PAGE
<PAGE>
RULE 497(e)
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
P r o s pectus. 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 Philadelphia Stock Exchange Gold/Silver
Metals Fund IndexTM (XAU)
PAGE
<PAGE>
Rydex U.S. 120% of the price movement of current Long
Government Bond Treasury Bond
Fund
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,
r e s pectively. 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
<PAGE> 3<PAGE>
The Trust also offers the Rydex Institutional Money Market
Fund and 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, as supplemented March 1, 1997, 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 Statement of Additional
Information is available, without charge, upon request to the
Trust at the address above or by telephoning the Trust at the
t e lephone numbers above. The Securities and Exchange
Commission also maintains a Web site ( http://www.sec.gov )
that contains this Statement of Additional Information,
material incorporated by reference, and other information
regarding registrants that file electronically with the
Securities and Exchange Commission.
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 PASSED 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, as
supplemented March 1, 1997.
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
<PAGE> 4<PAGE>
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 33
TAX-SHELTERED RETIREMENT PLANS 34
TRANSACTION CHARGES 34
DIVIDENDS AND DISTRIBUTIONS 34
TAXES 35
MANAGEMENT OF THE TRUST 37
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:
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
i n c luding 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.
<PAGE> 5<PAGE>
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
t h a t 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
c u r r ent 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 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
<PAGE> 6<PAGE>
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 or guaranteed, 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 its 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
M o n e y 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
i n strumentalities, 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
<PAGE> 7<PAGE>
investors who intend to invest in the Funds as part of an
asset-allocation or market-timing 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 result 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
w i l l 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
a n d options on securities, stock indexes, and futures
c o ntracts. 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, with no
sales or redemption charge, at the net asset value per share
of the Fund next determined. For shareholders who have
engaged a registered investment adviser with discretionary
authority over the shareholder s account, the minimum initial
investment in the Rydex Funds currently is $15,000; for all
other shareholder accounts, the minimum initial investment in
the Rydex Funds currently is $25,000. These minimums also
apply to retirement plan accounts. Shares of any available
Fund described in this Prospectus may be exchanged at any time
for shares of any other available Fund, with no charge, on the
basis of the relative net asset values next computed (subject
t o c ompliance with applicable minimum investment
<PAGE> 8<PAGE>
requirements). The Trust reserves the right to modify its
m i nimum investment requirements. Shareholders will be
i n f o r med of any increase in the minimum investment
requirements by a letter accompanying a new prospectus or a
prospectus supplement, in which the new minimum is disclosed.
Any time that you request a partial redemption of your Trust
shares, please be aware of the currently-applicable minimum
investment, because, as described below, there are
circumstances under which your entire account may be closed
if, as a result of your request, your account balance falls
below the currently-applicable minimum investment in the
Trust. A redemption from a tax-qualified retirement plan may
have adverse tax consequences and a shareholder contemplating
such a redemption should consult his or her own tax adviser.
Other shareholders should consider the tax consequences of any
redemption.
Because of the administrative expense of handling small
accounts, any request for a redemption (including pursuant to
check writing privileges) by an investor whose account balance
is (a) below the currently-applicable minimum investment, or
(b) would be below that minimum as a result of the redemption,
will be treated as a request by the investor of a complete
redemption of that account. In addition, upon sixty days
notice to a shareholder, the Trust may redeem an account whose
balance (due in whole or in part to redemptions since the time
of last purchase) has fallen below the minimum investment
amount applicable at the time of the shareholder s most recent
purchase of Rydex Fund shares (unless the shareholder brings
his or her account value up to the currently applicable
minimum investment during that notice period). See "How To
Invest In the Funds," "Redeeming An Investment (Withdrawals),"
and "Exchanges."
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 under "Dividends 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
<PAGE> 9<PAGE>
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> 10<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> 11<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> 12<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> 13<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)
<PAGE> 14<PAGE>
Net Asset Value -- End of
Period $ 15.68 $ 11.81 $ 9.77
Total Investment Return 32.77% 32.65% (2.47)%
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> 15<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
<PAGE> 16<PAGE>
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 17<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)
</TABLE>
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> 18<PAGE>
<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)
</TABLE>
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.
<PAGE> 19<PAGE>
**** For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales on equity
securities.
<PAGE> 20<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)
</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 3, 1994.
** Annualized for the period ended June 30, 1994.
<PAGE> 21<PAGE>
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 22<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)
</TABLE>
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.
<PAGE> 23<PAGE>
<PAGE> 24<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)
</TABLE>
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.
<PAGE> 25<PAGE>
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 26<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
A d v i sor 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
b e c omes 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
s u f f iciently to its current benchmark. If believed
<PAGE> 27<PAGE>
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 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.
<PAGE> 28<PAGE>
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
F u n d 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.
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
<PAGE> 29<PAGE>
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
m a rkets, 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 sensitivity 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
<PAGE> 30<PAGE>
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.
Metals-related investments are considered speculative and are
influenced by a host 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
i n vestments 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
i n formation 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
<PAGE> 31<PAGE>
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
F u nd 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 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 assets 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 involve 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
<PAGE> 32<PAGE>
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
l o s s 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 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.
<PAGE> 33<PAGE>
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
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. 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 pro 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
<PAGE> 34<PAGE>
non-financial securities listed on the NASDAQ Stock Market.
The index was created in 1985.
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.
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
r a te 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 by
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,
<PAGE> - 35 -<PAGE>
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
h i g her portfolio turnover rate would likely involve
c o rrespondingly 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 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
<PAGE> - 36 -<PAGE>
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
t h ereon 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
c l o s i ng out certain positions to avoid adverse tax
c o nsequences. 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
f u t ures 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
<PAGE> - 37 -<PAGE>
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.
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
<PAGE> - 38 -<PAGE>
(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.
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
t r a ding 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
o u t s tanding 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 struments 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
<PAGE> - 39 -<PAGE>
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 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
p r eventing 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
<PAGE> - 40 -<PAGE>
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.
U n like 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> - 41 -<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
b a s is) a segregated account consisting of cash, U.S.
G o vernment 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,
<PAGE> - 42 -<PAGE>
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.
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
<PAGE> - 43 -<PAGE>
the call or the put option. If a put or a call option which
the Fund has purchased expires 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 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.
<PAGE> - 44 -<PAGE>
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.
G o v e rnment 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.
S o m e 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
o r i nstrumentality, or the credit of the agency or
instrumentality itself.
<PAGE> - 45 -<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
R e s erve 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
<PAGE> - 46 -<PAGE>
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 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 may 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 Fund (other than the Bond Fund and the Money Market Fund)
may invest in the securities of other investment companies to
the extent permitted by Section 12(d)(1) of the 1940 Act or by
the conditions of any exemptive order relating to that section
that may be obtained by the Trust. In addition, each Fund
<PAGE> - 47 -<PAGE>
(including both the Bond Fund and the Money Market Fund) may
invest in securities of investment companies acquired as part
of a merger, consolidation, acquisition of assets, or plan of
reorganization. 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
t h at the Funds may execute brokerage or other agency
t r a n sactions through registered broker-dealers, for a
commission, in conformity with the 1940 Act, the Securities
E x change 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.
W h en 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 to
p o sition, the reliability, financial condition, general
execution and operational 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
<PAGE> - 48 -<PAGE>
For shareholders who have engaged a registered investment
adviser with discretionary authority over the shareholder s
account, the minimum initial investment in the Rydex Funds is
$15,000. For all other shareholder accounts ("Self-Directed
Accounts"), the minimum initial investment in the Rydex Funds
is $25,000. These minimums also apply to retirement plan
accounts. The Trust, 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. The Trust reserves the
r i g h t to modify its minimum investment requirements.
Shareholders will be informed of any increase in the minimum
investment requirements by a letter accompanying a new
prospectus or a prospectus supplement, in which the new
minimum is disclosed.
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
<PAGE> - 49 -<PAGE>
is canceled because your wire transfer is not received, you
may be liable for any loss that the Trust may incur.
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
<PAGE> - 50 -<PAGE>
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.
Any time that you request a partial redemption of your Trust
shares, please be aware of the currently-applicable minimum
investment, because, as described below, there are
circumstances under which your entire account may be closed
if, as a result of your request, your account balance falls
below the currently-applicable minimum investment in the
Trust. A redemption from a tax-qualified retirement plan may
have adverse tax consequences and a shareholder contemplating
such a redemption should consult his or her own tax adviser.
Other shareholders should consider the tax consequences of any
redemption.
Because of the administrative expense of handling small
accounts, any request for a redemption (including pursuant to
check writing privileges) by an investor whose account balance
is (a) below the currently-applicable minimum investment, or
(b) would be below that minimum as a result of the redemption,
will be treated as a request by the investor of a complete
redemption of that account. In addition, upon sixty days
notice to a shareholder, the Trust may redeem an account whose
balance (due in whole or in part to redemptions since the time
of last purchase) has fallen below the minimum investment
amount applicable at the time of the shareholder s most recent
purchase of Rydex Fund shares (unless the shareholder brings
his or her account value up to the currently applicable
minimum investment during that notice period).
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,
<PAGE> - 51 -<PAGE>
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
F u nd 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
e x change 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, the Metals
Fund, or the High Yield Fund are issued on the third business
<PAGE> - 52 -<PAGE>
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. With proper authorization, telephone
and electronic redemption and transfer requests are also
permitted. 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. Redemption and exchange 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 and electronic redemption and exchange orders will
be accepted only during the period indicated above. If the
primary exchange or market on which a Fund transacts 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 and electronic 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 or electronic transaction request and the investor
would bear the risk of any such loss. The Trust will employ
reasonable procedures to confirm that telephone and electronic
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 or electronic medium, including, among others,
<PAGE> - 53 -<PAGE>
requiring some form of personal identification or password
prior to acting upon instructions received by telephone or
electronic medium, providing written confirmation not later
than five business days after such transactions, and/or tape
recording of telephone and electronic instructions. Investors
also should be aware that telephone and electronic 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. 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
<PAGE> - 54 -<PAGE>
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
o t her 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
a m o rtization 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 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
<PAGE> - 55 -<PAGE>
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> - 56 -<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
i n v e stment 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.
<PAGE> - 57 -<PAGE>
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
i n c o me 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 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.
I n 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
<PAGE> - 58 -<PAGE>
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
r e s u lting 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
i n 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
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
<PAGE> - 59 -<PAGE>
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
o f 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
c o u n try 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 adviser. From 1992 to
June 1993, Mr. Viragh was the portfolio manager of The
Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc.,
<PAGE> - 60 -<PAGE>
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.
<PAGE> - 61 -<PAGE>
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
s h a r e s, except for expenses in connection with the
distribution of shares of the Institutional Fund and the High
Yield Fund that are paid by these two Rydex Funds in
accordance with distribution plans adopted by these Rydex
Funds pursuant to Rule 12b-1 under the 1940 Act.
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
S e p tember 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
t h e T rust 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
<PAGE> - 62 -<PAGE>
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; the 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
s h areholder reports and notices; registration fees and
expenses; proxy and annual meeting expenses, if any; all
F e d e r al, 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.
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
i s 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.
<PAGE> - 63 -<PAGE>
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
o f 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
t o 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
<PAGE> - 64 -<PAGE>
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
" e f f ective 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
c o m p ounding 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 Exchange, the
Philadelphia Stock Exchange, Morgan Stanley Capital
International, Wilshire Associates, the Financial Times-Stock
E x c h ange, 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
<PAGE> - 65 -<PAGE>
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.,
a n d similar sources which utilize information compiled
(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
p e r formance 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. 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
S t a tement 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.
<PAGE> - 66 -<PAGE>
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
i n vestment 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
s h areholders 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
T r ustee 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 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.
<PAGE> - 67 -<PAGE>
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
P R ESENTATIONS 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> - 68 -<PAGE>
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
S t a t ement 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 Philadelphia Stock Exchange Gold/Silver
Metals Fund IndexTM (XAU)
Rydex U.S. 120% of the price movement of current Long
Government Bond Treasury Bond
Fund
The Juno Fund Inverse (opposite) of the price movement
of the current Long Treasury Bond
PAGE
<PAGE>
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 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,
<PAGE> 2<PAGE>
dated November 1, 1996, as supplemented March 1, 1997. 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, as supplemented March 1, 1997.
<PAGE> 3<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS 4
INVESTMENT POLICIES AND TECHNIQUES 4
INVESTMENT RESTRICTIONS 10
PORTFOLIO TRANSACTIONS AND BROKERAGE1 14
MANAGEMENT OF THE TRUST 15
PRINCIPAL HOLDERS OF SECURITIES 19
DETERMINATION OF NET ASSET VALUE 22
PERFORMANCE INFORMATION 24
CALCULATION OF RETURN QUOTATIONS 25
INFORMATION ON COMPUTATION OF YIELD 26
DIVIDENDS, DISTRIBUTIONS, AND TAXES 27
AUDITORS AND CUSTODIAN 32
FINANCIAL STATEMENTS 32
<PAGE> 4<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 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
i n t end 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
I n v estment 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 the Trust's investment adviser, PADCO Advisors,
Inc., a Maryland corporation with offices at 6116 Executive
B o u l evard, 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,
<PAGE> 5<PAGE>
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
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.
<PAGE> 6<PAGE>
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.
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. ADRs 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,
i n cluding withholding taxes, brokerage commissions, and
<PAGE> 7<PAGE>
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
U n i ted 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
f o r eign 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 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 transactions 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
y e ars; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. Government
<PAGE> 8<PAGE>
S e c u r ities 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
S m all 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 Student Loan Marketing Association, and
the National Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government
a g encies 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
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 only 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
<PAGE> 9<PAGE>
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,
t h e 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
o b l igations 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
c o upon 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
r i sk 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 than regular coupon-bearing bonds.
Thus, when interest rates rise, the value of zero coupon bonds
<PAGE> 10<PAGE>
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
m a i ntain 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
<PAGE> 11<PAGE>
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
c o verage (total assets, including assets acquired with
borrowed funds, less liabilities exclusive 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
b o rrow 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
i s 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 may 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
<PAGE> 12<PAGE>
l e n d i ng 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
b e tween a month and 120 days after the date of the
t r ansaction). 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. 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)
presently 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.
<PAGE> 13<PAGE>
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 Trust and the Advisor have applied to the Securities and
Exchange Commission for an exemptive order that would permit
other investment companies to invest in the Funds as part of a
fund of funds arrangement (the FOF Order ). Once the Trust
receives the FOF Order, and for as long as the FOF Order
remains effective (and subject to the FOF Order being modified
in the future), none of the Funds (including both the Bond
Fund and the Money Market Fund) will invest in any securities
of investment companies, except as these securities may be
acquired as part of a merger, consolidation, acquisition of
assets, or plan of reorganization. There is no assurance that
the FOF Order will be issued.
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
c h anging 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
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
<PAGE> 14<PAGE>
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-
t h e-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, 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
i n v estment 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
<PAGE> 15<PAGE>
time of acquisition may subsequently become illiquid. In such
event, appropriate remedies will be considered to minimize the
effect on the Fund s liquidity.
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
s e curities 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.
I n struments 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
a d o pted 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
<PAGE> 16<PAGE>
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.
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
s e curities in connection with transactions in
options, futures, options on futures, and other
s i m ilar investments, and except as otherwise
permitted herein and in Investment Restriction Nos.
<PAGE> 17<PAGE>
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
i n itial 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:
6. Invest in commodities except that the Fund may
purchase and sell futures contracts, including those
relating to securities, currencies, indexes, and
o p t ions on futures contracts or indexes and
currencies underlying or related to any such futures
contracts, and purchase and sell currencies (and
o p tions 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. 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 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
i n v estment leverage but solely to facilitate
management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of
<PAGE> 18<PAGE>
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
s h o rt-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:
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
o w n s 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.
<PAGE> 19<PAGE>
The following restrictions are applicable to the Metals Fund:
The Metals Fund shall not:
12. P u r chase 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
s h o rt-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:
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 Money 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.
<PAGE> 20<PAGE>
17. Issue senior securities, except as permitted by the
M o ney 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, consolidation, 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
s h o rt-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. 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 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
i n v estment 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
l i m i tation, Fund assets invested in 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
<PAGE> 21<PAGE>
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
j u r i sdictions 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 Fund 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. To 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> 22<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the
A d visor 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
p r a c tice 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
a c counts 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
s e c u rities 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 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
<PAGE> 23<PAGE>
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 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 Advisor'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
$ 1 50,696, $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,
<PAGE> 24<PAGE>
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
*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
C o mpany, 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
P r esident 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 (56)
<PAGE> 25<PAGE>
Trustee of the Trust; Manager of the Separate Account,
1 9 9 6 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
D i rector of Rushmore 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. Government Money Market Fund
(since 1993), and The Rydex Institutional Money Market
<PAGE> 26<PAGE>
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 Separate 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
a m e n ded 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 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
<PAGE> 27<PAGE>
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. 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%
<PAGE> 28<PAGE>
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
s e r vices, 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
p r e p a ration 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; the 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
s h areholder reports and notices; registration fees and
expenses; proxy and annual meeting expenses, if any; all
F e d e r al, state, and local taxes (including, without
<PAGE> 29<PAGE>
limitation, stamp, excise, income, and franchise taxes);
o r ganizational 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 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,
$ 3 67,676, $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 , 4 41,508, $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
A d v i sor amounted to $1,747,874, $2,469,816, $916,004,
$704,167, $236,172, $320,232, and $1,758,657, respectively.
<PAGE> 30<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
</TABLE>
* 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.
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.
<PAGE> 31<PAGE>
<TABLE>
<CAPTION>
Fund Name and Address Number of %Ownership
Shares
<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
Nova Donaldson Lufkin 1,077,196.868 6.2%1/
Fund Jenrette
(conti- P.O. Box 2052
nued) 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
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
<PAGE> 32<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
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
Stocktontrust Nominee 575,744.824 8.4%1/
Partnership
c/o Stockton Trust,
Inc.
3001 East Camelback
Phoenix, AZ 85016
OTC Fund First Trust Corp. 502,513.450 7.3%1/
(conti- P.O. Box 173736
nued) Denver, CO 80217
Record Owner for:
Potomac Fund 502,513.450 7.3%2/
Management
19522 Clubhouse Road
Gaithersburg, MD
20879
<PAGE> 33<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
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
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
<PAGE> 34<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
U.S.
Govern- National Financial 214,773.435 17.2%1/
ment Services Corp.
Bond P.O. Box 3908
Fund New York, NY 10008
(conti-
nued)
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
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
</TABLE>
<PAGE> 35<PAGE>
1/ Record owner only.
2/ Beneficial owner only.
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.
DETERMINATION OF NET ASSET VALUE
The Money Market Fund will utilize the amortized cost method
i n v aluing 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
a m o rtization 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
M o ney 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
<PAGE> 36<PAGE>
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. 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
s e curity 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
<PAGE> 37<PAGE>
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 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
b a sis, the net asset value per share, under ordinary
circumstances, is likely to remain constant. Otherwise,
<PAGE> 38<PAGE>
r e alized 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
M a r ket Fund) may include 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 shareholders or prospective shareholders,
advertisements, and other promotional literature may be
c o m pared to the record of various unmanaged indexes.
Performance information for the Nova Fund, the Ursa Fund, and
the 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
<PAGE> 39<PAGE>
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.
S u ch 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 Lipper 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
p e r formance 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
c l a s s , 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
m u tual funds and to other relevant market indexes in
advertisements or in reports to shareholders, performance for
<PAGE> 40<PAGE>
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:
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
t h e 1, 5, or 10 year periods (or
fractional portion thereof).
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
f o r th 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.
<PAGE> 41<PAGE>
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
p e r i o d 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:
<TABLE>
<CAPTION>
One Year From Inception
<S> <C> <C>
The Nova Fund 32.77% 71.89%
The Ursa Fund -14.11% -22.21%
The Rydex OTC Fund 26.44% 65.03%
The Rydex Precious Metals Fund 3.67% -8.72%
The Rydex U.S. Government Bond Fund -1.48% -1.75%
The Juno Fund 4.30% -5.30%
</TABLE>
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 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> 42<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 income, 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 the information 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 June 30, 1996, based on a thirty-
day base period, was approximately 1.37%.
The Money Market Fund. The Money Market 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 therefrom (which reflect
deductions of all expenses of the Money Market Fund such as
<PAGE> 43<PAGE>
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
q u oted 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 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 June
30, 1996, were 4.15% and 4.07%, 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
<PAGE> 44<PAGE>
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
r e a l ized 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
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
<PAGE> 45<PAGE>
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 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").
<PAGE> 46<PAGE>
These requirements may also restrict the extent of a Fund's
a c tivities 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
c o n nection with redemptions and exchanges without the
realization of gains on the sales of stock or securities,
options, futures or forward contracts, options on futures
c o n tracts, 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 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
<PAGE> 47<PAGE>
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 into futures contracts as a hedge against
<PAGE> 48<PAGE>
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
c o n tractual 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
d a te 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
identification 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
s e c urities 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
<PAGE> 49<PAGE>
"foreign currencies" and from foreign currency options,
f o reign 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 contracts
will be valued for purposes of the RIC diversification
requirements applicable to the Metals Fund.
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 or 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
<PAGE> 50<PAGE>
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 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
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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
c o r r e ct 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 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.
<PAGE> 52<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 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.
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