund, the Rydex U.S.
Government Money Market Fund, the Rydex High Yield Fund, and the Rydex
Institutional Money Market Fund; other separate series may be added in the
future. As of October 24, 1996, net Trust assets under management of the
Advisor were approximately $1 billion. Pursuant to the advisory agreement
with the Advisor, the Funds pay the Advisor the following fees at an annual
<PAGE> 22<PAGE>
rate based on the average daily net assets for each respective Fund, as set
forth below:
The Nova Fund 0.75%
The Ursa Fund 0.90%
The Rydex OTC Fund 0.75%
The Rydex Precious Metals Fund 0.75%
The Rydex U.S. Government Bond Fund 0.50%
The Juno Fund 0.90%
The Rydex U.S. Government Money Market Fund 0.50%
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund commenced operations on July 12,
1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3,
1994, March 3, 1995, and December 3, 1993, respectively. For the period
from inception to June 30, 1994, total management fees paid by the Nova
Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the
Money Market Fund to the Advisor amounted to $158,834, $193,185, $14,901,
$16,816, $4,888, and $163,459, respectively. For the period from July 1,
1994 (or inception, if later) to June 30, 1995, total management fees paid
by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond
Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to
$411,286, $1,587,040, $361,659, $221,309, $7,704, $29,837, and $727,027,
respectively. For the period from July 1, 1995 to June 30, 1996, total
management fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the
Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $1,022,794, $1,607,706, $541,443, $406,902, $97,820,
$174,866, and $891,864, respectively.
The Advisor reimbursed the Bond Fund $0, $5,831, and $0 for the fiscal
years ended June 30, 1994, 1995, and 1996, respectively.
The Advisor manages the investment and the reinvestment of the assets of
each of the Funds, in accordance with the investment objectives, policies,
and limitations of the Fund, subject to the general supervision and control
of the Trustees and the officers of the Trust. The Advisor bears all costs
associated with providing these advisory services and the expenses of the
Trustees of the Trust who are affiliated with or interested persons of the
Advisor. The Advisor, from its own resources, including profits from
advisory fees received from the Funds, provided such fees are legitimate
and not excessive, may make payments to broker-dealers and other financial
institutions for their expenses in connection with the distribution of Fund
shares, and otherwise currently pay all distribution costs for Fund shares.
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Funds by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995, and amended on March 8, 1996 and also amended on September 25, 1996.
<PAGE> 23<PAGE>
The Servicer is wholly-owned by Albert P. Viragh, Jr., who is the Chairman
of the Board and the President of the Trust and the sole controlling person
and majority owner of the Advisor.
Under this service agreement, the Funds pay the Servicer the following fees
at an annual rate based on the average daily net assets for each respective
Fund, as set forth below:
The Nova Fund 0.25%
The Ursa Fund 0.25%
The Rydex OTC Fund 0.20%
The Rydex Precious Metals Fund 0.20%
The Rydex U.S. Government Bond Fund 0.20%
The Juno Fund 0.25%
The Rydex U.S. Government Money Market Fund 0.20%
For the period from inception to June 30, 1994, total service fees paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
and the Money Market Fund to the Advisor amounted to $37,545, $53,647,
$3,973, $4,641, $1,955, and $65,383, respectively. For the period from
July 1, 1994 (or inception, if later) to June 30, 1995, total service fees
paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the
Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted
to $137,082, $440,721, $96,637, $59,001, $3,333, $8,232, and $290,811,
respectively. For the period from July 1, 1995 to June 30, 1996, total
service fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $327,476, $451,107, $123,358, $114,476, $37,793,
$47,333, and $403,167, respectively.
Under the service agreement, the Servicer provides the Trust and each Fund
with all required general administrative services, including, without
limitation, office space, equipment, and personnel; clerical and general
back office services; bookkeeping, internal accounting, and secretarial
services; the determination of net asset values; and the preparation and
filing of all reports, registration statements, proxy statements, and all
other materials required to be filed or furnished by the Trust and each
Fund under Federal and state securities laws. The Servicer also maintains
the shareholder account records for each Fund, distributes dividends and
distributions payable by each Fund, and produces statements with respect to
account activity for each Fund and each Fund's shareholders. The Servicer
pays all fees and expenses that are directly related to the services
provided by the Servicer to each Fund; each Fund reimburses the Servicer
for all fees and expenses incurred by the Servicer which are not directly
related to the services the Servicer provides to the Fund under the service
agreement.
Each Fund bears all expenses of its operations other than those assumed by
the Advisor or the Servicer. Fund expenses include: the management fee;
t h e servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; securities valuation expenses; fidelity bonds and
<PAGE> 24<PAGE>
other insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; non-interested
Trustees' fees and expenses; the costs and expenses of redeeming shares of
the Fund; fees and expenses paid to any securities pricing organization;
d u e s and expenses associated with membership in any mutual fund
organization; and costs for incoming telephone WATTS lines. In addition,
each of the Funds pays an equal portion of the Trustee fees and expenses
for attendance at Trustee meetings for the Trustees of the Trust who are
not affiliated with or interested persons of the Advisor.
For the period from inception to June 30, 1994, the total expenses of Fund
operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, and the Money Market Fund to the Advisor amounted to
$376,156, $367,676, $44,250, $45,787, $30,901, and $384,373, respectively.
For the period from July 1, 1994 (or inception, if later) to June 30, 1995,
the total expenses of Fund operations borne by the Nova Fund, the Ursa
Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the
Money Market Fund to the Advisor amounted to $785,175, $2,441,508,
$680,241, $405,626, $40,599, $51,932, and $1,290,628, respectively. For
the period from July 1, 1995 to June 30, 1996, the total expenses of Fund
operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $1,747,874, $2,469,816, $916,004, $704,167, $236,172,
$320,232, and $1,758,657, respectively.
<PAGE> 25<PAGE>
The aggregate compensation paid by the Trust to each of its trustees
serving during the fiscal year ended June 30, 1996, is set forth in the
table below:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Compensation Benefits Accrued Estimated Annual
Name of Person, from the as Part of the Benefit upon
Position Trust** Trust s Expenses Retirement
----------- ---------- ------------- ----------
<S> <C> <C> <C>
Albert P. Viragh, $0 $0 $0
Jr.*
Chairman and
President
Corey A. Colehour $7,500 $0 $0
Trustee
J. Kenneth Dalton $4,500 $0 $0
Trustee
Roger Somers $7,500 $0 $0
Trustee
* Denotes an interested person of the Trust.
** Mr. David R. Petersen, who resigned as a Trustee,
effective October 13, 1995, was paid $2,000 in aggregate
compensation by the Trust during the fiscal year ended
June 30, 1996.
</TABLE>
<PAGE> 26<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of October 17, 1996, the following persons were the only
persons who were record owners or, to the knowledge of the
Trust, beneficial owners of 5% or more of the shares of the
Funds.
<TABLE>
<CAPION>
Fund Name and Address Number of Shares % ownership
------ ----------------- ---------------- ------------
<S> <C> <C> <C>
Nova National Financial 4,638,399.963 26.6%1/
Fund Services Corp.
P.O. Box 3908
New York, NY 10008
Schwab & Company 2,846,108.327 16.3%1/
101 Montgomery
Street
San Francisco, CA
94104
First Trust Corp. 1,085,284.837 6.2%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Portfolio Advisory 1,085,284.837 6.2% 2/
Services
725 South Figueroa
Suite 2328
Los Angeles, CA
90017
Donaldson Lufkin 1,077,196.868 6.2%1/
Jenrette
P.O. Box 2052
Jersey City, NJ
07303
First Trust Corp. 886,137.511 5.1%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Keystone Capital 886,137.511 5.1%2/
Management
<PAGE> 27<PAGE>
</TABLE>
<TABLE>
<CAPION>
Fund Name and Address Number of Shares % ownership
------ ----------------- ---------------- ------------
<S> <C> <C> <C>
The Hatten
Building
Suite 313
Gulfport, MS 39502
Ursa Schwab & Company 7,394,264.720 17.1%1/
Fund 101 Montgomery
Street
San Francisco, CA
94104
National Financial 4,025,622.414 9.3%1/
Services Corp.
P.O. Box 3908
New York, NY 10008
Donaldson Lufkin 3,290,932.667 7.6%1/
Jenrette
P.O. Box 2052
Jersey City, NJ
07303
Schwab & Company 2,681,825.883 6.2%1/
101 Montgomery
Street
San Francisco, CA
94104
OTC Fund First Trust Corp. 1,742,714.527 25.3%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Keystone Capital 1,742,714.527 25.3%2/
Management
The Hatten
Building
Suite 313
Gulfport, MS 39502
Donaldson Lufkin 650,141.713 9.4%1/
Jenrette
P.O. Box 2052
Jersey City, NJ
07303
<PAGE> 28<PAGE>
</TABLE>
<TABLE>
<CAPION>
Fund Name and Address Number of Shares % ownership
------ ----------------- ---------------- ------------
<S> <C> <C> <C>
Stocktontrust 575,744.824 8.4%1/
Nominee Partnership
c/o Stockton Trust,
Inc.
3001 East Camelback
Phoenix, AZ 85016
First Trust Corp. 502,513.450 7.3%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Potomac Fund 502,513.450 7.3%2/
Management
19522 Clubhouse
Road
Gaithersburg, MD
20879
First Trust Corp. 483,725.149 7.0%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Trendline Research 483,725.149 7.0%2/
& Mgmt.
1100 Boulders
Parkway
Suite 702
Richmond, VA 23225
Precious First Trust Corp. 544,187.863 16.1%1/
Metals P.O. Box 173736
Fund Denver, CO 80217
Record Owner for:
Clark Capital 544,187.863 16.1%2/
1735 Market Street
Philadelphia, PA
19103
<PAGE> 29<PAGE>
</TABLE>
<TABLE>
<CAPION>
Fund Name and Address Number of Shares % ownership
------ ----------------- ---------------- ------------
<S> <C> <C> <C>
Donaldson Lufkin 226,588.181 6.7%1/
Jenrette
P.O. Box 2052
Jersey City, NJ
07303
U.S. Independent Trust 265,817.521 21.3%1/
Govern- Corporation
ment 15255 S. 94th Avenue
Bond Suite 303
Fund Orland Park, IL
60462-3897
Record Owner for:
Brookstreet 265,817.521 21.3%2/
Securities
2361 Campus Drive
Suite 210
Irvine, CA 92715
National Financial 214,773.435 17.2%1/
Services Corp.
P.O. Box 3908
New York, NY 10008
Independent Trust 129,575.912 10.4%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL
60462-3897
Record Owner for:
Brookstreet 129,575.912 10.4%2/
Securities
2361 Campus Drive
Suite 210
Irvine, CA 92715
<PAGE> 30<PAGE>
</TABLE>
<TABLE>
<CAPION>
Fund Name and Address Number of Shares % ownership
------ ----------------- ---------------- ------------
<S> <C> <C> <C>
Independent Trust 92,026.093 7.4%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL
60462-3897
Record Owner for:
Trendstat Capital 92,026.093 7.4%2/
Management, Inc.
6991 East
Camelback
Suite D210
Scottsdale, AZ
85251
Juno National Financial 168,993.240 11.7%1/
Fund Services Corp.
P.O. Box 3908
New York, NY 10008
Donaldson Lufkin 135,642.359 9.4%1/
Jenrette
P.O. Box 2052
Jersey City, NJ
07303
1/ Record owner only.
2/ Beneficial owner only.
</TABLE>
As of the date of this Statement of Additional Information,
the Trustees and the officers of the Trust, as a group, owned,
of record and beneficially, less than 1.0% of the outstanding
shares of each Fund.
<PAGE> 31<PAGE>
DETERMINATION OF NET ASSET VALUE
The Money Market Fund will utilize the amortized cost method in valuing its
portfolio securities for purposes of determining the net asset value of the
shares of the Money Market Fund. The Money Market Fund will utilize the
amortized cost method in valuing its portfolio securities even though the
portfolio securities may increase or decrease in market value, generally,
in connection with changes in interest rates. The amortized cost method of
valuation involves valuing a security at its cost adjusted by a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, this method may result
in periods during which value, as determined by amortized cost, is higher
or lower than the price the Money Market Fund would receive if this Fund
sold the instrument. During such periods, the yield to investors in the
Money Market Fund may differ somewhat from that obtained in a similar
company which uses mark-to-market values for all its portfolio securities.
For example, if the use of amortized cost resulted in a lower (higher)
aggregate portfolio value on a particular day, a prospective investor in
the Money Market Fund would be able to obtain a somewhat higher (lower)
yield than would result from investment in such a similar company and
existing investors would receive less (more) investment income. The
purpose of this method of calculation is to facilitate the maintenance of a
constant net asset value per share of $1.00.
The Money Market Fund's use of the amortized cost method to value its
portfolio securities and the maintenance of the per share net asset value
of $1.00 is permitted pursuant to Rule 2a-7 under the 1940 Act (the
"Rule"), and is conditioned on the Money Market Fund's compliance with
various conditions including: (a) the Board is obligated, as a particular
responsibility within the overall duty of care owed to the Money Market
Fund's shareholders, to establish written procedures reasonably designed,
taking into account current market conditions and the Money Market Fund's
investment objectives, to stabilize the net asset value per share as
computed for the purpose of distribution and redemption at $1.00 per share;
(b) the procedures should provide for (i) the calculation, at such
intervals as the Trustees determine are appropriate and as are reasonable
in light of current market conditions, of the deviation, if any, between
net asset value per share using amortized cost to value portfolio
securities and net asset value per share based upon available market
quotations with respect to such portfolio securities; (ii) the periodic
review by the Trustees of the amount of deviation as well as methods used
to calculate the amount of deviation; and (iii) the maintenance of written
records of the procedures, the Trustees considerations made pursuant to
the procedures and any actions taken upon such considerations; (c) the
Trustees should consider what steps should be taken, if any, in the event
of a difference of more than 1/2 of 1% between the two methods of
valuation; and (d) the Trustees should take such action as the Trustees
deem appropriate (such as shortening the average portfolio maturity,
realizing gains or losses, or, as provided by the Trust's Declaration of
Trust, reducing the number of the outstanding shares of the Money Market
Fund) to eliminate or reduce to the extent reasonably practicable material
dilution or other unfair results to investors or existing shareholders.
<PAGE> 32<PAGE>
Any reduction of the outstanding shares of the Money Market Fund will be
effected by having each shareholder proportionately contribute to the Money
Market Fund's capital the shares necessary to eliminate or reduce the
material dilution or other unfair results to investors or existing
shareholders. Each Money Market Fund shareholder will be deemed to have
agreed to such contribution in these circumstances by investment in the
Money Market Fund.
The Rule further requires that the Money Market Fund limit its investments
to U.S. dollar-denominated instruments which the Trustees determine present
minimal credit risks and which are Eligible Securities (as defined below).
The Rule also requires the Money Market Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the Money
Market Fund's objective of maintaining a stable net asset value of $1.00
per share and precludes the purchase of any instrument with a remaining
maturity of more than thirteen months. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity
of more than 90 days, the Money Market Fund would be required to invest its
available cash in such a manner as to reduce such maturity to 90 days or
less as soon as reasonably practicable.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Money
Market Fund's interest in the instrument is subject to market action) until
the date noted on the face of the instrument as the date on which the
principal amount must be paid, or, in the case of an instrument called for
redemption, the date on which the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand. A floating rate
instrument that is subject to a demand feature is deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b) either (i) is
rated in the two highest short-term rating categories by any two
nationally-recognized statistical rating organizations ("NSROs") that have
issued a short-term rating with respect to the security or class of debt
obligations of the issuer, or (ii) if only one NSRO has issued a short-term
rating with respect to the security, then by that NSRO; (c) was a long-term
security at the time of issuance whose issuer has outstanding a short-term
debt obligation which is comparable in priority and security and has a
rating as specified in clause (b) above; or (d) if no rating is assigned by
any NSRO as provided in clauses (b) and (c) above, the unrated security is
determined by the Trustees to be of comparable quality to any such rated
security.
As permitted by the Rule, the Trustees have delegated to the Advisor,
subject to the Trustees' oversight pursuant to guidelines and procedures
adopted by the Trustees, the authority to determine which securities
<PAGE> 33<PAGE>
present minimal credit risks and which unrated securities are comparable in
quality to rated securities.
If the Trustees determine that it is no longer in the best interests of the
Money Market Fund and its shareholders to maintain a stable price of $1.00
per share, or if the Trustees believe that maintaining such price no longer
reflects a market-based net asset value per share, the Trustees have the
right to change from an amortized cost basis of valuation to valuation
based on market quotations. The Money Market Fund will notify shareholders
of any such change.
The Money Market Fund will manage its portfolio in an effort to maintain a
constant $1.00 per share price, but the Money Market Fund cannot assure
that the value of the shares of the Money Market Fund will never deviate
from this price. Since dividends from net investment income (and net
short-term capital gains, if any) are declared and accrued on a daily
basis, the net asset value per share, under ordinary circumstances, is
likely to remain constant. Otherwise, realized and unrealized gains and
losses will not be distributed on a daily basis but will be reflected in
the Money Market Fund's net asset value. The amounts of such gains and
losses will be considered by the Trustees in determining the action to be
taken to maintain the Money Market Fund's $1.00 per share net asset value.
Such action may include distribution at any time of part or all of the
then-accumulated undistributed net realized capital gains, or reduction or
elimination of daily dividends by an amount equal to part or all of the
then-accumulated net realized capital losses. However, if realized losses
should exceed the sum of net investment income plus realized gains on any
day, the net asset value per share on that day might decline below $1.00
per share. In such circumstances, the Money Market Fund may reduce or
eliminate the payment of daily dividends for a period of time in an effort
to restore the Money Market Fund's $1.00 per share net asset value. A
decline in prices of securities could result in significant unrealized
depreciation on a mark-to-market basis. Under these circumstances the
Money Market Fund may reduce or eliminate the payment of dividends, and
utilize a net asset value per share as determined by using available market
quotations, or reduce the number of Money Market Fund shares outstanding.
PERFORMANCE INFORMATION
From time to time, each of the Funds (other than the Money Market Fund) may
i n c lude the Fund's total return in advertisements or reports to
shareholders or prospective shareholders. Quotations of average annual
total return for a Fund will be expressed in terms of the average annual
compounded rate of return on a hypothetical investment in the Fund over a
period of at least one, five, and ten years (up to the life of the Fund)
(the ending date of the period will be stated). Total return of a Fund is
calculated from two factors: the amount of dividends earned by each Fund
share and by the increase or decrease in value of the Fund's share price.
See "Calculation of Return Quotations."
Performance information for each of the Funds contained in reports to
s h areholders or prospective shareholders, advertisements, and other
promotional literature may be compared to the record of various unmanaged
indexes. Performance information for the Nova Fund, the Ursa Fund, and the
<PAGE> 34<PAGE>
Metals Fund may be compared to various unmanaged indexes, including, but
not limited to, the S&P500 Index or the Dow Jones Industrial Average.
Performance information for the Metals Fund also may be compared to its
current benchmark, the XAU Index. Performance information for the OTC Fund
may be compared to various unmanaged indexes, including, but not limited
to, its current benchmark, the NASDAQ 100 IndexTM, and the NASDAQ Composite
IndexTM. The NASDAQ Composite IndexTM comparison may be provided to show
how the OTC Fund's total return compares to the record of a broad average
of over-the-counter stock prices over the same period. The OTC Fund has
the ability to invest in securities not included in the NASDAQ 100 IndexTM
or the NASDAQ Composite IndexTM, and the OTC Fund's investment portfolio
may or may not be similar in composition to NASDAQ 100 IndexTM or the
NASDAQ Composite IndexTM. The NASDAQ Composite IndexTM is based on the
prices of an unmanaged group of stocks and, unlike the OTC Fund's returns,
the returns of the NASDAQ Composite IndexTM, and such other unmanaged
indexes, may assume the reinvestment of dividends, but generally do not
reflect payments of brokerage commissions or deductions for operating costs
and other expenses of investing. Performance information for the Bond Fund
and the Juno Fund may be compared to various unmanaged indexes, including,
but not limited to, the Shearson Lehman Government (LT) Index.
Such unmanaged indexes may assume the reinvestment of dividends, but
generally do not reflect deductions for operating costs and expenses. In
addition, a Fund's total return may be compared to the performance of broad
groups of comparable mutual funds with similar investment goals, as such
performance is tracked and published by such independent organizations as
L i p p e r Analytical Services, Inc. ("Lipper"), and CDA Investment
Technologies, Inc., among others. When Lipper's tracking results are used,
the Fund will be compared to Lipper's appropriate fund category, that is,
by fund objective and portfolio holdings. Accordingly, the Lipper ranking
and comparison, which may be used by the Trust in performance reports, will
be drawn from the "Capital Appreciation Funds" grouping for each of the
Nova Fund and the Ursa Fund, from the "Small Company Growth Funds" grouping
for the OTC Fund, from the "Precious Metals Funds" grouping for the Metals
Fund, and from the "Bond Funds" grouping for the Bond Fund and the Juno
Fund. Rankings may be listed among one or more of the asset-size classes
as determined by Lipper. Since the assets in all mutual funds are always
changing, a Fund may be ranked within one Lipper asset-size class at one
time and in another Lipper asset-size class at some other time. Footnotes
in advertisements and other marketing literature will include the time
period and Lipper asset-size class, as applicable, for the ranking in
question. Performance figures are based on historical results and are not
intended to indicate future performance.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of a Fund (other than
the Money Market Fund) to that of other mutual funds and to other relevant
market indexes in advertisements or in reports to shareholders, performance
for the Fund may be stated in terms of total return. Under the rules of
the Securities and Exchange Commission ("SEC Rules"), Funds advertising
performance must include total return quotes calculated according to the
following formula:
<PAGE> 35<PAGE>
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year periods at the end of the 1, 5, or 10 year
periods (or fractional portion thereof).
<PAGE> 36<PAGE>
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover 1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Trust. In calculating
the ending redeemable value, all dividends and distributions by a Fund are
assumed to have been reinvested at net asset value as described in the
Trust's Prospectus on the reinvestment dates during the period. Total
return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested
to the ending redeemable value.
From time to time, each Fund, other than the Money Market Fund, also may
include in such advertising a total return figure that is not calculated
according to the formula set forth above in order to compare more
accurately the performance of the Fund with other measures of investment
return. For example, in comparing the total return of a Fund with data
published by Lipper Analytical Services, Inc., or with the performance of
the S&P500 Index or the Dow Jones Industrial Average for each of the Nova
Fund and the Ursa Fund, the NASDAQ 100 IndexTM for the OTC Fund, the XAU
Index for the Metals Fund, and the Lehman Government (LT) Index for the
Bond Fund and the Juno Fund, each respective Fund calculates its aggregate
total return for the specified periods of time by assuming the investment
of $10,000 in Fund shares and assuming the reinvestment of each dividend or
other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment
from the ending value and by dividing the remainder by the beginning value.
Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under SEC
Rules.
For the one year period ended June 30, 1996, and for the period from
inception of the Funds (see "Portfolio Transactions and Brokerage") to June
30, 1996, the average annual compounded rate of return of the respective
Funds (other than the Money Market Fund), assuming the reinvestment of all
dividends and distributions, was as follows:
One From
The Nova Fund Year Inception
The Ursa Fund 32.77% 71.89%
The Rydex OTC Fund -14.11% -22.21%
The Rydex Precious Metals Fund 26.44% 65.03%
The Rydex U.S. Government Bond Fund 3.67% -8.72%
The Juno Fund -1.48% -1.75%
4.30% -5.30%
INFORMATION ON COMPUTATION OF YIELD
The Bond Fund. In addition to the total return quotations discussed
above, the Bond Fund also may advertise the Bond Fund's yield based on a
thirty-day (or one month) period ended on the date of the most recent
balance sheet included in the Trust's Registration Statement, computed by
dividing the net investment income per share of the Bond Fund earned during
<PAGE> 37<PAGE>
the period by the maximum offering price per Bond Fund share on the last
day of the period, according to the following formula:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period;
b =expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = the maximum offering price per share on the last day
of the period.
<PAGE> 38<PAGE>
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (i) computing the yield to maturity of each
obligation held by the Bond Fund based on the market value of the
obligation (including actual accrued interest) at the close of business on
the last day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), (ii)
dividing that figure by 360 and multiplying the quotient by the market
value of the obligation (including actual accrued interest as referred to
above) to determine the interest income on the obligation that is in the
Bond Fund's portfolio (assuming a month of thirty days), and (iii)
computing the total of the interest earned on all debt obligations and all
dividends accrued on all equity securities during the thirty-day or one
month period. In computing dividends accrued, dividend income is
recognized by accruing 1/360 of the stated dividend rate of a security each
day that the security is in the Bond Fund's portfolio. Undeclared earned
i n c ome, computed in accordance with generally accepted accounting
principles, may be subtracted from the maximum offering price calculation
required pursuant to "d" above.
The Bond Fund from time to time may also advertise its yield based on a
thirty-day period ending on a date other than the most recent balance sheet
included in the Trust's Registration Statement, computed in accordance with
the yield formula described above, as adjusted to conform with the
differing period for which the yield computation is based.
Any quotation of performance stated in terms of yield (whether based on a
thirty-day or one month period) will be given no greater prominence than
t h e i nformation prescribed under SEC Rules. In addition, all
advertisements containing performance data of any kind will include a
legend disclosing that such performance data represents past performance
and that the investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost of such shares.
The Bond Fund's yield as of September 30, 1996, based on a thirty-day base
period, was approximately 5.51%.
The Money Market Fund. The Money Market Fund's annualized current yield,
a s may be quoted from time to time in advertisements and other
communications to shareholders and potential investors, is computed by
determining, for a stated seven-day period, the net change, exclusive of
capital changes and including the value of additional shares purchased with
dividends and any dividends declared therefrom (which reflect deductions of
all expenses of the Money Market Fund such as management fees), in the
value of a hypothetical pre-existing account having a balance of one share
at the beginning of the period, and dividing the difference by the value of
the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The Money Market Fund's annualized effective yield, as may be quoted from
time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining (for the same stated seven-
<PAGE> 39<PAGE>
day period as the current yield) the net change, exclusive of capital
changes and including the value of additional shares purchased with
dividends and any dividends declared therefrom (which reflect deductions of
all expenses of the Money Market Fund such as management fees), in the
value of a hypothetical pre-existing account having a balance of one share
at the beginning of the period, and dividing the difference by the value of
the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result.
The Money Market Fund's annualized effective yield and annualized current
yield, for the seven-day period ended September 30, 1996, were 4.45% and
4.36%, respectively.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Money Market Fund in the
future since the yield is not fixed. Actual yields will depend not only on
the type, quality, and maturities of the investments held by the Money
Market Fund and changes in interest rates on such investments, but also on
changes in the Money Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Fund and for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments which
typically pay a fixed yield for a stated period of time, the Money Market
Fund's yield fluctuates.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends and Distributions. Dividends from net investment income and any
distributions of net realized capital gains from each of the Funds will be
distributed as described in the Trust's Prospectus under "Dividends and
Distributions." All such distributions of a Fund normally automatically
will be reinvested without charge in additional shares of the same Fund.
As discussed in the Trust's Prospectus, the Money Market Fund intends to
declare dividends daily from net investment income (and net short-term
capital gains, if any) and distribute such dividends monthly. Net income,
for dividend purposes, includes accrued interest and accretion of original
issue and market discount, plus or minus any short-term gains or losses
realized on sales of portfolio securities, less the amortization of market
premium and the estimated expenses of the Money Market Fund. Net income
will be calculated immediately prior to the determination of net asset
value per share of the Money Market Fund.
The Trustees may revise the dividend policy, or postpone the payment of
dividends, if the Money Market Fund should have or anticipate any large
unexpected expense, loss, or fluctuation in net assets which, in the
opinion of the Trustees, might have a significant adverse effect on
shareholders of the Money Market Fund. On occasion, in order to maintain a
constant $1.00 per share net asset value for the Money Market Fund, the
<PAGE> 40<PAGE>
Trustees may direct that the number of outstanding shares of the Money
Market Fund be reduced in each shareholder's account. Such reduction may
result in taxable income to a shareholder of the Money Market Fund in
excess of the net increase (i.e., dividends, less such reduction), if any,
in the shareholder's account for a period of time. Furthermore, such
reduction may be realized as a capital loss when the shares are liquidated.
With respect to the investment by the Bond Fund in U.S. Treasury zero
coupon bonds, a portion of the difference between the issue price of zero
coupon securities and the face value of such securities (the "original
issue discount") is considered to be income to the Bond Fund each year,
even though the Bond Fund will not receive cash interest payments from
these securities. This original issue discount (imputed income) will
comprise a part of the investment company taxable income of the Bond Fund
which must be distributed to shareholders of the Bond Fund in order to
maintain the qualification of the Bond Fund as a regulated investment
company (a "RIC") under Subchapter M of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), as described immediately below under
"Regulated Investment Company Status," and to avoid Federal income tax at
the level of the Bond Fund. Shareholders of the Bond Fund will be subject
to income tax on such original issue discount, whether or not such
shareholders elect to receive their distributions in cash.
Regulated Investment Company Status. As a RIC, a Fund would not be subject
to Federal income taxes on the net investment income and capital gains that
the Fund distributes to the Fund's shareholders. The distribution of net
investment income and capital gains will be taxable to Fund shareholders
regardless of whether the shareholder elects to receive these distributions
in cash or in additional shares. Distributions reported to Fund
shareholders as long-term capital gains shall be taxable as such,
regardless of how long the shareholder has owned the shares. Fund
shareholders will be notified annually by the Fund as to the Federal tax
status of all distributions made by the Fund. Distributions may be subject
to state and local taxes.
Shareholders of the Money Market Fund will be subject to Federal income tax
on dividends paid from interest income derived from taxable securities and
on distributions of realized net short-term capital gains. Interest and
realized net short-term capital gains distributions are taxable to a
shareholder of the Money Market Fund as ordinary dividend income regardless
of whether the shareholder receives such distributions in additional shares
of the Money Market Fund or in cash. Since the Money Market Fund's income
is expected to be derived entirely from interest rather than dividends,
none of such distributions will be eligible for the Federal dividends
received deduction available to corporations.
Each of the Funds will seek to qualify for treatment as a RIC under the
Code. Provided that a Fund (i) is a RIC and (ii) distributes at least 90%
of the Fund's net investment income (including, for this purpose, net
realized short-term capital gains), the Fund itself will not be subject to
Federal income taxes to the extent the Fund's net investment income and the
Fund's net realized long- and short-term capital gains, if any, are
<PAGE> 41<PAGE>
distributed to the Fund's shareholders. To avoid an excise tax on its
undistributed income, each Fund generally must distribute at least 98% of
its income, including its net long-term capital gains. One of several
requirements for RIC qualification is that the Fund must receive at least
90% of the Fund's gross income each year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition
of securities or foreign currencies, or other income derived with respect
to the Fund's investments in stock, securities, and foreign currencies (the
"90% Test"). Income from investments in precious metals and in precious
minerals will not qualify as gross income from "securities" for purposes of
the 90% Test. The Metals Fund, therefore, intends to restrict its
investment in precious metals and in precious minerals to avoid a violation
of the 90% Test.
In addition, under the Code, a Fund will not qualify as a RIC for any
taxable year if more than 30% of the Fund's gross income for that year is
derived from gains on the sale of securities held less than three months
(the "30% Test"). These requirements may also restrict the extent of a
Fund's activities in option and other portfolio transactions.
Specifically, the 30% Test will limit the extent to which a Fund may: (i)
sell securities held for less than three months; (ii) write options which
expire in less than three months; and (iii) effect closing transactions
with respect to call or put options that have been written or purchased
within the preceding three months. Finally, as discussed below, this 30%
Test requirement also may limit investments by a Fund in futures contracts
and options on stock indexes, securities, and futures contracts.
Each of the Funds, other than the Money Market Fund, expects to have
greater difficulty than other mutual funds in satisfying the 30% Test
because of frequent redemptions and exchanges of shares that are expected
to occur as investors in the Fund seek to take advantage of anticipated
changes in market conditions as a part of their market-timing investment
strategies. To minimize the risk that it will not satisfy the 30% Test
because of such frequent redemptions and exchanges of shares, each Fund
will seek to meet that Fund's obligations in connection with redemptions
and exchanges without the realization of gains on the sales of stock or
securities, options, futures or forward contracts, options on futures
contracts, or foreign currencies (or options, futures contracts, or forward
contracts on such foreign currencies). In this regard, the Fund will seek
(consistent with the Fund's investment strategies) to use available cash,
proceeds of borrowing facilities, proceeds of the sale of stock or
securities, options, futures or forward contracts, options on futures
contracts, or foreign currencies (or options, futures contracts, or forward
contracts on such foreign currencies) that have been held for three months
or more, and the proceeds of the sale of such assets that produce either no
gain or the smallest amount of such gain.
Section 851(h)(3) of the Code provides a special rule for series mutual
funds with respect to the 30% Test. Pursuant to Section 851(h)(3), a RIC
that is part of a series fund will not fail the 30% Test as a result of
sales made within five days of "abnormal redemptions" if: (i) the sum of
the percentages for abnormal redemptions exceeds 30%; and (ii) the RIC of
<PAGE> 42<PAGE>
which such fund is a part would meet the 30% Test if all the funds of the
investment company were treated as a single corporation. Abnormal
redemptions are defined as redemptions which occur on any day when net
redemptions exceed one percent of net asset value. If abnormal redemptions
require a Fund to sell securities with a holding period of less than three
months, the Fund intends to make those sales within five days of such
redemptions so as to qualify for the exclusion afforded by Section
851(h)(3) of the Code if it is possible to do so. Despite each Fund's
objective to satisfy the requirements of Section 851 of the Code, there can
be no assurance that a Fund's efforts to achieve that objective will be
successful.
If a Fund does not satisfy the 30% Test for the Fund's first taxable year,
or for any subsequent taxable year, the Fund will not qualify as a RIC for
that year. If a Fund fails to qualify as a RIC for any taxable year, the
Fund would be taxed in the same manner as an ordinary corporation. In that
event, the Fund would not be entitled to deduct the distributions which the
Fund had paid to shareholders and, thus, would incur a corporate income tax
liability on all of the Fund's taxable income whether or not distributed.
The imposition of corporate income taxes on the Fund would directly reduce
the return to an investor from an investment in the Fund.
In the event of a failure by a Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends
that would be taxable to the shareholders of the Fund as ordinary income
and would be eligible for the dividends received deduction for corporate
shareholders. This treatment would also apply to any portion of the
distributions that might have been treated in the shareholder's hands as
long-term capital gains, as discussed below, had the Fund qualified as a
RIC.
If a Fund were to fail to qualify as a RIC for one or more taxable years,
the Fund could then qualify (or requalify) as a RIC for a subsequent
taxable year only if the Fund had distributed to the Fund's shareholders a
taxable dividend equal to the full amount of any earnings or profits (less
the interest charge mentioned below, if applicable) attributable to such
period. The Fund might also be required to pay to the U.S. Internal
Revenue Service (the "IRS") interest on 50% of such accumulated earnings
and profits. In addition, pursuant to the Code and an interpretative
notice issued by the IRS, if the Fund should fail to qualify as a RIC and
should thereafter seek to requalify as a RIC, the Fund may be subject to
tax on the excess (if any) of the fair market of the Fund's assets over the
Fund's basis in such assets, as of the day immediately before the first
taxable year for which the Fund seeks to requalify as a RIC.
If a Fund determines that the Fund will not qualify as a RIC under
Subchapter M of the Code, the Fund will establish procedures to reflect the
anticipated tax liability in the Fund's net asset value.
When a Fund, other than the Money Market Fund, is required to sell
securities to meet significant redemptions or exchanges, the Fund may enter
<PAGE> 43<PAGE>
into futures contracts as a hedge against price changes in the securities
to be sold. Gains realized by the Fund upon closing out the Fund's
position in these contracts are subject to the 30% Test. Ordinarily, these
gains could not be offset by declines in the value of the hedged securities
for purposes of the 30% Test. Section 851(g)(1) of the Code, however,
provides that, in the case of a "designated hedge," for purposes of the 30%
Test, increases and decreases in value (during the period of the hedge) of
positions which are part of the hedge are to be netted. Section 851(g)(2)
of the Code provides that a "designated hedge" exists when: (i) the
taxpayer's risk of loss with respect to any position in property is reduced
by reason of a contractual obligation to sell substantially identical
property; and (ii) the taxpayer clearly identifies the positions which are
part of the hedge in the manner prescribed in the IRS regulations.
IRS regulations have not yet been issued specifying how this identification
requirement can be satisfied. The legislative history with respect to
Section 851(g) states that, prior to issuance of regulations, the
identification requirement is satisfied either by: (i) placing the
positions that are part of the hedge in a separate account that is
maintained by a broker, futures commission merchant ("FCM"), custodian, or
similar person, and that is designated as a hedging account, provided that
such person maintaining such account makes notations identifying the hedged
and hedging positions and the date on which the hedge is established; or
(ii) the designation by such a broker, FCM, custodian, or similar person of
such positions as a hedge for purposes of these provisions, provided that
the RIC is provided with a written confirmation stating the date that the
hedge is established and identifying the hedged and hedging positions.
When a Fund, other than the Money Market Fund, enters into futures
contracts to hedge against price changes of securities to be sold, the Fund
may identify such securities and contracts as a hedge so as to qualify
under Section 851(g)(1) of the Code. There can be no assurances, however,
that a Fund (or the Fund's agents) will be able to comply with the
i d e n tification requirements that may be contained in future IRS
regulations. Moreover, the netting rule of Section 851(g)(1) is available
only if the securities to be sold and the property subject to the futures
contracts constitute "substantially identical" property. Each of the
Funds, other than the Money Market Fund, generally intends to sell pro rata
the securities being hedged, but it is unclear whether the securities and
the futures contracts would constitute "substantially identical" property.
Special Considerations Applicable to The Rydex Precious Metals Fund. In
general, with respect to the Metals Fund, gains from "foreign currencies"
and from foreign currency options, foreign currency futures, and forward
foreign exchange contracts ("forward contracts") relating to investments in
stock, securities, or foreign currencies will be qualifying income for
purposes of determining whether the Metals Fund qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, futures, or forward
c o ntracts will be valued for purposes of the RIC diversification
requirements applicable to the Metals Fund.
<PAGE> 44<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar).
In general, foreign currency gains or losses from forward contracts, from
futures contracts that are not "regulated futures contracts," and from
unlisted options will be treated as ordinary income or loss under Code
Section 988. Also, certain foreign exchange gains derived with respect to
foreign fixed-income securities are also subject to Section 988 treatment.
In general, Code Section 988 gains or losses will increase or decrease the
amount of the Metals Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing
o r decreasing the amount of the Metals Fund's net capital gain.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Metals Fund would not be able to
make any ordinary dividend distributions.
The Metals Fund may incur a liability for dividend withholding tax as a
result of the Metals Fund's investment in stock or securities of foreign
corporations. If, at any year end, more than 50% of the assets of the
Metals Fund are comprised of stock or securities of foreign corporations,
the Metals Fund may elect to "pass through" to shareholders the amount of
foreign taxes paid by the Metals Fund. The Metals Fund will make such an
election only if the Metals Fund deems this to be in the best interests of
its shareholders. If the Metals Fund does not qualify to make this
election or does qualify, but does not choose to do so, the imposition of
such taxes would directly reduce the return to an investor from an
investment in the Metals Fund.
Transactions By the Funds. If a call option written by a Fund expires, the
amount of the premium received by the Fund for the option will be short-
term or long-term capital gain to the Fund depending on the Fund's holding
period for the underlying security or underlying futures contract. If such
an option is closed by a Fund, any gain or loss realized by the Fund as a
result of the closing purchase transaction will be short-term or long-term
capital gain or loss depending on the Fund's holding period for the
underlying security or underlying futures contract. If the holder of a
call option exercises the holder's right under the option, any gain or loss
realized by the Fund upon the sale of the underlying security or underlying
futures contract pursuant to such exercise will be short-term or long-term
capital gain or loss to the Fund depending on the Fund's holding period for
the underlying security or underlying futures contract.
With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and
will realize short-term or long-term capital loss if the option is allowed
to expire depending on the Fund's holding period for the call option. If
such a call option is exercised, the amount paid by the Fund for the option
will be added to the basis of the stock or futures contract so acquired.
A Fund has available to it a number of elections under the Code concerning
the treatment of option transactions for tax purposes. A Fund will utilize
the tax treatment that, in the Fund's judgment, will be most favorable to a
<PAGE> 45<PAGE>
majority of investors in the Fund. Taxation of these transactions will
vary according to the elections made by the Fund. These tax considerations
may have an impact on investment decisions made by the Fund.
Each of the Nova Fund, the Ursa Fund, the OTC Fund, and the Metals Fund in
its operations also will utilize options on stock indexes. Options on
"broad based" stock indexes are classified as "nonequity options" under the
Code. Gains and losses resulting from the expiration, exercise, or closing
of such nonequity options, as well as gains and losses resulting from
futures contract transactions, will be treated as long-term capital gain or
loss to the extent of 60% thereof and short-term capital gain or loss to
the extent of 40% thereof (hereinafter, "blended gain or loss"). In
addition, any nonequity option and futures contract held by a Fund on the
last day of a fiscal year will be treated as sold for market value on that
date, and gain or loss recognized as a result of such deemed sale will be
blended gain or loss.
The trading strategies of each of the Nova Fund, the Ursa Fund, the OTC
Fund, and the Metals Fund involving nonequity options on stock indexes may
constitute "straddle" transactions. "Straddles" may affect the taxation of
such instruments and may cause the postponement of recognition of losses
incurred in certain closing transactions. Each of these four Funds will
also have available to the Fund a number of elections under the Code
concerning the treatment of option transactions for tax purposes. Each
such Fund will utilize the tax treatment that, in the Fund's judgment, will
be most favorable to a majority of investors in the Fund. Taxation of
these transactions will vary according to the elections made by the Fund.
These tax considerations may have an impact on investment decisions made by
the Fund.
A Fund's transactions in options, under some circumstances, could preclude
the Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements of Subchapter M of the Code. However,
it is the intention of each Fund's portfolio management to limit gains from
such investments to less than 10% of the gross income of the Fund during
any fiscal year in order to maintain this qualification.
Back-Up Withholding. Each Fund is required to withhold and remit to the
U.S. Treasury 31% of (i) reportable taxable dividends and distributions and
(ii) the proceeds of any redemptions of Fund shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails to report
fully dividend or interest income, or who fails to certify to the Trust
that the shareholder has provided a correct taxpayer identification number
and that the shareholder is not subject to withholding. (An individual's
taxpayer identification number is the individual's social security number.)
The 31% "back-up withholding tax" is not an additional tax and may be
credited against a taxpayer's regular Federal income tax liability.
Other Issues. Each Fund may be subject to tax or taxes in certain states
where the Fund does business. Furthermore, in those states which have
<PAGE> 46<PAGE>
income tax laws, the tax treatment of a Fund and of Fund shareholders with
respect to distributions by the Fund may differ from Federal tax treatment.
Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this Statement of
Additional Information in light of the particular tax situations of the
shareholders and regarding specific questions as to Federal, state, or
local taxes.
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are
the auditors and the independent certified public accountants of the Trust
and each of the Funds. Star Bank, N.A., 425 Walnut Street, Cincinnati,
Ohio 45202, acts as the Custodian bank for the Trust and each of the
Funds.
FINANCIAL STATEMENTS
The Financial Statements (audited) of the Trust for the fiscal year ended
June 30, 1996, are incorporated by reference from the Trust's 1996 Annual
Report to Shareholders. Copies of the Trust's Annual Report may be
obtained without charge by contacting the Trust at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the
Trust at 800-820-0888 or 301-468-8520.
<PAGE> 47<PAGE>
RULE 497(c)
File No. 33-59692
RYDEX SERIES TRUST
RYDEX INSTITUTIONAL MONEY MARKET FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
STATEMENT OF ADDITIONAL INFORMATION
The Rydex Institutional Money Market Fund (the "Fund") is a diversified
series of the Rydex Series Trust, an open-end management investment company
(the "Trust"). The investment objectives of the Fund are security of
principal, high current income, and liquidity consistent with preservation
of capital. In attempting to achieve its objectives, the Fund will invest
primarily in money market instruments which are issued or guaranteed, as to
p r i ncipal and interest, by the U.S. Government, its agencies or
instrumentalities, as well as in repurchase agreements secured by such
securities and in bank money market instruments and commercial paper. The
Fund is part of the Rydex Group of Funds, which is designed for
professional money managers and knowledgeable investors who intend to
invest in the Rydex Group of Funds as part of an asset-allocation or
market-timing investment strategy.
The securities of the Fund are not deposits or obligations of any bank, and
are not endorsed or guaranteed by any bank, and an investment in the Fund
is neither insured nor guaranteed by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
Government. The Fund seeks to maintain a constant $1.00 net asset value
per share, although this cannot be assured.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Fund's Prospectus, dated November 1, 1996. A
copy of the Fund's Prospectus may be obtained without charge by writing or
telephoning the Fund.
The date of this Statement of Additional Information is November 1, 1996.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS 3
PAGE
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES 3
INVESTMENT RESTRICTIONS 4
PORTFOLIO TRANSACTIONS 5
MANAGEMENT OF THE TRUST 6
DISTRIBUTION PLAN 9
PRINCIPAL HOLDERS OF SECURITIES 10
DETERMINATION OF NET ASSET VALUE 11
INFORMATION ON COMPUTATION OF YIELD 13
DIVIDENDS, DISTRIBUTIONS, AND TAXES 13
AUDITORS AND CUSTODIAN 14
FINANCIAL STATEMENTS 14
<PAGE> 2<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including The Rydex Institutional Money
Market Fund, The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex
Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund,
The Rydex U.S. Government Money Market Fund, and, beginning on or about
December 1, 1996 (subject to obtaining all necessary regulatory approvals),
The Rydex High Yield Fund (collectively, the "Rydex Funds"); other separate
Rydex Funds may be added in the future. Shares of any Rydex Fund may be
exchanged, without any charge, for shares of any other Rydex Fund on the
basis of the respective net asset values of the shares involved; provided,
that, in connection with exchanges for shares of the Rydex Institutional
Money Market Fund, certain minimum investment levels are maintained.
C o p ies of the separate Prospectuses and Statements of Additional
Information for the Rydex Funds other than the Rydex Institutional Money
Market Fund are available, without charge, upon request to the Trust at
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by
telephoning the Trust at (800) 820-0888 or (301) 468-8520.
INVESTMENT POLICIES AND TECHNIQUES
General
Reference is made to the sections entitled "Investment Objectives and
Policies" in the Fund's Prospectus for a discussion of the investment
objectives and policies of the Fund. In addition, set forth below is
further information relating to the Fund. Portfolio management is provided
to the Fund by the Trust's investment adviser, PADCO Advisors, Inc., a
Maryland corporation with offices at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852 (the "Advisor").
The investment strategies of the Fund discussed below, and as discussed in
the Fund's Prospectus, may be used by the Fund if, in the opinion of the
Advisor, these strategies will be advantageous to the Fund. The Fund is
free to reduce or eliminate the Fund's activity in any of those areas
without changing the Fund's fundamental investment policies. There is no
assurance that any of these strategies or any other strategies and methods
of investment available to the Fund will result in the achievement of the
Fund's objectives.
U.S. Government Securities
The Fund invests primarily in money market instruments which are issued or
guaranteed, as to principal and interest, by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). Some
o b l igations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the
U.S. Government to purchase certain obligations of the Federal agency,
while other obligations issued by or guaranteed by Federal agencies, such
<PAGE> 3<PAGE>
as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. Government
provides financial support to such U.S. Government-sponsored Federal
agencies, no assurance can be given that the U.S. Government will always do
so, since the U.S. Government is not so obligated by law. U.S. Treasury
notes and bonds typically pay coupon interest semi-annually and repay the
principal at maturity. The Fund will invest in U.S. Government Securities
only when the Advisor is satisfied that the credit risk with respect to the
issuer is minimal.
Repurchase Agreements
As discussed in the Fund's Prospectus, the Fund may enter into repurchase
a g reements with financial institutions. The Fund follows certain
procedures designed to minimize the risks inherent in such agreements.
These procedures include effecting repurchase transactions only with large,
w e l l -capitalized and well-established financial institutions whose
condition will be continually monitored by the Advisor. In addition, the
value of the collateral underlying the repurchase agreement will always be
at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or
bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the Fund's right to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a
loss. It is the current policy of the Fund not to invest in repurchase
agreements that do not mature within seven days if any such investment,
together with any other illiquid assets held by the Fund, amounts to more
than 10% of its net assets. The Fund's investments in repurchase
agreements may, at times, be substantial when, in the view of the Advisor,
liquidity or other considerations so warrant.
When-Issued and Delayed Delivery Securities
As discussed in the Fund's Prospectus, the Fund, from time to time, in the
ordinary course of business, may purchase securities on a when-issued or
delayed delivery basis (i.e., delivery and payment can take place between a
month and 120 days after the date of the transaction). At the time the
Fund makes the commitment to purchase securities on a when-issued or
delayed delivery basis, the Fund will record the transaction and thereafter
reflect the value of the securities, each day, of such security in
determining the Fund's net asset value. At the time of delivery of the
securities, the value of the securities may be more or less than the
purchase price. The Fund will also establish a segregated account with its
custodian bank in which the Fund will maintain cash or liquid securities
equal to or greater in value than the Fund s purchase commitments for such
when-issued or delayed delivery securities. The Fund does not believe that
the Fund's net asset value or income will be adversely affected by the
Fund's purchase of securities on a when-issued or delayed delivery basis.
The foregoing strategies, and those discussed in the Fund's Prospectus
under the heading "Investment Objectives and Policies," may subject the
<PAGE> 4<PAGE>
Fund to the effects of interest rate fluctuations to a greater extent than
would occur if such strategies were not used. While these strategies may
be used by the Fund if, in the opinion of the Advisor, these strategies
will be advantageous to the Fund, the Fund will be free to reduce or
eliminate its activity in any of those areas without changing its
fundamental investment policies. Certain provisions of the Internal
Revenue Code, related regulations, and rulings of the Internal Revenue
Service may also have the effect of reducing the extent to which the
previously-cited techniques may be used by the Fund, either individually or
in combination. Furthermore, there is no assurance that any of these
strategies or any other strategies and methods of investment available to
the Fund will result in the achievement of the Fund s objectives.
Illiquid Securities
While the Fund does not anticipate doing so, the Fund may purchase illiquid
securities, including securities that are not readily marketable and
securities that are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which can be
offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act. The Fund will not invest more than 10% of the Fund s net
assets in illiquid securities. The Fund will adhere to a more restrictive
limitation on the Fund s investment in illiquid securities as required by
the securities laws of those jurisdictions where shares of the Fund are
registered for sale. The term illiquid securities for this purpose means
securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued
the securities. Under the current guidelines of the staff of the
Securities and Exchange Commission (the Commission ), illiquid securities
also are considered to include, among other securities, purchased over-the-
counter options, certain cover for over-the-counter options, repurchase
agreements with maturities in excess of seven days, and certain securities
whose disposition is restricted under the Federal securities laws. The
Fund may not be able to sell illiquid securities when the Advisor considers
it desirable to do so or may have to sell such securities at a price that
is lower than the price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses
than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result
of the promulgation of Rule 144A under the 1933 Act, which provides a safe
harbor from 1933 Act registration requirements for qualifying sales to
institutional investors. When Rule 144A restricted securities present an
attractive investment opportunity and other meet selection criteria, the
Fund may make such investments. Whether or not such securities are
illiquid depends on the market that exists for the particular security.
The Commission staff has taken the position that the liquidity of Rule 144A
restricted securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration of the
<PAGE> 5<PAGE>
readily-available trading markets and the review of any contractual
restrictions. The staff also has acknowledged that, while a board of
trustees retains ultimate responsibility, the trustees may delegate this
function to an investment adviser. The trustees of the Trust (the
Trustees ) have delegated this responsibility for determining the
liquidity of Rule 144A restricted securities which may be invested in by
the Fund to the Advisor. It is not possible to predict with assurance
exactly how the market for Rule 144A restricted securities or any other
security will develop. A security which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid and, accordingly,
a security which was deemed to be liquid at the time of acquisition may
subsequently become illiquid. In such event, appropriate remedies will be
considered to minimize the effect on the Fund s liquidity.
INVESTMENT RESTRICTIONS
As described in the section of the Fund's Prospectus entitled "Investment
O b jectives and Policies," the Fund has adopted certain investment
restrictions as fundamental policies which cannot be changed without the
approval of the holders of a "majority" of the outstanding shares of the
Fund, as that term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). The term "majority" is defined in the 1940 Act
as the lesser of: (i) 67% or more of the shares of the series present at a
meeting of shareholders, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy; or (ii) more than
50% of the outstanding shares of the series. (All policies of the Fund not
specifically identified in this Statement of Additional Information or the
Fund's Prospectus as fundamental may be changed without a vote of the
shareholders of the Fund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial
investment. Any subsequent change in a particular percentage resulting
from fluctuations in value does not require the elimination of any security
from the Fund's portfolio.
These restrictions provide that the Fund may not:
1. Borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes and then only in amounts not in excess of 5% of
the value of its total assets from a bank or (ii) in an amount up to
one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments. This provision is not for investment
leverage but solely to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous.
2. Mortgage, pledge, or hypothecate its assets except to secure
permitted borrowings. In those cases, the Fund may mortgage, pledge,
or hypothecate assets having a market value not exceeding the lesser
of the dollar amounts borrowed or 15% of the value of total assets at
the time of the borrowing.
<PAGE> 6<PAGE>
3. Issue senior securities, except as permitted by its investment
objectives and policies.
4. Write or purchase put or call options.
5. Underwrite the securities of another issuer.
6. Purchase, hold, or deal in real estate or oil and gas interests,
although the Fund may purchase and sell securities that are secured
by real estate or interests therein and may purchase mortgage-related
securities and may hold and sell real estate acquired for the Fund as
a result of the ownership of securities.
7. Make loans to others except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into repurchase
agreements.
8. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation, acquisition of
assets or plan of reorganization.
10. Lend its portfolio securities in excess of 15% of its total assets.
Any loans of portfolio securities will be made according to
guidelines established by the trustees of the Trust, including
maintenance of cash collateral of the borrower equal at all times to
the current market value of the securities loaned.
The Fund has no present intention to borrow money or pledge assets in
excess of 5% of the value of its net assets. Except with respect to
borrowing money, if a percentage limitation is adhered to at the time of
investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such
restriction.
PORTFOLIO TRANSACTIONS
Subject to the general supervision by the Trustees, and in conformity with
the 1940 Act, the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder, the Advisor is responsible for decisions
to buy and sell securities for each of the Rydex Funds (including the Fund)
and the selection of brokers and dealers to effect the transactions. In
seeking to implement the Fund's policies, the Advisor effects transactions
with those brokers and dealers who the Advisor believes provide the most
favorable prices and are capable of providing efficient executions.
The Advisor may serve as an investment manager to a number of clients,
including other investment companies. It is the practice of the Advisor to
cause purchase and sale transactions to be allocated among the Rydex Funds
<PAGE> 7<PAGE>
and others whose assets the Advisor manages in such manner as the Advisor
deems equitable. The main factors considered by the Advisor in making such
allocations among the Rydex Funds and other client accounts of the Advisor
are the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held, and the
opinions of the person(s) responsible, if any, for managing the portfolios
of the Rydex Funds and the other client accounts.
Purchases and sales of U.S. Government Securities are normally transacted
through issuers, underwriters, or major dealers in U.S. Government
Securities acting as principals. Such transactions are made on a net basis
and do not involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriters; transactions with dealers normally
reflect the spread between bid and asked prices.
Portfolio turnover rate is defined as the value of the securities purchased
or securities sold, excluding all securities whose maturities at time of
acquisition were one year or less, divided by the average monthly value of
such securities owned during the year. Based on this definition, it is
anticipated that the Fund's policy of investing in government securities
with remaining maturities of less than one year will not result in a
quantifiable portfolio turnover rate. However, because of the short-term
nature of the Fund's portfolio securities, it is anticipated that the
number of purchases and sales or maturities of such securities will be
substantial. Nevertheless, as brokerage commissions are not normally
charged on purchases and sales of such securities, the large number of
these transactions does not have an adverse effect upon the net yield and
net asset value of the shares of the Fund.
The Fund commenced operations on July 11, 1996. For the period from
inception to September 30, 1996, total brokerage commissions paid by the
Fund amounted to $0.
MANAGEMENT OF THE TRUST
The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities
of the Trust's officers. The names and addresses (and ages) of the
Trustees and the officers of the Trust and the officers of the Advisor,
together with information as to their principal business occupations during
the past five years, are set forth below. Fees and expenses for non-
interested Trustees will be paid by the Trust.
Trustees
*Albert P. Viragh, Jr. (55)
<PAGE> 8<PAGE>
Chairman of the Board of Trustees and President of the Trust;
Chairman of the Board, President, and Treasurer of PADCO Advisors,
Inc., investment adviser to the Trust, 1993 to present; Chairman of
the Board, President, and Treasurer of PADCO Service Company, Inc.,
shareholder and transfer agent servicer to the Trust, 1993 to
present; Chairman of the Board of Managers of the Rydex Advisor
Variable Annuity Account (the Separate Account ), a separate account
of Great American Reserve Insurance Company, 1996 to present;
Chairman of the Board, President, and Treasurer of PADCO Advisors II,
Inc., investment adviser to the Separate Account, 1996 to present;
Chairman of the Board, President, and Treasurer of PADCO Financial
Services, Inc., a registered broker-dealer firm, and the Rydex
Institutional Money Market Fund s principal underwriter, 1996 to
present; Vice President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (51)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
J. Kenneth Dalton (55)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Mortgage Banking Consultant and Investor, The Dalton Group,
April 1995 to present; President, CRAM Mortgage Group, Inc. 1966 to
April 1995. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Roger Somers (52)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; President, Arrow Limousine, 1963 to present. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Officers
Timothy P. Hagan (54)
Treasurer and Vice President of the Trust; Vice President of PADCO
Advisors, Inc., investment adviser to the Trust, 1993 to present;
Treasurer and Vice President of the Separate Account, 1996 to
present; Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Employee of PADCO
Service Company, Inc., shareholder and transfer agent servicer to the
Trust, 1993 to present; President and Director of Rushmore Services,
Inc., a registered transfer agent, 1981 to 1993. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
<PAGE> 9<PAGE>
Robert M. Steele (38)
Secretary and Vice President of the Trust; Vice President of PADCO
Advisors, Inc., investment adviser to the Trust, 1994 to present;
Secretary and Vice President of the Separate Account, 1996 to
present; Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Vice President of
The Boston Company, Inc., an institutional money management firm,
1987 to 1994. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Michael P. Byrum (26)
Assistant Secretary of the Trust; Employee of PADCO Advisors, Inc.,
1993 to present; portfolio manager of The Ursa Fund (since 1996),
The Rydex Precious Metals Fund (since 1993), The Rydex U.S.
G o v e rnment Money Market Fund (since 1993), and The Rydex
Institutional Money Market Fund (since 1996), each a series of the
Trust; Assistant Secretary of the Separate Account, 1996 to present;
Employee of PADCO Advisors II, Inc., investment adviser to the
S e parate Account; Investment Representative, Money Management
Associates, a registered investment adviser, 1992 to 1993; Student,
Miami University, of Oxford, Ohio (B.A., Business Administration,
1992). Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
_________________________
* This Trustee is deemed to be an "interested person" of the Trust,
within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as
this person is affiliated with the Advisor, as described herein.
The Advisor, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, provides the Fund with investment advisory
services. The Advisor was incorporated in the State of Maryland on
February 5, 1993. Albert P. Viragh, Jr., the Chairman of the Board of
Trustees and the President of the Advisor, owns a controlling interest in
the Advisor.
Under an investment advisory agreement with the Advisor, dated May 14,
1993, and amended on November 2, 1993, December 13, 1994, March 8, 1996,
and September 25, 1996, the Advisor serves as the investment adviser for
each series of the Trust and provides investment advice to the Funds and
oversees the day-to-day operations of the Funds, subject to direction and
control by the Trustees and the officers of the Trust. The Trust currently
is composed of nine separate series, the Nova Fund, the Ursa Fund, the
Rydex OTC Fund, the Rydex Precious Metals Fund, the Rydex U.S. Government
Bond Fund, the Juno Fund, The Rydex High Yield Fund, the Rydex U.S.
Government Money Market Fund, and the Rydex Institutional Money Market
Fund; other separate series may be added in the future. As of October 24,
1996, net Trust assets under management of the Advisor were approximately
$1 billion, and as of October 24, 1996, net Fund assets under management of
the Advisor were approximately $53.6 million. Pursuant to the advisory
<PAGE> 10<PAGE>
agreement, the Fund pays the Advisor a fee at an annual rate based on 0.55%
of the net assets of the Fund. The Fund commenced operations on July 11,
1996. For the period from July 11, 1996 to September 30, 1996, total
management fees paid by the Fund to the Advisor amounted to $47,002. The
Advisor manages the investment and the reinvestment of the assets of the
Fund, in accordance with the Fund's investment objectives, policies, and
limitations, subject to the general supervision and control of the officers
of the Trust and the Trustees. The Advisor bears all costs associated with
providing these advisory services. The Advisor, from its own resources,
including profits from advisory fees received from the Fund, provided such
fees are legitimate and not excessive, may make payments to broker-dealers
and other financial institutions for their expenses in connection with the
distribution of Fund shares, and otherwise currently pays all distribution
costs for Fund shares.
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Fund by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995 and as amended on March 8, 1996 and also amended on September 25,
1996. The Servicer is wholly-owned by Albert P. Viragh, Jr., who is the
Chairman of the Board and the President of the Trust and the sole
controlling person and majority owner of the Advisor.
Under the service agreement with the Servicer, the Fund pays the Servicer
an annual fee based on 0.20% of the net assets of the Fund. For the
period from July 11, 1996 to September 30, 1996, total service fees paid by
the Fund to the Servicer amounted to $17,100. Under the service agreement,
the Servicer provides the Fund with all required general administrative
services, including, without limitation, office space, equipment, and
personnel; clerical and general back office services; bookkeeping, internal
accounting, and secretarial services; the determination of net asset
values; and the preparation and filing of all reports, registration
statements, proxy statements, and all other materials required to be filed
or furnished by the Fund under Federal and state securities laws. The
Servicer also maintains the shareholder account records for the Fund,
distributes dividends and distributions payable by the Fund, and produces
statements with respect to account activity for the Fund and its
shareholders. The Servicer pays all fees and expenses that are directly
related to the services provided by the Servicer to the Fund; the Fund
reimburses the Servicer for all fees and expenses incurred by the Servicer
which are not directly related to the services the Servicer provides to the
Fund under the service agreement.
The Fund bears all expenses of its operations other than those assumed by
the Advisor or the Servicer. Fund expenses include: the management fee;
t h e servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; fidelity bonds and other insurance premiums;
expenses of preparing and printing prospectuses, confirmations, proxy
<PAGE> 11<PAGE>
statements, and shareholder reports and notices; registration fees and
expenses; proxy and annual meeting expenses, if any; all Federal, state,
and local taxes (including, without limitation, stamp, excise, income, and
franchise taxes); organizational costs; non-interested trustees' fees and
expenses; the costs and expenses of redeeming shares of the Fund; fees and
expenses paid to any securities pricing organization; dues and expenses
associated with membership in any mutual fund organization; and costs for
incoming telephone WATTS lines. In addition, each of the nine Rydex Funds,
including the Fund, pays an equal portion of the Trustee fees and expenses
for attendance at Trustee meetings for the Trustees of the Trust who are
not affiliated with or interested persons of the Advisor. For the period
from July 11, 1996 to September 30, 1996, the total expenses of Fund
operations borne by the Fund, other than those expenses assumed or
reimbursed by the Advisor or the Servicer, amounted to $98,553.
The aggregate compensation paid by the Trust to each of its Trustees
serving during the fiscal year ended June 30, 1996, is set forth in the
table below:
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Estimated
Compensation Accrued as Part Annual Benefit
Name of Person, from the of the Trust s upon
Position Trust** Expenses Retirement
---------- ---------- ------------- ----------
<S> <C> <C> <C>
Albert P. Viragh, $0 $0 $0
Jr.*
Chairman and
President
Corey A. Colehour $7,500 $0 $0
Trustee
J. Kenneth Dalton $4,500 $0 $0
Trustee
Roger Somers $7,500 $0 $0
Trustee
___________________________
* Denotes an "interested person" of the Trust.
** Mr. David R. Petersen, who resigned as a Trustee,
effective October 13, 1995, was paid $2,000 in aggregate
compensation by the Trust during the fiscal year ended
June 30, 1996.
</TABLE>
As of the date of this Statement of Additional Information, no
person, other than the Advisor, was a record owner or, to the
<PAGE> 12<PAGE>
knowledge of the Trust, beneficial owner of 5% or more of the
shares of the Fund.
DISTRIBUTION PLAN
Pursuant to the Trust's plan of distribution for the Fund
adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act
(the "Distribution Plan"), the Fund will pay PADCO Financial
Services, Inc. (the "Distributor"), monthly at a rate not to
exceed 0.25% of the average daily net assets of the Fund
during that month for expenses actually incurred in the
distribution and promotion of the Fund's shares, and the
Distributor, in turn, on a quarterly basis will pay certain
securities dealers or brokers, administrators, investment
advisers, institutions, including bank trust departments, and
other persons ("Recipients") amounts based on the average
daily net asset value of shares of the Fund owned by that
Recipient or its customers during that quarter. No such
payments, however, will be made to any Recipient in any
quarter if the aggregate net asset value of all Fund shares
held by the Recipient or its customers at the end of such
quarter, taken without regard to the minimum holding period,
does not exceed a minimum amount. The minimum holding period
and minimum level of holdings, if any, will be determined from
time to time by a majority of the Trustees of the Trust who
are not "interested persons" of the Trust, as defined in the
1940 Act, and who have no direct or indirect financial
interest in the operation of the Distribution Plan or any
agreements related to the Distribution Plan (the "Rule 12b-1
Trustees"). The services to be provided by the Recipients may
i n c l ude, but are not limited to, distributing sales
literature, answering routine customer inquiries regarding the
Trust and the Fund, assisting in establishing and maintaining
shareholder accounts and processing purchase and redemption
t r a nsactions, making the Trust's investment plans and
shareholder services options available and providing such
other information and services as the Distributor or the Trust
may reasonably request from time to time.
Pursuant to the Distribution Plan, the Distributor, in
addition to being reimbursed by the Fund for any payments to
Recipients, also will be entitled to reimbursement monthly (up
to the maximum of 0.25% per annum of the average net assets of
the Fund) for the Distributor's other expenses incurred in the
distribution and promotion of the Fund's shares, including,
but not limited to, the printing of certain reports used for
sales purposes, advertisements, expenses of preparation and
printing of sales literature, and other distribution related
expenses, including any distribution or service fees paid to
Recipients who have executed a distribution or service
agreement with the Distributor. The maximum amount which may
be paid to these Recipients by the Distributor (which will be
<PAGE> 13<PAGE>
determined according to the services provided in assisting
investors with their accounts and/or shares sold) is 0.25% (on
an annual basis) of the Fund's average net assets owned by
those Recipients or by clients of those Recipients.
For the period from July 11, 1996 to September 30, 1996, and
pursuant to the Distribution Plan, the total reimbursement
payments paid or payable by the Fund to the Distributor
amounted to $21,627, which constituted 0.25 of 1% of the
Fund's average daily net assets during this period. Of these
payments by the Fund to the Distributor under the Distribution
Plan, $16,740 was paid as compensation by the Distributor to
Recipients pursuant to agreements related to the Distribution
P l an, and $4,887 was spent on the printing of sales
literature, travel entertainment, due diligence, and other
promotional expenses; none of these payments was spent on
advertising and marketing, the printing and mailing of
prospectuses for persons other than current shareholders of
the Fund, or as compensation to wholesalers of the Distributor
in respect of sales of shares of the Fund. In addition, for
the period from July 11, 1996 to September 30, 1996, the
Advisor, pursuant to agreements related to the Distribution
Plan, also made payments from its own resources to Recipients
aggregating $11,066. In the event that the Distributor is not
fully reimbursed for payments or expenses incurred by the
D i stributor, these unreimbursed expenses under the
Distribution Plan will not be carried forward beyond twelve
months from the date these expenses were incurred. For the
period from July 11, 1996 to September 30, 1996, an aggregate
of $3,089 of distribution expenses, or 0.04% of the average
daily net assets of the Fund's shares (annualized), was not
reimbursed or recovered by the Distributor through the receipt
of reimbursement payments under the Distribution Plan.
The Distributor is required to report in writing to the
Trustees of the Trust at least quarterly on the monies
reimbursed to the Distributor under the Distribution Plan, as
well as to furnish the Trustees with such other information as
may reasonably be requested in connection with the payments
made under the Distribution Plan in order to enable the
Trustees to make an informed determination as to whether the
Distribution Plan should be continued.
The Trustees of the Trust have determined that a consistent
cash flow resulting from the sale of new shares of the Fund is
necessary and appropriate to meet redemptions and to take
advantage of buying opportunities without having to make
unwarranted liquidations of portfolio securities of the Fund.
The Trustees, therefore, felt that it will likely benefit the
Fund to have monies available for the direct distribution
activities of the Distributor in promoting the sale of the
Fund's shares. The Trustees, including the Rule 12b-1
<PAGE> 14<PAGE>
Trustees, concluded, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, that
there is a reasonable likelihood that the Distribution Plan
will benefit the Fund and its shareholders.
The Distribution Plan has been approved by the Trustees of the
Trust, including all of the Rule 12b-1 Trustees, and by the
Fund's initial shareholder. The Distribution Plan must be
renewed annually by the Trustees of the Trust, including by a
majority of the Rule 12b-1 Trustees, cast in person at a
meeting called for that purpose. The Distribution Plan and
any distribution or service agreement may be terminated at any
time, without any penalty, by the Trustees or by a vote of a
majority of the Fund's outstanding shares on sixty (60) days'
written notice. The Distributor or any Recipient also may
terminate their respective distribution or service agreement
at any time upon written notice.
T h e Distribution Plan and any distribution or service
agreement may not be amended to increase materially the amount
spent for distribution expenses or in any other material way
without approval by a majority of the Fund's outstanding
shares, and all material amendments to the Distribution Plan
or any distribution or service agreement shall be approved by
the Rule 12b-1 Trustees, cast in person at a meeting called
for the purpose of voting on any such amendment.
PRINCIPAL HOLDERS OF SECURITIES
As of October 17, 1996, the following persons were the only
persons who were record owners or, to the knowledge of the
Trust, beneficial owners of 5% or more of the shares of the
Fund:
<TABLE>
<CAPTION>
Name and Address Number of Shares % Ownership
----------------- ---------------- -----------
<S> <C> <C>
Centurion Trust Co. 12,504,710.830 36.1%1/
2525 East Camelback Road
Suite 640
Phoenix, AZ 85016
Trust Company of America 8,268,087.240 23.8%1/
7103 S. Revere Parkway
Denver, CO 80217
Record Owner for:
<PAGE> 15<PAGE>
Name and Address Number of Shares % Ownership
----------------- ---------------- -----------
<S> <C> <C>
Satell Investment 8,268,087.240 23.8%2/
Management
8015 Broadway
Suite 101
San Antonio, TX 78209
Independent Trust 4,253,999.820 12.3%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL 60462-3897
Record Owner for:
Portfolio Strategies 4,253,999.820 12.3%2/
1102 Broadway Plaza
Suite 302
Tacoma, WA 98402
National Financial 2,455,310.000 7.1%1/
Services Corp.
P.O. Box 3908
New York, NY 10008
First Trust Corp. 2,059,117.620 5.9%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Zweig/Avatar 2,059,117.620 5.9%2/
900 Third Avenue
New York, New York 10022
Independent Trust 1,794,309.660 5.2%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL 60462-3897
Record Owner for:
Brookstreet Securities 1,794,309.660 5.2%2/
2361 Campus Drive
Suite 210
Irvine, CA 92715
<PAGE> 16<PAGE>
1/ Record owner only.
2/ Beneficial owner only.
</TABLE>
As of the date of this Statement of Additional Information,
the Trustees and the officers of the Trust, as a group, owned,
of record and beneficially, less than 1.0% of the outstanding
shares of the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined each day on which
both the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of New York (the "New York Fed") are open for business at 1:00 P.M.,
Eastern Time. Currently, the NYSE and the New York Fed are closed on
weekends, and the following holiday closings have been scheduled for 1997:
(i) New Year's Day, Martin Luther King Jr.'s Birthday, Washington's
Birthday, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day,
Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any
of those holidays falls on a Saturday or the subsequent Monday when any one
of those holidays falls on a Sunday. To the extent that portfolio
securities of the Fund are traded in other markets on days when the NYSE or
the New York Fed is closed, the Fund's net asset value may be affected on
days when investors do not have access to the Fund to purchase or redeem
shares. Although the Trust expects the same holiday schedule to be
observed in the future, the NYSE and the New York Fed each may modify its
holiday schedule at any time. The net asset value of the Fund serves as
the basis for the purchase and redemption price of the Fund's shares.
The Fund will utilize the amortized cost method in valuing its portfolio
securities for purposes of determining the net asset value of the shares of
the Fund. The Fund will utilize the amortized cost method in valuing its
portfolio securities even though the portfolio securities may increase or
decrease in market value, generally, in connection with changes in interest
rates. The amortized cost method of valuation involves valuing a security
at its cost adjusted by a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the
market value of the instrument.
The Fund's use of the amortized cost method to value its portfolio
securities and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 under the 1940 Act (the "Rule"), and is
conditioned on the Fund's compliance with various conditions including: (a)
the Trustees are obligated, as a particular responsibility within the
overall duty of care owed to the Fund's shareholders, to establish written
p r ocedures reasonably designed, taking into account current market
conditions and the Fund's investment objectives, to stabilize the net asset
value per share as computed for the purpose of distribution and redemption
at $1.00 per share; (b) the procedures should provide for (i) the
calculation, at such intervals as the Trustees determine are appropriate
and as are reasonable in light of current market conditions, of the
deviation, if any, between net asset value per share using amortized cost
to value portfolio securities and net asset value per share based upon
<PAGE> 17<PAGE>
available market quotations with respect to such portfolio securities; (ii)
the periodic review by the Trustees of the amount of deviation as well as
methods used to calculate the amount of deviation; and (iii) the
m a i n tenance of written records of the procedures, the Trustees'
considerations made pursuant to the procedures and any actions taken upon
such considerations; (c) the Trustees should consider what steps should be
taken, if any, in the event of a difference of more than 1/2 of 1% between
the two methods of valuation; and (d) the Trustees should take such action
as the Trustees deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, or, as provided by the Declaration of
Trust, reducing the number of the outstanding shares of the Fund) to
eliminate or reduce to the extent reasonably practicable material dilution
or other unfair results to investors or existing shareholders. Any
reduction of outstanding shares will be effected by having each shareholder
proportionately contribute to the Fund's capital the shares necessary to
eliminate or reduce the material dilution or other unfair results to
investors or existing shareholders. Each shareholder will be deemed to
have agreed to such a contribution in these circumstances by investment in
the Fund.
The Rule further requires that the Fund limits its investments to U.S.
dollar-denominated instruments which the Trustees determine present minimal
credit risks and which are Eligible Securities (as defined below). The
Rule also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the Fund's objective of
maintaining a stable net asset value of $1.00 per share and precludes the
purchase of any instrument with a remaining maturity of more than thirteen
months. Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund would be
required to invest its available cash in such a manner as to reduce such
maturity to 90 days or less as soon as reasonably practicable.
An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b) either (i) is
rated in the two highest short-term rating categories by any two
nationally-recognized statistical rating organizations ("NSROs") that have
issued a short-term rating with respect to the security or class of debt
obligations of the issuer, or (ii) if only one NSRO has issued a short-term
rating with respect to the security, then by that NSRO; (c) was a long-term
security at the time of issuance whose issuer has outstanding a short-term
debt obligation which is comparable in priority and security and has a
rating as specified in clause (b) above; or (d) if no rating is assigned by
any NSRO as provided in clauses (b) and (c) above, the unrated security is
determined by the Trustees to be of comparable quality to any such rated
security.
As permitted by the Rule, the Trustees have delegated to the Fund's
Advisor, subject to the Trustees' oversight pursuant to guidelines and
procedures adopted by the Trustees, the authority to determine which
securities present minimal credit risks and which unrated securities (and
securities that are rated only by a single NSRO) are comparable in quality
to rated securities. The Advisor will, under the supervision of the
Trustees, cause the Fund to dispose of any security as soon as practicable
<PAGE> 18<PAGE>
if the security is no longer of high quality, unless the Trustees determine
that this action would not be in the best interest of the Fund.
If the Trustees determine that it is no longer in the best interests of the
Fund and its shareholders to maintain a stable price of $1.00 per share, or
if the Trustees believe that maintaining such price no longer reflects a
market-based net asset value per share, the Trustees have the right to
change from an amortized cost basis of valuation to valuation based on
market quotations. The Fund will notify shareholders of any such change.
The Fund will manage its portfolio in an effort to maintain a constant
$1.00 per share price, but the Fund cannot assure that the value of the
Fund's shares will never deviate from this price. Since dividends from net
investment income (and net short-term capital gains, if any) are declared
and accrued on a daily basis, the net asset value per share, under ordinary
circumstances, is likely to remain constant. Otherwise, realized and
unrealized gains and losses will not be distributed on a daily basis but
will be reflected in the Fund's net asset value. The amounts of such gains
and losses will be considered by the Trustees in determining the action to
be taken to maintain the Fund's $1.00 per share net asset value. Such
action may include distribution at any time of part or all of the then-
accumulated undistributed net realized capital gains, or reduction or
elimination of daily dividends by an amount equal to part or all of the
then-accumulated net realized capital losses. However, if realized losses
should exceed the sum of net investment income plus realized gains on any
day, the net asset value per share on that day might decline below $1.00
per share. In such circumstances, the Fund may reduce or eliminate the
payment of daily dividends for a period of time in an effort to restore the
Fund's $1.00 per share net asset value. A decline in prices of securities
could result in significant unrealized depreciation on a mark-to-market
basis. Under these circumstances the Fund may reduce or eliminate the
payment of dividends, and utilize a net asset value per share as determined
by using available market quotations, or reduce the number of its shares
outstanding.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at
their respective fair value as determined in good faith by, or under
procedures established by, the Trustees, which procedures may include the
delegation of certain responsibilities regarding valuation to the Advisor
or the officers of the Trust. The officers of the Trust report, as
necessary, to the Trustees regarding portfolio valuation determination.
The Trustees, from time to time, will review these methods of valuation and
will recommend changes which may be necessary to assure that the
investments of the Funds are valued at fair value.
INFORMATION ON COMPUTATION OF YIELD
The Fund's annualized current yield, as may be quoted from time to time in
advertisements and other communications to shareholders and potential
investors, is computed by determining, for a stated seven-day period, the
net change, exclusive of capital changes and including the value of
additional shares purchased with dividends and any dividends declared
<PAGE> 19<PAGE>
therefrom (which reflect deductions of all expenses of the Fund such as
management fees), in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period, and dividing
the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then multiplying the base
period return by (365/7).
The Fund's annualized effective yield, as may be quoted from time to time
in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period
as the current yield), the net change, exclusive of capital changes and
including the value of additional shares purchased with dividends and any
dividends declared therefrom (which reflect deductions of all expenses of
the Fund such as management fees), in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the
period, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
The Fund s annualized effective yield and annualized current yield, for the
s e ven-day period ended September 30, 1996, were 4.46% and 4.37%,
respectively.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Fund in the future since
the yield is not fixed. Actual yields will depend not only on the type,
quality, and maturities of the investments held by Fund and changes in
interest rates on such investments, but also on changes in the Fund's
expenses during the period.
Yield information may be useful in reviewing the performance of the Fund
a n d for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments which
typically pay a fixed yield for a stated period of time, the Fund's yield
fluctuates.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends and Distributions. As discussed in the Fund's Prospectus, the
Fund intends to declare dividends daily from net investment income (and net
short-term capital gains, if any) and distribute such dividends monthly.
N e t income, for dividend purposes, includes accrued interest and
amortization of original issue and market discount, plus or minus any
short-term gains or losses realized on sales of portfolio securities, less
the amortization of market premium and the estimated expenses of the Fund.
Net income will be calculated immediately prior to the determination of net
asset value per share of the Fund.
The Trustees may revise the dividend policy, or postpone the payment of
dividends, if the Fund should have or anticipate any large unexpected
expense, loss, or fluctuation in net assets which, in the opinion of the
Trustees, might have a significant adverse effect on shareholders. On
<PAGE> 20<PAGE>
occasion, in order to maintain a constant $1.00 per share net asset value,
the Trustees may direct that the number of outstanding shares be reduced in
each shareholder's account. Such reduction may result in taxable income to
a shareholder in excess of the net increase (i.e., dividends, less such
reduction), if any, in the shareholder's account for a period of time.
Furthermore, such reduction may be realized as a capital loss when the
shares are liquidated.
Regulated Investment Company Status. The Fund intends to qualify as a
regulated investment company (a "RIC") under Subchapter M of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund
itself would not be subject to Federal income taxes on the net investment
income and capital gains that the Fund distributes to the Fund's
shareholders. The distribution of net investment income and capital gains
will be taxable to Fund shareholders regardless of whether the shareholder
elects to receive these distributions in cash or in additional shares.
Distributions may be subject to state and local taxes.
Shareholders will be subject to Federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of
realized net short-term capital gains. Interest and realized net short-
term capital gains distributions are taxable to the shareholder as ordinary
dividend income regardless of whether the shareholder receives such
distributions in additional shares or in cash. Since the Fund's income is
expected to be derived entirely from interest rather than dividends, none
of such distributions will be eligible for the Federal dividends received
deduction available to corporations.
The Fund will seek to qualify for treatment as a RIC under the Code.
Provided that the Fund (i) is a RIC and (ii) distributes at least 90% of
the Fund's net investment income (including, for this purpose, net realized
short-term capital gains), the Fund itself will not be subject to Federal
income taxes to the extent the Fund's net investment income and the Fund's
net realized short-term capital gains, if any, are distributed to the
Fund's shareholders. To avoid an excise tax on its undistributed income,
the Fund generally must distribute at least 98% of its income. One of
several requirements for RIC qualification is that the Fund must receive at
least 90% of the Fund's gross income each year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies, or other income derived
with respect to the Fund's investments in stock, securities, and foreign
currencies (the "90% Test").
In addition, under the Code, the Fund will not qualify as a RIC for any
taxable year if more than 30% of the Fund's gross income for that year is
derived from gains on the sale of securities held less than three months
(the "30% Test"). If the Fund does not satisfy the 30% Test for the Fund's
first taxable year, or for any subsequent taxable year, the Fund will not
qualify as a RIC for that year. If the Fund fails to qualify as a RIC for
any taxable year, the Fund would be taxed in the same manner as an ordinary
corporation. In that event, the Fund would not be entitled to deduct the
distributions which the Fund had paid to shareholders and, thus, would
incur a corporate income tax liability on all of the Fund's taxable income
<PAGE> 21<PAGE>
whether or not distributed. The imposition of corporate income taxes on
the Fund would directly reduce the return to an investor from an investment
in the Fund.
In the event of a failure by the Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends
that would be taxable to the shareholders of the Fund as ordinary income
and would be eligible for the dividends-received deduction for corporate
shareholders.
If the Fund were to fail to qualify as a RIC for one or more taxable years,
the Fund could then qualify (or requalify) as a RIC for a subsequent
taxable year only if the Fund had distributed to the Fund's shareholders a
taxable dividend equal to the full amount of any earnings or profits (less
the interest charge mentioned below, if applicable) attributable to such
period. The Fund might also be required to pay to the U.S. Internal
Revenue Service (the "IRS") interest on 50% of such accumulated earnings
and profits. In addition, pursuant to the Code and an interpretative
notice issued by the IRS, if the Fund should fail to qualify as a RIC and
should thereafter seek to requalify as a RIC, the Fund may be subject to
tax on the excess (if any) of the fair market of the Fund's assets over the
Fund's basis in such assets, as of the day immediately before the first
taxable year for which the Fund seeks to requalify as a RIC.
If the Fund determines that the Fund will not qualify as a RIC under
Subchapter M of the Code, the Fund will establish procedures to reflect the
anticipated tax liability in the Fund's net asset value.
Back-Up Withholding. The Fund is required to withhold and remit to the
U.S. Treasury 31% of (i) reportable taxable dividends and distributions and
(ii) the proceeds of any redemptions of Fund shares with respect to any
shareholder who is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails to report
fully dividend or interest income, or who fails to certify to the Trust
that the shareholder has provided a correct taxpayer identification number
and that the shareholder is not subject to withholding. (An individual's
taxpayer identification number is the individual's social security number.)
The 31% "back-up withholding tax" is not an additional tax and may be
credited against a taxpayer's regular Federal income tax liability.
Other Issues. The Fund may be subject to tax or taxes in certain states
where the Fund does business. Furthermore, in those states which have
income tax laws, the tax treatment of the Fund and of Fund shareholders
with respect to distributions by the Fund may differ from Federal tax
treatment.
Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this Statement of
Additional Information in light of the particular tax situations of the
shareholders and regarding specific questions as to Federal, state, or
local taxes.
<PAGE> 22<PAGE>
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are
the auditors and the independent certified public accountants of the Trust
and the Fund. Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202,
acts as the Custodian bank for the Trust and the Fund.
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, for the period from July 11,
1996 (the date the Fund commenced operations) to September 30, 1996, are
included herein.
<PAGE> 23<PAGE>
