SCHWAB CAPITAL TRUST, 497, 1996-02-28

SCHWAB CAPITAL TRUST
497, 1996-02-28

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<PAGE> 1

SCHWAB INTERNATIONAL INDEX FUND(TM)
- --------------------------------------------------------------------------------
PROSPECTUS February 28, 1996

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD (800-266-5623), 24 hours a
day.

THE SCHWAB INTERNATIONAL INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab International Index(R) (the
"Index"), an index created by Schwab to represent the performance of common
stocks and other equity securities including preferred stocks, rights and
warrants ("Stocks") issued by large, publicly traded companies from countries
around the world with major developed securities markets, excluding the United
States. The Fund will attempt to achieve its objective by investing
substantially all of its assets in the Stocks that comprise the Index, in
approximately the same proportion as the constituent companies (or "issuers")
are represented in the Index. The Fund is a diversified investment portfolio of
Schwab Capital Trust (the "Trust"), a no-load, open-end management investment
company.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Trust's Statement of Additional Information, dated February 28, 1996
(as amended from time to time). The Statement of Additional Information has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated by
reference into this Prospectus. This Prospectus is also available electronically
by using our Internet address: http://www.schwab.com. To receive a free paper
copy of this Prospectus or the Statement of Additional Information, call Schwab
at 800-2 NO-LOAD, 24 hours a day, or write Schwab at 101 Montgomery Street, San
Francisco, CA 94104. TDD users may contact Schwab at 800-345-2550, 24 hours a
day.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB INTERNATIONAL INDEX................................................ 11
MANAGEMENT OF THE FUND........................................................ 12
DISTRIBUTIONS AND TAXES....................................................... 14
SHARE PRICE CALCULATION....................................................... 15
HOW THE FUND SHOWS PERFORMANCE................................................ 16
TAX-ADVANTAGED RETIREMENT PLANS............................................... 17
GENERAL INFORMATION........................................................... 17
SHAREHOLDER GUIDE............................................................. 18
HOW TO PURCHASE SHARES...................................................... 18
HOW TO SELL OR EXCHANGE SHARES.............................................. 22
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 23
OTHER IMPORTANT INFORMATION................................................... 24
</TABLE>

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 2

KEY FEATURES OF THE FUND

PERFORMANCE. The investment objective of the Schwab International Index Fund(TM)
is to attempt to track the price and dividend performance (total return) of the
Schwab International Index(R) (the "Index"), an index created to represent the
performance of common stocks and other equity securities including preferred
stocks, rights and warrants ("Stocks") issued by large, publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. (See "The Schwab International Index.")
The Fund will attempt to achieve its objective by investing substantially all of
its assets in the Stocks that comprise the Index, in approximately the same
proportions as the constituent companies (or "issuers") are represented in the
Index. (See "Investment Objective, Policies and Risks.")

DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
Stocks of the 350 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers from various countries as opposed to being concentrated in a few
individual securities. Internationally diversified investors have historically
reduced their overall risk and at the same time earned significantly higher
returns. International Stocks may have greater price volatility and illiquidity
than U.S. Stocks. In addition, certain investment strategies such as foreign
currency exchange transactions and trading in options and futures may involve
increased risks to the Fund. (See "Investment Objective, Policies and Risks.")

LOW MINIMUM INVESTMENT. Investors can begin their investment program in the Fund
with as little as $1,000. Subsequent investments can be made with only $100.

LOW-COST INVESTING. The Fund brings a low-cost approach to investing with:

- no sales charges;
- an index fund management strategy designed to minimize overall
operating expenses; and
- the guarantee of Charles Schwab Investment Management, Inc. (the
"Investment Manager") and Schwab that the Fund's total fund operating
expenses will, through at least February 28, 1997, not exceed 0.69% of
the Fund's average daily net assets. (See "Management of the Fund.")

MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")

PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. currently
provides investment management services to the mutual funds in the SchwabFunds
Family(R), a family of 22 mutual funds. As of January 31, 1996, the SchwabFunds
had aggregate net assets of approximately $33 billion. (See "Management of the
Fund.")

2
<PAGE> 3

SHAREHOLDER SERVICE. Schwab serves as the Fund's principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD. TDD users may contact Schwab at
800-345-2550, 24 hours a day. As a discount broker, Schwab gives you investment
choices and lets you make your own decisions. Schwab has many services that help
you make the most informed investment decisions. Schwab also enables you to
execute your trading requests electronically by using StreetSmart(TM), The
Equalizer(R) and TeleBroker(R). (See "How to Purchase Shares" and "How to Sell
or Exchange Shares.")

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. You
avoid the inconvenience, delay and expense associated with checks or bank wires.
(See "Automatic Investment Plan," visit or call your local Schwab office or call
800-2 NO-LOAD, 24 hours a day.)

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report. (See
"Other Important Information.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Fund.")

SUMMARY OF EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee 1............................................................ 0.75%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction) 2............................................ 0.40%
12b-1 Fees........................................................................ None
Other Expenses (after fee reduction and expense reimbursement) 3.................. 0.29%
TOTAL FUND OPERATING EXPENSES (AFTER FEE REDUCTION AND EXPENSE REIMBURSEMENT) 3, 4.. 0.69%
</TABLE>

1 Applies only to the redemption (including by exchange) of shares purchased and
held less than six months. The fee is paid to the Fund and is designed to
protect long-term investors from the cost of frequent investments and
redemptions by short-term investors. (See "How to Sell or Exchange Shares.") The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and The Charles Schwab Trust Company (the "Trust Company") and for
certain tax-advantaged retirement plans. Call your Schwab representative for
more information.

<PAGE> 4

2 This amount has been restated to reflect a reduction by the Investment Manager
which is guaranteed through at least February 28, 1997. If there were no such
reduction, the maximum management fee would be 0.70% of the Fund's average daily
net assets.

3 This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least February 28, 1997, the total fund
operating expenses for the Fund will not exceed 0.69% of the Fund's average
daily net assets. Without the guarantees on total fund operating expenses in
effect for the fiscal year ended October 31, 1995 (0.95% of the Fund's average
daily net assets through June 30, 1995, and 0.69% through October 31, 1995),
other expenses and total fund operating expenses would have been 0.52% and
1.22%, respectively, of the Fund's average daily net assets.

4 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage account or Schwab One(R) account. (See "How to Purchase
Shares--Schwab Account Minimums and Associated Fees.") Schwab Individual
Retirement Accounts with balances of $10,000 or more by September 15, 1996 will
not be charged Schwab's $29 annual IRA account fee for the life of the account.
Schwab Keogh plans are currently charged an annual fee of $45. (See "Tax-
Advantaged Retirement Plans.")

EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$7 $22 $38 $86
</TABLE>

THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY. This example reflects the guarantee by the Investment Manager and
Schwab that the total fund operating expenses will not exceed the amount
specified for the time period referred to in note (3). ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return
pursuant to requirements of the SEC. THIS HYPOTHETICAL RATE OF RETURN IS NOT
INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.

4
<PAGE> 5

FINANCIAL HIGHLIGHTS

Set forth below is the table containing information as to income and capital
changes for a share outstanding for the periods indicated below. This
information has been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose unqualified report appears with the financial statements in
the Statement of Additional Information.

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED SEPTEMBER 9, 1993
OCTOBER 31, (COMMENCEMENT
-------------------- OF OPERATIONS)
1995 1994 TO OCTOBER 31, 1993
-------- -------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period............... $ 10.89 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.14 0.11 0.03
Net realized and unrealized gain on investments and
foreign currency transactions................... 0.22 0.69 0.12
-------- -------- ---------
Total from investment operations................... 0.36 0.80 0.15
LESS DISTRIBUTIONS
Dividends from net investment income............... (0.12) (0.04) --
Distributions from realized gain on investments.... -- (0.02) --
-------- -------- ---------
Total distributions................................ (0.12) (0.06) --
-------- -------- ---------
Net asset value at end of period..................... $ 11.13 $ 10.89 $ 10.15
========= ========= =========
Total return(%)...................................... 3.35 7.89 1.50
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)................... $179,612 $142,355 $ 106,085
Ratio of expenses to average net assets(%)......... 0.85 0.90 0.60*
Ratio of net investment income to average net
assets(%)....................................... 1.45 1.14 2.15*
Portfolio turnover rate(%)......................... 0 6 2
</TABLE>

Notes:
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1995, 1994 and 1993, would have been 1.22%, 1.30% and 2.10%*,
respectively, and the ratio of net investment income to average net assets would
have been 1.08%, 0.74% and 0.65%*, respectively.

On June 30, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.

* Annualized

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<PAGE> 6

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

As a complement to a domestic equity portfolio, the Fund offers a convenient way
to invest a portion of your assets internationally, while at the same time
achieving a level of diversification of countries and companies that would be
difficult and costly to achieve with individual securities. Internationally
diversified investors have historically reduced their risk and at the same time
earned significantly higher returns.

INVESTMENT OBJECTIVE, POLICIES AND RISKS
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THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE SCHWAB INTERNATIONAL
INDEX(R).
- -------------------------------------------------------------------------

The Fund is a diversified investment portfolio of the Trust, an open-end
management investment company. The investment objective of the Fund is to
attempt to track the price and dividend performance (total return) of the Schwab
International Index, an index created to represent the performance of Stocks
issued by large, publicly traded companies from countries around the world with
major developed securities markets, excluding the United States. As a matter of
fundamental policy, the Fund will invest at least 65% of its total assets in
common stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three countries other than the U.S.
The Fund's investment objective is fundamental and cannot be changed without
shareholder approval. The Fund's investment policies and restrictions, unless
otherwise noted, are non-fundamental and may be changed by the Board of
Trustees. (See "Investment Restrictions" in the Statement of Additional
Information.) While there is no assurance that the Fund will achieve its
investment objective, it will endeavor to do so by following the investment
policies set forth below.
- -----------------------------------------------------
THE FUND FOLLOWS AN "INDEXING" OR "PASSIVE" STRATEGY.
- -----------------------------------------------------

The Fund follows an "indexing" or "passive" strategy under which Stocks are
purchased or sold only in order to match the composition of the Index.
Accordingly, the Investment Manager generally does not select securities for the
Fund's investment portfolio based upon traditional economic, financial and
market analyses and/or forecasting.
- ------------------------------------------------------------------------------
THE FUND IS MANAGED TO MINIMIZE COSTS AND INCREASE SHAREHOLDERS' TOTAL RETURN.
- ------------------------------------------------------------------------------

The Fund is managed to offset capital gains with capital losses in order to
minimize your capital gains tax liability. This special feature of the Fund can
make a real difference in your after tax return, especially if you are in a high
tax bracket.

The Fund has adopted a number of policies that should cause its portfolio
turnover rate to be below that experienced in many other mutual fund portfolios.
The Fund's portfolio turnover rates for the fiscal years ended October 31, 1995
and 1994 were 0% and 6%, respectively. Lower portfolio turnover acts to minimize
associated transaction costs as well as the level of realized capital gains.
Shareholders' current tax liability for capital gains should be reduced and
their total return increased by these policies.

6
<PAGE> 7

To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e.,"rebalanced") to reflect changes in the Index. The Fund's trading strategy
is designed to further minimize transaction costs (e.g., the Fund will generally
only buy round-lots of stocks and may trade large blocks of securities). These
policies may cause a particular Stock or a group of Stocks from a particular
country to be over- or under-represented in the Fund relative to its Index
weighting or result in its continued ownership by the Fund after its deletion
from the Index, thereby reducing the correlation between Fund and Index
composition. However, given the diversified nature of the Fund, the Investment
Manager does not expect that these potential deviations will significantly
impact the correlation between Fund and Index performance. Moreover, the
Investment Manager will engage in these practices only to the extent that they
do not have a material effect on the Fund's ability to track the performance of
the Index.
- -------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- -------------------------------------------------------------------

Under normal market conditions, the Fund will invest at least 80% of its total
assets in Stocks that comprise the Index ("Index Stocks"). The Fund, however, is
not required to buy or sell securities solely because the percentage of its
assets invested in Index Stocks changes when the market value of its holdings
increases or decreases. In addition, the Fund may omit or remove an Index Stock
from its portfolio if the Investment Manager believes the Stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated. To compensate for
any Index Stocks omitted or removed from its investment portfolio, the Fund may
purchase Stocks not in the Index (which would then be considered Index Stocks
for purposes of the Fund's policy regarding the percentage of its assets to be
invested in Index Stocks) if the Investment Manager believes that their market
performance is likely to replicate that of the Index Stocks they replace.

It is anticipated that the Fund will be able to invest in a majority of Index
Stocks. The Fund will generally select Index Stocks by reference to their
weighting in the Index. Thus, the Fund intends that the percentage of its assets
invested in each Index Stock will approximate the weighting of that Stock in the
Index.
- ------------------------------------------------
FUND PERFORMANCE SHOULD TRACK THAT OF THE INDEX.
- ------------------------------------------------

While Fund performance will not precisely match Index performance, the Fund will
attempt to maximize the correlation between its performance and that of the
Index. Factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and current capital gains tax liability, and changes in the
international securities markets and the Index itself are expected by the
Investment Manager to account for any differences between the Fund's performance
and that of the Index.

Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Schwab International Index(R) of 0.9 or
better. A figure of 1.0 would indicate

7
<PAGE> 8

perfect correlation. The Investment Manager monitors the correlation between
Fund and Index performance on a regular basis. In the unlikely event that a
correlation of 0.9 or better is not achieved, the Board of Trustees will
consider alternative arrangements.
- --------------------------------------------------------
INTERNATIONAL STOCKS MAY HAVE LESS LIQUIDITY AND GREATER
PRICE VOLATILITY THAN U.S. STOCKS.
- --------------------------------------------------------

Because the Fund will be invested primarily in international equity securities,
its price volatility may be even greater than if it were invested in U.S. equity
securities. When the Fund invests in such securities, they usually will be
denominated in a foreign currency, and the Fund may temporarily hold foreign
currencies. Thus, the value of the Fund's shares will be affected by changes in
currency exchange rates. The value of the Fund's investments denominated in
foreign currencies will depend on the relative strength of those currencies and
the U.S. dollar, and the Fund may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between foreign
currencies and the U.S. dollar. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange market as well as by political factors. Changes in the foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to shareholders by the Fund. Accordingly, the
Fund's ability to achieve its investment objective will depend, to some extent,
on favorable exchange rates.

Other risks and considerations of international investing include: differences
in accounting, auditing and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions; small trading volumes and
generally lower liquidity of foreign stock markets, which may result in greater
price volatility; foreign withholding taxes payable on the Fund's security
holdings, which may reduce dividend income payable to shareholders; the
possibility of expropriation, nationalization or confiscatory taxation; adverse
changes in investment or exchange control regulations; political instability
which could affect U.S. investment in foreign countries; and potential
restrictions on the flow of international capital.

As a fundamental policy, the Fund may invest up to 10% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument.

Because of the risks associated with international equity investments, the Fund
is intended to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock market movements.
Investors should not consider the Fund a complete investment program, but should
also hold securities with different risk characteristics including other mutual
funds or portfolios of individual securities, U.S. common stocks, bonds and
money market instruments.
- ---------------------------------------------------
THE FUND MAY PURCHASE SECURITIES ASIDE FROM STOCKS.
- ---------------------------------------------------

8
<PAGE> 9

the Fund may invest in securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, certificates of deposit, bankers'
acceptances, and commercial paper (which has been rated in one of the two
highest categories by a non-affiliated, nationally recognized statistical
ratings organization); enter into repurchase agreements collateralized by these
instruments; and purchase shares of other investment companies that invest
primarily in any of the securities described above. In the aggregate, no more
than 10% of the Fund's total assets may be invested in other investment
companies, and an investment in any one investment company will be limited to 5%
of total Fund assets. The Investment Manager will charge no management fees
attributable to any Fund assets invested in other investment companies. (See
"Investment Restrictions" in the Statement of Additional Information.)
- ----------------------------------------------------
THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
- ----------------------------------------------------

The Fund may also purchase futures contracts on stocks and stock indices and
options contracts (including options on futures contracts) to accommodate cash
flows or in anticipation of taking a market position when, in the opinion of the
Investment Manager, available cash balances do not permit economically efficient
Stock purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. Futures contracts and
options may be used to maintain cash reserves while simulating full investment;
to facilitate trading; or to seek higher investment returns or simulate full
investment when a futures contract is priced more attractively or is otherwise
considered more advantageous than the underlying security or index. The Fund may
enter into futures contracts and options thereon provided that the aggregate
deposits required on these contracts do not exceed 5% of the Fund's total
assets. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Fund's total assets. In addition,
certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the Fund's use of futures contracts and options.

Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Fund and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior is expected to
resemble that of the Fund's underlying securities. 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.

The risk of loss in trading futures contracts and options in some strategies can
be substantial, due both to the low margin deposits required and the extremely
high degree of leverage that can be involved in futures and options pricing. As
a result, a relatively small price movement in a futures contract or an option
may result in immediate and substantial loss (or gain) to the investor. While
futures contracts and options can be used as leveraged instruments, the Fund may
not use futures contracts or options to leverage its portfolio. When investing
in futures contracts and options, the Fund will segregate cash, cash-equivalents
or liquid, high-quality debt instruments in the amount of the underlying
obligation.

9
<PAGE> 10

CURRENCY HEDGING. The Fund may engage in foreign currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
expects to engage in foreign currency exchange transactions in connection with
the purchase and sale of portfolio securities (so-called "transaction hedging")
and to protect the value of specific portfolio positions ("position hedging").

For transaction hedging purposes, the Fund enters into foreign currency
transactions with respect to specific receivables or payables of the Fund
arising in connection with the purchase or sale of its portfolio securities. By
transaction hedging, the Fund will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the applicable foreign currency during the period between the date on
which the security is purchased or sold, and the transaction's settlement date.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or against an
increase in the value of currency for securities which the Fund expects to
purchase).

When it engages in portfolio and/or transaction hedging, the Fund may purchase
or sell a foreign currency on a spot (or cash) basis at the prevailing spot
rate, and may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts ("futures contracts"). The Fund may also purchase
exchange-listed and over-the-counter call and put options on futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Fund the right to sell a currency at
an exercise price until the expiration of the option. A call option on a futures
contract gives the Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Fund the right to purchase a currency at the exercise price until the expiration
of the option.

Hedging transactions involve costs and may result in losses, and the Fund's
ability to engage in hedging transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the prices of
the underlying securities that the Fund owns or expects to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain that might result from an increase in the value of such
currency.

For further information on currency forward and futures contracts and foreign
currency options, see "Investment Securities" in the Statement of Additional
Information.
- --------------------------
THE FUND MAY BORROW MONEY.
- --------------------------

10
<PAGE> 11

- ----------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
- ----------------------------------------------------

To increase its income, the Fund may lend securities from its portfolio
to brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the market value of the loaned securities plus accrued interest.
(For more information regarding securities lending, see "Other Investment
Policies--Loans of Portfolio Securities" in the Statement of Additional
Information.)

THE SCHWAB INTERNATIONAL INDEX(R)
- -------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- -------------------------------------

To be included in the Index, a company must satisfy all of the following
criteria:

1. it must be an "operating company" (i.e., not an investment company) whose
principal trading market is in a country with major developed securities
markets outside the United States;

2. a liquid market for its shares must exist;

3. its market value must place it among the top 350 such companies as measured
by market capitalization, provided that the total of all companies from any
country may not exceed 35% of the Index on a rebalancing date.

A particular Stock's weighting in the Index is based on its relative total
market value (i.e., its market price per share times the number of shares
outstanding), divided by the total market value of the Index. As of January 31,
1996 the aggregate market capitalization of Index Stocks was approximately $3.8
trillion.
- -----------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- -----------------------------------------

The Index, which as of January 31, 1996 represented approximately 37% of the
total market value of all publicly traded non-United States companies, was
developed in 1993 and is maintained by Schwab to represent the total return of
common stocks and other equity securities issued by large publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. Currently the countries included in the
Index are Australia, Belgium, Canada, Denmark, France, Germany, Hong Kong,
Italy, Japan, the Netherlands, Singapore, Spain, Sweden, Switzerland and the
United Kingdom. The Index serves as a standard of comparison for the Fund's
performance. Schwab receives no compensation from the Fund for maintaining the
Index.
- ------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- ------------------------------------------------------------

The Index's performance (i.e., the market value of all Index Stocks in U.S.
dollars) is calculated and made available each Business Day by Schwab. The total
return of the Index is computed monthly

11
<PAGE> 12
(using beginning of month capitalization weightings and assuming reinvestment of
dividends) and may be reported from time to time to Fund shareholders.
- ---------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- ---------------------------------------------------------

Schwab reviews and, as necessary, revises the list of companies whose securities
are included in the Index at least semi-annually. Companies known by Schwab to
meet or no longer meet the inclusion criteria will be added or deleted as
appropriate. Schwab will also modify the Index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits,
tenders, mergers, swaps, spin-offs or bankruptcy filings made because of a
company's inability to continue operating as a going concern). Schwab may change
Index inclusion criteria if it determines that doing so would cause the Index to
be more representative of the large, publicly traded international company
equity market. In the future, the Trust's Board of Trustees, subject to
shareholder approval, may select another index should it decide that taking such
action would be in the best interests of Fund shareholders.

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the Trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to providing
day-to-day portfolio management of the Fund, the Investment Manager provides
general investment advice regarding the Fund's investment strategies and
performs expense management, accounting and recordkeeping, and other
administrative services necessary to the operation of the Fund. The Investment
Manager, formed in 1989, is the investment adviser and administrator of the
mutual funds in the SchwabFunds Family(R), a family of 22 mutual funds. As of
January 31, 1996, the SchwabFunds had aggregate net assets of approximately $33
billion.

Pursuant to separate agreements, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund ("Schwab" or the "Transfer Agent"). Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of the Fund's shares and
facilitating effective cash management of shareholders' account balances. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary and appropriate to provide
the described shareholder and transfer agency information and services. Schwab
is also the Fund's distributor, but receives no compensation for its services as
such.

Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 3.3 million active customer accounts and has over 200 branch offices.
Schwab also offers convenient access to financial information services and
provides products and services that help investors make investment decisions.
Schwab and the Investment Manager are wholly owned subsidiaries of The Charles
Schwab Corporation. Charles R. Schwab is the founder, Chairman, Chief Executive
Officer and a director of

12
<PAGE> 13

The Charles Schwab Corporation and, as of January 31, 1996, the beneficial owner
of approximately 20.1% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.

Geri Hom is the portfolio manager of the Fund. She joined Schwab in March 1995
as Portfolio Manager--Equities and currently manages the four Schwab index funds
and co-manages the three Schwab Asset Director(R) Funds with combined assets of
over $1.7 billion in assets. For four years before joining Schwab, she was a
Principal for Wells Fargo Nikko Investment Advisors. For the prior seven years,
she was Vice President and Manager of the Domestic Equity Portfolio Management
Group for Wells Fargo Nikko.

Stephen B. Ward, Senior Vice President and Chief Investment Officer, also
participates in the management of the Fund. Prior to April 1991, Mr. Ward was
Vice President and Portfolio Manager for Federated Investors.

Please see the Fund's Annual Report to Shareholders for the fiscal year ended
October 31, 1995 for a discussion by the Investment Manager of the Fund's
performance.

- ---------------------------------------------------------------------
THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT TOTAL FUND OPERATING
EXPENSES WILL NOT EXCEED 0.69% OF THE FUND'S AVERAGE DAILY NET ASSETS
THROUGH AT LEAST FEBRUARY 28, 1997.
- ---------------------------------------------------------------------

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund a
graduated annual fee, payable monthly, of 0.70% of the Fund's average daily net
assets not in excess of $300 million and 0.60% of such assets over $300
million. The Investment Manager has agreed to waive the Fund's management fee
in excess of 0.40% of the Fund's average daily net assets through at least
February 28, 1997. In addition, the Investment Manager and Schwab guarantee
that total fund operating expenses will not exceed 0.69% of the Fund's average
daily net assets through at least February 28, 1997. This expense limit will
serve to maintain or lower the Fund's expenses and thus maintain or increase
the Fund's total return to shareholders. For the fiscal year ended October 31,
1995, the Fund paid investment management fees and total operating expenses of
0.43% and 0.85%, respectively, of the Fund's average daily net assets.

For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of the Fund's
average daily net assets. State Street Bank and Trust Company is the Fund's
custodian.

The Trust pays the expenses of its operations, including the fees and expenses
of independent auditors, legal counsel and custodian; the costs of calculating
net asset values, brokerage commissions or transaction costs; taxes;
registration fees; and the fees and expenses of qualifying the Trust and its
shares for distribution. The expenses will generally be allocated among the
Trust's investment portfolios or classes on the basis of relative net assets at
the time the expense is incurred. However, expenses directly attributable to a
particular Fund or class will be charged to that Fund or class.

13
<PAGE> 14

PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain best price and execution.
The full range and quality of brokerage services available are considered in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab or another qualified
affiliated broker or dealer to execute the Fund's transactions when it
reasonably believes that commissions (or prices) charged and transaction quality
will be at least comparable to those available from other qualified brokers or
dealers.

DISTRIBUTIONS AND TAXES
- -------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- -------------------------------------------------

DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund will distribute substantially all of
its net investment income and net capital gains, if any, on an annual basis, as
determined by the Trust's Board of Trustees. All distributions will be
automatically reinvested in additional shares of the Fund unless the shareholder
elects otherwise.

FEDERAL TAX INFORMATION. The Fund is treated as a separate entity for tax
purposes, has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. In order to so qualify, the Fund will distribute substantially all of
its net investment income and net capital gains to shareholders on an annual
basis and will meet certain other requirements. Such qualification will relieve
the Fund of liability for federal income tax to the extent its earnings are so
distributed.

Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. Distributions received from the Fund designated as long-term
capital gains (net of capital losses), whether received in cash or reinvested,
will be taxable as long-term capital gains without regard to the length of time
a shareholder has owned shares in the Fund. However, any loss on the sale or
exchange of shares held for six months or less shall, to the extent of any
long-term capital gain distributions received with respect to such shares, be
treated as a long-term capital loss. If a shareholder is not subject to income
tax, generally the shareholder will not be taxed on amounts distributed by the
Fund, including any foreign taxes paid by the Fund and passed through, as
described below.

Dividends and distributions paid by the Fund are not eligible for the
dividends-received deduction for corporate shareholders if, as expected, none of
the Fund's income consists of dividends paid by United States corporations.

Income received by the Fund from sources within various foreign countries may be
subject to foreign income taxes withheld at the source. If more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
securities issued by foreign corporations, the Fund is permitted to elect to
"pass through" to the Fund's shareholders the amount of foreign income taxes
paid by the Fund. Pursuant to this election, U.S. shareholders must include in
gross income, even though not actually received, their respective pro rata share
of foreign taxes paid by the Fund, and may either

14
<PAGE> 15

deduct their pro rata share of foreign taxes (but not for alternative minimum
tax purposes) or credit the tax against U.S. income taxes (subject to certain
limitations described in Code section 904), but not both. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.

The foregoing discussion relates only to federal income tax law as applicable to
U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates)
generally are subject to U.S. withholding tax at the rate of 30% (or lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign shareholders of long-term capital gains
and any gains from the sale or other disposition of shares of the Fund generally
are not subject to U.S. taxation. Different tax consequences may result if the
foreign shareholder is engaged in a U.S. trade or business or is present in the
U.S. for more than 183 days during the year. In addition, the tax consequences
to a foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by the Fund may also be
subject to state, local and foreign taxes, and their treatment under applicable
tax laws may differ from the federal income tax treatment.

The Fund may inadvertently invest in non-U.S. corporations which would be
treated as Passive Foreign Investment Companies ("PFICs") or become a PFIC under
the Code. This could result in adverse tax consequences upon the disposition of,
or the receipt of "excess distributions" with respect to, such equity
investments. To the extent the Fund does invest in PFICs, it may elect to treat
the PFIC as a "qualified electing fund" or mark-to-market its investments in
PFICs annually. In either case, the Fund may be required to distribute amounts
in excess of its realized income and gains. To the extent that the Fund itself
is required to pay a tax on income or gain from investment in PFICs, the payment
of this tax would reduce the Fund's economic return.

Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Fund will notify
shareholders at least annually as to the nature of all distributions made during
the taxable year, including amounts qualifying as ordinary dividends and capital
gain distributions.

The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. The discussion of taxes set forth above
is included for general information purposes only. Prospective investors should
consult their tax advisers with specific reference to their own tax situations.

SHARE PRICE CALCULATION
- ------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ------------------------------------------------

15
<PAGE> 16

Exchange is open for trading (a "Business Day") at 4:00 p.m., Eastern time. The
Fund's NAV will fluctuate, and Fund shares are not insured against reduction in
net asset value. Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt and verification by Schwab's
Mutual Fund Transfer Agency Department or its authorized agent. (See "Share
Price Calculation" in the Statement of Additional Information.)

The Fund values its portfolio securities daily based on their market value. Each
security held by the Fund which is listed on a securities exchange and for which
market quotations are available is valued at the last quoted sale price for a
given day, or if a sale is not reported for that day, at the mean between the
most recent quoted bid and asked prices. Price information on each listed
security is taken from the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Other assets for which
no quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value. If extraordinary events that materially affect the value of
the investments of the Fund occur subsequent to the close of the securities
market on which such securities are primarily traded, the investments affected
thereby will be valued at "fair value" (as described above).

HOW THE FUND SHOWS PERFORMANCE
- ------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- ------------------------------------------------------------------

From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.

The Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return mandated by the SEC. Other reported total return
figures may differ in that they may report non-standard periods or represent
aggregate or cumulative return over a stated length of time.

The Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R), the Schwab International Index(R), the
Schwab Small-Cap Index(TM) and the Standard & Poor's 500 Index), United States
Treasury obligations, bank certificates of deposit, the Consumer Price Index and
other investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings or other
information prepared by Lipper Analytical Services, Inc. and Morningstar, Inc.

Additional performance information is included in the Fund's Annual Report to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD or from
your local Schwab office.

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<PAGE> 17

TAX-ADVANTAGED RETIREMENT PLANS
- -------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES, AND THE FUND
MAY BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.
- -------------------------------------------------------------

Schwab offers tax-advantaged retirement plans for which the Fund may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.

SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRAs with balances of $10,000 or more by September 15, 1996 will not be
charged Schwab's $29 annual IRA account fee for the life of the account.

SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permits the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.

SCHWAB CORPORATE RETIREMENT PLANS. A well-designed retirement program can help a
company attract and retain valuable employees. Call your local Schwab office or
800-2 NO-LOAD, 24 hours a day, for more information.

GENERAL INFORMATION

ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on May 7, 1993 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more investment portfolios or
series ("Series"). Currently, shares of six Series are offered. The Board of
Trustees may authorize the issuance of shares of additional Series or classes if
it deems it desirable. Shares within each Series or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights as
to distributions, assets and liquidation vary among classes of a Series.

The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
Trustees, changing fundamental policies, or approving or amending an investment
advisory agreement. In addition, a Trustee may be removed by shareholders at a
special meeting called upon written request by shareholders owning at least 10%
of the outstanding shares of the Trust. Shareholders will vote by Series and not
in the aggregate (for example, when voting to approve the investment advisory
agreement), except when voting in the aggregate is permitted under the
Investment Company Act of 1940, as amended, such as for the election of
Trustees.

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<PAGE> 18

SHAREHOLDER GUIDE
- ------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- ------------------------------------------------------

SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.

Investors should be aware that telephone transactions may be difficult during
periods of drastic economic or market changes. Shareholders who experience
difficulties in purchasing, redeeming or exchanging shares by telephone can
utilize the alternative methods discussed below to place their orders.

To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.

You may purchase shares through an account maintained with Schwab or through any
other entity which has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Fund shares through a Schwab
account relates solely to transactions through Schwab accounts and should not be
read to apply to transactions through other designated entities. For more
information, see "Purchase and Redemption of Shares" in the Statement of
Additional information or contact such designated entity.

HOW TO PURCHASE SHARES
- ---------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- ---------------------------------------------------------------

If you purchase Fund shares through an account maintained with Schwab, payment
for shares must be made directly to Schwab. The Securities Investor Protection
Corporation ("SIPC") will provide account protection in an amount up to $500,000
for securities, including Fund shares, that you hold in a Schwab account. Of
course, this SIPC account protection does not protect shareholders from share
price fluctuations.

You may purchase Fund shares through your Schwab account as described below. If
you already have a Schwab account, you need not open a new account.

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<PAGE> 19
at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should call their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.

You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). You may
also buy Fund shares using electronic products such as StreetSmart(TM), The
Equalizer(R) and TeleBroker(R). All deposit checks should be made payable to
Charles Schwab & Co., Inc. If you would like to wire funds into your existing
Schwab account, please contact your local Schwab office for instructions.

PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund through an account maintained with the Trust
Company. Payment for shares must be made directly to the Trust Company, and you
must have funds available in your account to purchase shares of the Fund.
Contact a Trust Company representative for more information.

SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 deposit
and account balance minimum to maintain a Schwab brokerage account ($500 for
custodial accounts). A quarterly fee of $7.50 will be charged on Schwab
brokerage accounts that fall below the minimum. This fee, if applicable, will be
charged at the end of each quarter and will be waived if there has been at least
one commissionable trade within the last six months, or if the shareholder's
combined account balances at Schwab total $10,000 or more.

Schwab currently imposes no fee for opening a Schwab One(R) account with a
minimum of $5,000 account equity. Schwab One accounts containing less than
$5,000 account equity are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.
- -------------------------------------------------------------
YOUR INITIAL FUND INVESTMENT MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- -------------------------------------------------------------

MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial Fund investment may be as low
as $1,000 ($500 for IRAs, certain other retirement plans and custodial
accounts). The minimum subsequent investment is $100. These requirements may be
reduced or waived on certain occasions. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.
- ---------------------------------------------
SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS
AVAILABLE IN YOUR SCHWAB ACCOUNT.
- ---------------------------------------------

WHEN SHARES WILL BE PURCHASED. You must have funds available in your account in
order to purchase Fund shares through your Schwab account. If funds (including
those which are transmitted by wire) are received by Schwab before the time the
Fund's NAV is calculated (normally 4:00 p.m. Eastern time), they will be
available for investment on the day of receipt. If funds arrive after that time,
they will be available for investment the next Business Day.

19
<PAGE> 20

METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase Fund shares. You may choose the one that works best for you, and Schwab
will confirm execution of your purchase order.

BY PHONE:

You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day. TDD users may
contact Schwab at 800-345-2550, 24 hours a day.

BY MAIL:

You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc., which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.

Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should:

- reference your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- specify the name of the Fund and the dollar amount of shares you would
like purchased; and
- (initial share purchases only) select one of the distribution options
listed below and on the following page.

ELECTRONICALLY:

For more information regarding how to purchase Fund shares electronically
using StreetSmart(TM), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

Visit your local Schwab office where a representative will be happy to assist
you.

AUTOMATIC INVESTMENT:

Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase Fund shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
- -----------------------------------------------
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
- -----------------------------------------------

SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in the Fund. If you
already are a Fund shareholder and wish to change your distribution option,
please call your local Schwab office for assistance.

1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gain
distributions will be reinvested in additional Fund shares. This option
will be selected automatically unless you

20
<PAGE> 21

specify another option. If you are purchasing Fund shares through Schwab's
Automatic Investment Plan, you must choose this distribution option for
this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and capital gain distributions will be reinvested in additional
shares.

3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.

Dividends and distributions subject to reinvestment will be invested at the NAV
next determined after their record date. Cash distributions will be credited to
your Schwab account and will be held there or mailed to you depending on the
account standing instructions applicable to your account. For information on how
to wire funds from your Schwab account to your bank, see "Other Important
Information--Wire Transfers To Your Bank."

OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion
and without prior notice to shareholders to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, are subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.

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<PAGE> 22

HOW TO SELL OR EXCHANGE SHARES
- ------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ------------------------------------------------

SALE OF SHARES. Shares will be redeemed at the NAV next determined after receipt
and verification by Schwab's Mutual Fund Transfer Agency Department or its
authorized agent of proper redemption instructions, as set forth on the
following pages. Payment for redeemed shares will be credited directly to your
Schwab account no later than 7 days after Schwab's Mutual Fund Transfer Agency
Department or its authorized agent receives your redemption instructions in
proper form. Redemption proceeds will then be held there or mailed to you
depending on the account standing instructions you selected. For information on
how to wire funds from your Schwab account to your bank, see "Other Important
Information--Wire Transfers to Your Bank." If you purchased shares by check,
your redemption proceeds may be held in your Schwab account until your check
clears (which may take up to 15 days). Depending on the type of Schwab account
you have, your money may earn interest during any holding period.

The Fund may suspend redemption rights or postpone payments when: trading on the
New York Stock Exchange (the "Exchange") is restricted; the Exchange is closed
for any reason other than its customary weekend or holiday closings; emergency
circumstances as determined by the SEC exist; or for such other circumstances as
the SEC may permit. The Fund may also elect to invoke a 7-day period for cash
settlement of individual redemption requests in excess of $250,000 of 1% of the
Fund's net assets, whichever is less. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

EXCHANGE OF SHARES. The exchange privilege allows you to exchange your
SchwabFunds(R) shares for shares of any other SchwabFunds class or Series
available to investors in your state. Thus, you can conveniently modify your
investments if your goals or market conditions change. An exchange involves the
redemption of Fund shares and the purchase of shares of any SchwabFunds class or
Series of your choice. An exchange of shares will be treated as a sale and
purchase of shares for federal income tax purposes. Note that you must meet the
initial or subsequent minimum investment requirements applicable to the shares
you wish to receive in exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.

EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.75%
(three-fourths of one percent) early withdrawal fee upon redemption or exchange
proceeds attributable to shares purchased and held less than six months. To
benefit Fund shareholders directly, the early withdrawal fee is paid directly to
the Fund and does not apply to the redemption or exchange of shares acquired
through reinvestment of dividends or capital gains. Solely for purposes of
calculating the amount (if any) of the early withdrawal fee, shares will be
treated as redeemed on a "first-in first-out basis," except that shares acquired
through dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee. The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

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<PAGE> 23

METHODS OF SELLING OR EXCHANGING SHARES.

BY PHONE:

To sell shares or to exchange shares between any of the SchwabFunds(R) by
telephone, please call your local Schwab office during its regular business
hours or 800-2 NO-LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day. To properly process your telephone redemption or
exchange request, we will need the following information:

- your Schwab account number and your name for verification;
- the number of shares to be sold or exchanged;
- the name of the Fund from which you wish to sell or exchange shares;
- the name of the Fund and class into which shares are to be exchanged,
if applicable; and
- the distribution option you select (if exchanging shares).

BY MAIL:

You may also request a redemption or an exchange by writing Schwab at 101
Montgomery Street, San Francisco, CA 94104 or your local Schwab office. To
properly process your mailed redemption or exchange request, we will need the
above information and a letter signed by at least one of the registered Schwab
account holders in the exact form specified in the account. Once mailed, a
redemption request is irrevocable and may not be modified or canceled.

ELECTRONICALLY:

For more information regarding how to sell or exchange Fund shares
electronically using StreetSmart(TM), The Equalizer(R) and TeleBroker(R),
please call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

You can also request a redemption or exchange in person at your local Schwab
office.

SCHWAB AUTOMATIC INVESTMENT PLAN
- ---------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY TO MAKE
REGULAR INVESTMENTS IN THE FUND.
- ---------------------------------------------------------------------------

Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds (and certain other funds available
through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet the Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab Money Fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing the Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call your local Schwab office or
800-2 NO-LOAD, 24 hours a day.

23
<PAGE> 24

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 minimum balance
requirement ($250 in the case of IRAs, other retirement plans and custodial
accounts). Shareholders will be notified in writing 30 days before the Fund
takes such action to allow them to increase their holdings to at least the
minimum level. Fund shares will be automatically redeemed should the Schwab
account in which they are carried be closed.

CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write Schwab at 101
Montgomery Street, San Francisco, CA 94104 to that effect.

===============================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
===============================================================================

24
<PAGE> 25

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 26

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 28

<TABLE>
<S> <C>
----------------
SCHWAB INTERNATIONAL INDEX BULK RATE
FUND(TM) U.S. POSTAGE
PAID
PROSPECTUS February 28, 1996 CHARLES SCHWAB

SchwabFunds(R) ----------------
101 Montgomery Street
San Francisco, California 94104

981-5 (2/96) CRS 10167 Printed on recycled paper.

SchwabFunds(R)
</TABLE>
<PAGE> 29

SCHWAB SMALL-CAP INDEX FUND(R)
- --------------------------------------------------------------------------------
PROSPECTUS February 28, 1996

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD (800-266-5623), 24 hours a
day.

THE SCHWAB SMALL-CAP INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM) (the
"Index"), an index created by Schwab to represent the performance of common
stocks of the second 1,000 largest United States corporations (excluding
investment companies), ranked by market capitalization (share price times the
number of shares outstanding). The issuers of these common stocks are referred
to in this prospectus as "Small-Cap Issuers." The Fund will attempt to achieve
its objective by investing substantially all of its assets in stocks that
comprise the Index, in approximately the same proportion as the Small-Cap
Issuers are represented in the Index. The Fund is a diversified investment
portfolio of Schwab Capital Trust (the "Trust"), a no-load, open-end management
investment company.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB SMALL-CAP INDEX.................................................... 10
MANAGEMENT OF THE FUND........................................................ 11
DISTRIBUTIONS AND TAXES....................................................... 13
SHARE PRICE CALCULATION....................................................... 14
HOW THE FUND SHOWS PERFORMANCE................................................ 14
TAX-ADVANTAGED RETIREMENT PLANS............................................... 15
GENERAL INFORMATION........................................................... 15
SHAREHOLDER GUIDE............................................................. 16
HOW TO PURCHASE SHARES...................................................... 16
HOW TO SELL OR EXCHANGE SHARES.............................................. 19
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 21
OTHER IMPORTANT INFORMATION................................................... 21
</TABLE>

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 30

KEY FEATURES OF THE FUND

PERFORMANCE. The investment objective of the Schwab Small-Cap Index Fund(R) is
to attempt to track the price and dividend performance (total return) of the
Index, an index composed of the common stocks of the second 1,000 largest United
States corporations (excluding investment companies), ranked by market
capitalization (share price times the number of shares outstanding). The Fund
will attempt to achieve its objective by investing substantially all of its
assets in stocks that comprise the Index, in approximately the same proportions
as the Small-Cap Issuers are represented in the Index. (See "Investment
Objective, Policies and Risks.")

DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
common stocks of the 1,000 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers as opposed to being concentrated in a few individual securities. Stocks
of Small-Cap Issuers generally have greater illiquidity and price volatility
than stocks of larger capitalization issuers. (See "Investment Objective,
Policies and Risks.")

LOW MINIMUM INVESTMENT. Investors can begin their investment program in the Fund
with as little as $1,000. Subsequent investments can be made with only $100.

LOW-COST INVESTING. The Fund brings a low-cost approach to investing with:

- no sales charges;
- an index fund management strategy designed to minimize overall
operating expenses; and
- the guarantee of Charles Schwab Investment Management, Inc. (the
"Investment Manager") and Schwab that the Fund's total fund operating
expenses will, through at least February 28, 1997, not exceed 0.59% of
the Fund's average daily net assets. (See "Management of the Fund.")

MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")

2
<PAGE> 31

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. You
avoid the inconvenience, delay and expense associated with checks or bank wires.
(See "Schwab Automatic Investment Plan," visit or call your local Schwab office
or call 800-2 NO-LOAD, 24 hours a day.)

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report. (See
"Other Important Information.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Fund.")

SUMMARY OF EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee 1............................................................ 0.50%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction) 2............................................ 0.30%
12b-1 Fees........................................................................ None
Other Expenses (after fee reduction and expense reimbursement) 3.................. 0.29%
TOTAL FUND OPERATING EXPENSES (AFTER FEE REDUCTION AND EXPENSE REIMBURSEMENT) 3, 4.. 0.59%
</TABLE>

3 This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least February 28, 1997, the total fund
operating expenses for the Fund will not exceed 0.59% of the Fund's average
daily net assets. Without the guarantees on total fund operating expenses in
effect for the fiscal year ended October 31, 1995 (0.75% of the Fund's average
daily net assets through June 30, 1995, and 0.59% through October 31, 1995),
other expenses and total fund operating expenses would have been 0.52% and
1.02%, respectively, of the Fund's average daily net assets.

3
<PAGE> 32

EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$6 $19 $33 $ 74
</TABLE>

4
<PAGE> 33

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 3, 1993
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- ----------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 10.05 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.10 0.06
Net realized and unrealized gain on investments........... 1.61 --
------------ ------------
Total from investment operations.......................... 1.71 0.06
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.06) (0.01)
Distributions from realized gain on investments........... -- --
Total distributions....................................... (0.06) (0.01)
------------ ------------
Net asset value at end of period............................ $ 11.70 $ 10.05
============= ============
Total return (%)............................................ 17.11 0.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s).......................... $122,074 $ 68,128
Ratio of expenses to average net assets (%)............... 0.68 0.67*
Ratio of net investment income to average
net assets (%)......................................... 0.68 0.68*
Portfolio turnover rate (%)............................... 24 16
</TABLE>

Notes:
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1995 and 1994, would have been 1.02% and 1.19%*, respectively, and
the ratio of net investment income to average net assets would have been 0.34%
and 0.16%*, respectively.

On May 1, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.

* Annualized

5
<PAGE> 34

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

The Fund may be appropriate for a variety of investment programs. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used to supplement and
diversify an investment portfolio that may be primarily comprised of larger
capitalization equity issues.
- --------------------------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR LONG-TERM INVESTORS.
- --------------------------------------------------------------------------------

Because the Fund will ordinarily invest in a large number of common stocks, it
may be especially appropriate for investors with long-term investment
objectives, including those saving for retirement or college. While common stock
prices tend to rise and decline for short or extended periods, historically they
have generally risen over the long-term. As a result, stocks have over time
historically provided many investors with higher returns than most alternative
securities investments.

INVESTMENT OBJECTIVE, POLICIES AND RISKS
- --------------------------------------------------------------------------------
THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE INDEX.
- --------------------------------------------------------------------------------

The Fund is a diversified investment portfolio of the Trust, a no-load, open-end
management investment company. The investment objective of the Fund is to
attempt to track the price and dividend performance (total return) of the Index,
an index created by Schwab to represent the performance of common stocks of
Small-Cap Issuers. As of December 31, 1995, the market capitalization of stocks
in the Index ranged in size from approximately $240 million to $849 million. As
a matter of fundamental policy, the Fund will invest at least 65% of its total
assets in common stocks or other equity securities including preferred stocks,
rights and warrants. The Fund's investment objective is fundamental and cannot
be changed without shareholder approval. The Fund's investment policies and
restrictions, unless otherwise noted, are non-fundamental and may be changed by
the Board of Trustees. (See "Investment Restrictions" in the Statement of
Additional Information.) While there is no assurance that the Fund will achieve
its investment objective, it will endeavor to do so by following the investment
policies set forth below.
- ---------------------------------------------------------------------------
THE FUND FOLLOWS AN "INDEXING" OR "PASSIVE" STRATEGY.
- ---------------------------------------------------------------------------

The Fund follows an "indexing" or "passive" strategy under which stocks are
purchased or sold only in order to match the composition of the Index.
Accordingly, the Investment Manager generally does not select securities for the
Fund's investment portfolio based upon traditional economic, financial and
market analyses and/or forecasting.
- --------------------------------------------------------------------------------
THE FUND IS MANAGED TO MINIMIZE COSTS TO INCREASE SHAREHOLDERS' TOTAL RETURN.
- --------------------------------------------------------------------------------

The Fund is managed to offset capital gains with capital losses in order to
minimize your capital gains tax liability. This special feature of the Fund can
make a real difference in your after-tax return, especially if you are in a high
tax bracket.

6
<PAGE> 35

operations) through October 31, 1994 were 24% and 16%, respectively. Lower
portfolio turnover acts to minimize associated transaction costs as well as the
level of realized capital gains. Shareholders' current tax liability for capital
gains should be reduced and their total return increased by these policies.

To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e.,"rebalanced") to reflect changes in the Index. The Fund's trading strategy
is designed to further minimize transaction costs (e.g., the Fund will generally
only buy round-lots of stocks and may trade large blocks of securities). These
policies may cause a particular stock to be over- or under-represented in the
Fund relative to its Index weighting or result in its continued ownership by the
Fund after its deletion from the Index, thereby reducing the correlation between
Fund and Index composition. However, given the diversified nature of the Fund,
the Investment Manager does not expect that these potential deviations will
significantly impact the correlation between Fund and Index performance.
Moreover, the Investment Manager will engage in these practices only to the
extent that they do not have a material effect on the Fund's ability to track
the performance of the Index.
- --------------------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- --------------------------------------------------------------------------------

Under normal market conditions, the Fund will invest at least 80% of its total
assets in stocks of Small-Cap Issuers that comprise the Index ("Index Stocks").
The Fund, however, is not required to buy or sell securities solely because the
percentage of its assets invested in Index Stocks changes when the market value
of its holdings increases or decreases. In addition, the Fund may omit or remove
an Index Stock from its portfolio if the Investment Manager believes the stock
to be insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated. To compensate for
any Index Stocks omitted or removed from its investment portfolio, the Fund may
purchase stocks not in the Index (which would then be considered Index Stocks
for purposes of the Fund's policy regarding the percentage of its assets to be
invested in Index Stocks) if the Investment Manager believes that their market
performance is likely to replicate that of the Index Stocks they replace.

It is anticipated that the Fund will be able to invest in a majority of Index
Stocks. The Fund will generally select Index Stocks by reference to their
weighting in the Index. Thus, the Fund intends that the percentage of its assets
invested in each Index Stock will approximate the weighting of that stock in the
Index.
- --------------------------------------------------------------------
FUND PERFORMANCE SHOULD TRACK THAT OF THE INDEX.
- --------------------------------------------------------------------

7
<PAGE> 36
Index itself are expected by the Investment Manager to account for any
differences between the Fund's performance and that of the Index.

Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Schwab Small-Cap Index(TM) of 0.9 or
better. A figure of 1.0 would indicate perfect correlation. The Investment
Manager monitors the correlation between Fund and Index performance on a regular
basis. In the unlikely event that a correlation of 0.9 or better is not
achieved, the Board of Trustees will consider alternative arrangements.
- --------------------------------------------------------------------------------
STOCKS OF SMALL-CAP ISSUERS GENERALLY HAVE GREATER PRICE VOLATILITY
AND LESS LIQUIDITY THAN LARGER CAPITALIZATION STOCKS.
- --------------------------------------------------------------------------------

Because the Fund will be invested primarily in common stocks and other equity
securities, its portfolio will be subject to price volatility over both short-
and long-term periods. Moreover, because the Fund invests in equity securities
of Small-Cap Issuers, its price volatility may be greater than if the Fund
invested in equity securities of issuers with larger market capitalizations than
those of Small-Cap Issuers.

Generally, equity securities of Small-Cap Issuers have historically been
characterized by greater volatility of returns, greater total returns, and lower
dividend yields than equity securities of large capitalization issuers. For any
particular period of time, these characteristics may not be consistent.
Historically, equity securities of Small-Cap Issuers have shown a pattern of
over-performing or under-performing equity securities of larger capitalization
issuers for extended periods of time (cycles) ranging in duration from four to
fourteen years. The greater price volatility of equity securities of Small-Cap
Issuers may result from the fact that there may be less market liquidity, less
publicly available information or fewer investors who monitor the activities of
these companies. In addition, the market prices of these securities may exhibit
more sensitivity to changes in industry or general economic conditions.

Because of the risks associated with investments in equity securities of
Small-Cap Issuers, the Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on short-term
stock market movements. Investors should not consider the Fund a complete
investment program, but should also hold securities with different risk
characteristics including other mutual funds or portfolios of individual
securities, equity securities of larger capitalization issuers, bonds and money
market instruments.
- ------------------------------------------------------------------------
THE FUND MAY PURCHASE SECURITIES ASIDE FROM STOCKS.
- ------------------------------------------------------------------------

The value of all non-Index Stock investments may normally represent no more than
20% of the Fund's total assets. In order to accommodate cash flows resulting
from the purchase and sale of Fund shares, the Fund may invest in securities
issued or guaranteed by the U.S. Government, its agencies or

8
<PAGE> 37

instrumentalities, certificates of deposit, bankers' acceptances and commercial
paper (which has been rated in one of the two highest categories by a
non-affiliated, nationally recognized statistical rating organization); enter
into repurchase agreements collateralized by these instruments; and purchase
shares of other investment companies that invest primarily in any of the
securities described above. In the aggregate, no more than 10% of the Fund's
total assets may be invested in other investment companies, and an investment in
any one investment company will be limited to 5% of total Fund assets. The
Investment Manager will charge no management fees attributable to any Fund
assets invested in other investment companies. (See "Investment Restrictions" in
the Statement of Additional Information.)
- -----------------------------------------------------------------------
THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
- -----------------------------------------------------------------------

The Fund may also purchase futures contracts on stocks and stock indices and
options contracts (including options on futures contracts) to accommodate cash
flows or in anticipation of taking a market position when, in the opinion of the
Investment Manager, available cash balances do not permit economically efficient
stock purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. Futures contracts and
options may be used to maintain cash reserves while simulating full investment;
to facilitate trading; or to seek higher investment returns or simulate full
investment when a futures contract is priced more attractively or is otherwise
considered more advantageous than the underlying security or index. The Fund may
enter into futures contracts and options thereon provided that the aggregate
deposits required on these contracts do not exceed 5% of the Fund's total
assets. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Fund's total assets. In addition,
certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the Fund's use of futures contracts and options.

9
<PAGE> 38

- -----------------------------------------
THE FUND MAY BORROW MONEY.
- -----------------------------------------

The Fund may borrow money for temporary purposes, but not for the purpose of
purchasing investments, in an amount up to one-third of the value of its total
assets. The Fund's borrowing policy is fundamental.
- -------------------------------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
- -------------------------------------------------------------------------

To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the market value of the loaned securities plus accrued interest.
(For more information regarding securities lending, see "Other Investment
Policies--Loans of Portfolio Securities" in the Statement of Additional
Information.)

THE SCHWAB SMALL-CAP INDEX(TM)
- ------------------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- ------------------------------------------------

To be included in the Index, a company must satisfy all of the following
criteria:

1. it must be an "operating company" (i.e., not an investment company)
incorporated in the United States, its territories or possessions;

2. a liquid market for its common shares must exist on the New York Stock
Exchange (the "Exchange"), the American Stock Exchange or the NASDAQ/NMS; and

3. its market value must place it among the second 1,000 such companies as
measured by market capitalization (i.e., from the company with a rank of
1,001 through the company with a rank of 2,000).

A particular stock's weighting in the Index is based on its relative total
market value (i.e., its market price per share times the number of shares
outstanding, for all classes of shares), divided by the total market value of
the Index. As of January 31, 1996, the aggregate market capitalization of Index
Stocks was approximately $463 billion.
- ------------------------------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- ------------------------------------------------------------

The Index was developed in 1993 and is maintained by Schwab to represent the
total return of common stocks of Small-Cap Issuers. The Index serves as a
standard of comparison for the Fund's performance. Schwab receives no
compensation from the Fund for maintaining the Index.

10
<PAGE> 39

- --------------------------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- --------------------------------------------------------------------------------

The Index's performance (i.e., the market value of all Index Stocks) is
calculated and made available each Business Day by Schwab. The total return of
the Index is computed monthly (using beginning of month capitalization
weightings and assuming reinvestment of dividends) and may be reported from time
to time to Fund shareholders.
- --------------------------------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- --------------------------------------------------------------------------------

Schwab reviews and, as necessary, revises the list of Small-Cap Issuers whose
securities are included in the Index at least semi-annually. Companies known by
Schwab to meet or no longer meet the inclusion criteria will be added or deleted
as appropriate. Schwab will also modify the Index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits, tender
offers, mergers, swaps, spin-offs or Chapter 11 bankruptcy filings made because
of a company's inability to continue operating as a going concern). Schwab may
change Index inclusion criteria if it determines that doing so would cause the
Index to be more representative of the domestic equity market. In the future,
the Trust's Board of Trustees, subject to shareholder approval, may select
another index should it decide that taking such action would be in the best
interests of Fund shareholders.

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the Trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to providing
day-to-day management of the Fund, the Investment Manager provides general
investment advice regarding the Fund's investment strategies and performs
expense management, accounting and recordkeeping, and other administrative
services necessary to the operation of the Fund. The Investment Manager, formed
in 1989, is the investment adviser and administrator of the mutual funds in the
SchwabFunds Family(R), a family of 22 mutual funds. As of January 31, 1996,
SchwabFunds had aggregate net assets of approximately $33 billion.

Pursuant to separate agreements, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund ("Schwab" or the "Transfer Agent"). Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of the Fund's shares and
facilitating effective cash management of shareholders' account balances. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as necessary and appropriate to provide
the described shareholder and transfer agency information and services. Schwab
is also the Fund's distributor but receives no compensation for its services as
such.

11
<PAGE> 40

information services and provides products and services that help investors make
investment decisions. Schwab and the Investment Manager are wholly owned
subsidiaries of The Charles Schwab Corporation. Charles R. Schwab is the
founder, Chairman, Chief Executive Officer and a director of The Charles Schwab
Corporation and, as of January 31, 1996, the beneficial owner of approximately
20.1% of the outstanding shares of that corporation. Mr. Schwab may be deemed to
be a controlling person of Schwab and the Investment Manager.

Geri Hom is the portfolio manager of the Fund. She joined Schwab in March 1995
as Portfolio Manager -- Equities and currently manages the four Schwab index
funds and co-manages the three Schwab Asset Director(R) Funds with combined
assets of over $1.7 billion. For four years before joining Schwab, she was a
Principal for Wells Fargo Nikko Investment Advisors. For the prior seven years,
she was Vice President and Manager of the Domestic Equity Portfolio Management
Group for Wells Fargo Nikko.

Please see the Fund's Annual Report to Shareholders for the fiscal year ended
October 31, 1995 for a discussion by the Investment Manager of the Fund's
performance.

- --------------------------------------------------------------------------------
THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT TOTAL FUND OPERATING EXPENSES
WILL NOT EXCEED 0.59% OF THE FUND'S AVERAGE DAILY NET ASSETS
THROUGH AT LEAST FEBRUARY 28, 1997.
- --------------------------------------------------------------------------------

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund a
graduated annual fee, payable monthly, of 0.50% of the Fund's average daily net
assets not in excess of $300 million and 0.45% of such assets over $300 million.
The Investment Manager has agreed to waive the Fund's management fee in excess
of 0.30% of the Fund's average daily net assets through at least February 28,
1997. In addition, the Investment Manager and Schwab guarantee that total fund
operating expenses will not exceed 0.59% of the Fund's average daily net assets
through at least February 28, 1997. This expense limit will serve to maintain or
lower the Fund's expenses and thus maintain or increase the Fund's total return
to shareholders. For the fiscal year ended October 31, 1995, the Fund paid
investment management fees and total fund operating expenses of 0.37% and 0.68%,
respectively, of the Fund's average daily net assets.

12
<PAGE> 41

portfolios or classes on the basis of relative net assets at the time the
expense is incurred. However, expenses directly attributable to a particular
Fund or class will be charged to that Fund or class.

DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- ---------------------------------------------------------------------

Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. For corporate investors in the Fund, dividend distributions
designated by the Fund to be from dividends received from qualifying domestic
corporations will be eligible for the 70% corporate dividends-received deduction
to the extent they would qualify if the Fund were a regular corporation.
Distributions received from the Fund designated as long-term capital gains (net
of capital losses), whether received in cash or reinvested, will be taxable as
long-term capital gains without regard to the length of time a shareholder has
owned shares in the Fund. However, any loss on the sale or exchange of shares
held for six months or less shall, to the extent of any long-term capital gain
distributions received with respect to such shares, be treated as a long-term
capital loss. If a shareholder is not subject to income tax, generally the
shareholder will not be taxed on amounts distributed by the Fund.

13
<PAGE> 42

SHARE PRICE CALCULATION
- ---------------------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ---------------------------------------------------------------

The price of a single Fund share on any given day is the Fund's net asset value
per share or "NAV." This amount is computed by dividing the total market value
of the Fund's investments and other assets on that day, less any liabilities, by
the number of shares outstanding. The Fund's NAV is determined on each day the
Exchange is open for trading (a "Business Day") at 4:00 p.m., Eastern time. The
Fund's NAV will fluctuate, and Fund shares are not insured against reduction in
net asset value. Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt and verification by Schwab's
Mutual Fund Transfer Agency Department or its authorized agent. (See "Share
Price Calculations" in the Statement of Additional Information.)

The Fund values its portfolio securities daily based on their market value. Each
security held by the Fund which is listed on a securities exchange and for which
market quotations are available is valued at the last quoted sale price for a
given day, or if a sale is not reported for that day, at the mean between the
most recently quoted bid and asked prices. Price information on each listed
security is taken from the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Other assets for which
no quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.

HOW THE FUND SHOWS PERFORMANCE
- --------------------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- --------------------------------------------------------------------------------

From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.

14
<PAGE> 43

deposit, the Consumer Price Index and other investments for which reliable
performance data is available. The Fund's performance may also be compared to
averages, performance rankings or other information prepared by Lipper
Analytical Services, Inc. and Morningstar, Inc.

Additional performance information is included in the Fund's Annual Report to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD or from
your local Schwab office.

TAX-ADVANTAGED RETIREMENT PLANS
- --------------------------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES, AND THE FUND MAY
BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.
- --------------------------------------------------------------------------------

GENERAL INFORMATION

ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on May 7, 1993 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more investment portfolios or
series ("Series"). Currently, shares of six Series are offered. The Board of
Trustees may authorize the issuance of shares of additional Series or classes if
it deems it desirable. Shares within each Series or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights to
distributions, assets and liquidation vary among classes of a Series.

15
<PAGE> 44

approve the investment advisory agreement), except when voting in the aggregate
is permitted under the Investment Company Act of 1940, as amended, such as for
the election of Trustees.

SHAREHOLDER GUIDE
- ----------------------------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- ----------------------------------------------------------------------------

SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmations of such instructions and tape
recording telephone transactions.

To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.

HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- --------------------------------------------------------------------------------

You may purchase Fund shares through your Schwab account as described below. If
you already have a Schwab account, you need not open a new account.

16
<PAGE> 45

If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab account application (available by calling 800-2 NO-LOAD
or contacting your local Schwab office) and mail or deliver it to your local
Schwab office. You may also mail the application to Schwab at 101 Montgomery
Street, San Francisco, CA 94104. Corporations and other organizations should
call their local Schwab office to determine which additional forms may be
necessary to open a Schwab account.

PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund though an account maintained with the Trust Company.
Payment for any such shares must be made directly to the Trust Company, and you
must have funds available in your account to purchase shares of the Fund.
Contact a Trust Company representative for more information.

Schwab currently imposes no fee for opening a Schwab One(R) account with a
minimum of $5,000 account equity. Schwab One accounts containing less than
$5,000 account equity are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.
- --------------------------------------------------------------------------------
YOUR INITIAL FUND INVESTMENT MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- --------------------------------------------------------------------------------

MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial Fund investment may be as low
as $1,000 ($500 for IRAs, certain other retirement plans, and custodial
accounts). The minimum subsequent investment is $100. These requirements may be
reduced or waived on certain occasions. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

17
<PAGE> 46

time), they will be available for investment on the day of receipt. If funds
arrive after that time, they will be available for investment the next Business
Day.

BY PHONE:

BY MAIL:

Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should:

ELECTRONICALLY:

For information regarding how to purchase Fund shares electronically using
StreetSmart(TM), The Equalizer(R) and TeleBroker(R), call 800-2 NO LOAD.

IN PERSON AT A SCHWAB OFFICE:

Visit your local Schwab office where a representative will be happy to assist
you.

AUTOMATIC INVESTMENT:

YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS. You may select from the three
distribution options listed on the following page when you first become a Fund
shareholder. If you already are a shareholder and wish to change your
distribution option, please call your local Schwab office for assistance.

18
<PAGE> 47

1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gain
distributions will be reinvested in additional Fund shares. This option will
be selected automatically unless you specify another option. If you are
purchasing Fund shares through Schwab's Automatic Investment Plan, you must
choose this distribution option for this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and any capital gain distributions will be reinvested in additional
shares.

3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.

Dividends and distributions subject to reinvestment will be invested at the NAV
next determined after their record date. Cash distributions will be credited to
your Schwab account and will be held there or mailed to you depending on the
account standing instructions applicable to your account. For information on how
to wire funds from a Schwab account to a bank, see "Other Important
Information--Wire Transfers to Your Bank."

HOW TO SELL OR EXCHANGE SHARES
- ---------------------------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ---------------------------------------------------------------------

SALE OF SHARES. Shares will be redeemed at the NAV next determined after receipt
and verification by Schwab's Mutual Fund Transfer Agency Department or its
authorized agent of proper redemption instructions, as set forth on the
following pages. Payment for redeemed shares will be credited directly to your
Schwab account no later than 7 days after Schwab's Mutual Fund Transfer Agency
Department or its authorized agent receives your redemption instructions in
proper form. Redemption proceeds will then be held there or mailed to you
depending on the account standing instructions you selected. For information on
how to wire funds from your Schwab account to your bank, see "Other Important
Information -- Wire Transfers to Your Bank." If you purchased shares by check,
your redemption proceeds may be held in your Schwab account until your check
clears (which may take up to 15 days). Depending on the type of Schwab account
you have, your money may earn interest during any holding period.

The Fund may suspend redemption rights or postpone payments when: trading on the
Exchange is restricted; the Exchange is closed for any reason other than its
customary weekend or holiday closings; emergency circumstances as determined by
the SEC exist; or for such other circumstances as the SEC may permit. The Fund
may also elect to invoke a 7-day period for cash settlement of individual

19
<PAGE> 48

redemption requests in excess of $250,000 of 1% of the Fund's net assets,
whichever is less. "See Purchase and Redemption of Shares" in the Statement of
Additional Information.)

EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.50% (one-half
of one percent) early withdrawal fee upon redemption or exchange proceeds
attributable to shares purchased and held less than six months. To benefit Fund
shareholders directly, the early withdrawal fee is paid directly to the Fund and
does not apply to the redemption or exchange of shares acquired through
reinvestment of dividends or capital gains. Solely for purposes of calculating
the amount (if any) of the early withdrawal fee, shares will be treated as
redeemed on a "first-in first-out basis," except that shares acquired through
dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee. The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

METHODS OF SELLING OR EXCHANGING SHARES.

BY PHONE:

To sell shares or to exchange shares between any of the SchwabFunds by
telephone, please call your local Schwab office during its regular business
hours or 800-2 NO LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day. To properly process your telephone redemption or
exchange request, we will need the following information:

- your Schwab account number and your name for verification;
- the number of shares to be sold or exchanged;
- the name of the Fund from which you wish to sell or exchange shares;
- the name of the Fund and class into which shares are to be exchanged, if
applicable; and
- the distribution option you select (if exchanging shares).

20
<PAGE> 49

BY MAIL:

ELECTRONICALLY:

For more information regarding how to sell or exchange Fund shares
electronically using Street Smart(TM), The Equalizer(R) and TeleBroker(R),
please call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

You can also request a redemption or exchange in person at your local Schwab
office.

SCHWAB AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY
TO MAKE REGULAR INVESTMENTS IN THE FUND.
- --------------------------------------------------------------------------------

Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet the Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab Money Fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing the Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call your local Schwab office or
800-2 NO LOAD, 24 hours a day.

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 minimum balance
requirement ($250 in the case of IRAs, other retirement plans and custodial
accounts.) Shareholders will be notified in writing 30 days before the Fund
takes such action to allow them to increase their holdings to at least the
minimum level. Fund shares will be automatically redeemed if the Schwab account
in which the shares are carried is closed.

21
<PAGE> 50

WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
will be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information. A $15 service fee will be charged
against your Schwab account for each wire sent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

22
<PAGE> 51

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 52
SCHWAB SMALL-CAP
INDEX FUND(R)
Prospectus February 28, 1996
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
2015-5 (2/96) CRS 10169 Printed on recycled paper.

SchwabFunds(R)

--------------
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
--------------
<PAGE> 53

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses................................... 2
Key Features of Our Fund................... 3
Matching the Fund to Your Investment
Needs.................................... 5
Investing in Our Fund...................... 6
How to Buy Investor Shares............... 7
How to Buy e.Shares...................... 8
How to Sell or Exchange Investor
Shares................................. 9
How to Sell or Exchange e.Shares......... 9
Investment Objective and Policies.......... 10
Investments and Techniques Used by
Our Fund and Related Risks............... 11
Important Information About
Your Investment.......................... 13
Dividends and Other Distributions........ 13
Federal Income Tax Information........... 14
How We Determine the Price of
Your Shares............................ 14
How Our Fund Reports Performance......... 15
Annual and Semi-Annual Report Mailings... 15
Organization and Management of Our Fund.... 16
Management Functions and
Responsibilities....................... 16
Operating Fees and Expenses.............. 16
Other Information on the Operation
of Our Fund............................ 17
Glossary of Important Terms................ 20
</TABLE>

READING THIS PROSPECTUS. Explanations of all italicized terms in this Prospectus
are included in the Glossary at the end of this Prospectus. References to "you"
and "your" in this Prospectus refer to prospective investors and/or
shareholders, while references to "we," "us," "our" and "our Fund" refer to the
Fund or in some cases, the Trust.

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

SCHWAB S&P 500 FUND

SCHWAB S&P 500 FUND - INVESTOR SHARES
SCHWAB S&P 500 FUND - E.SHARES(TM)

THE SCHWAB S&P 500 FUND (THE "FUND") seeks to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the Standard & Poor's Composite Index of 500 Stocks (the "S&P
500(R)" or "Index"). The Fund invests primarily in common stocks of companies
composing the S&P 500. The Fund is a diversified investment portfolio of Schwab
Capital Trust (the "Trust"), a no-load, open-end management investment company
managed by Charles Schwab Investment Management, Inc. (the "Investment Manager"
or "CSIM"). This Prospectus describes both of the Fund's classes of shares - the
Investor Shares and the e.Shares.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUND PROVIDES THE INVESTMENT
OPPORTUNITIES YOU SEEK. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE REFERENCE.
You can find more detailed information in the Statement of Additional
Information ("SAI"), dated February 28, 1996 (as amended from time to time). The
SAI has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in this Prospectus by reference (which means that it is legally
considered part of this Prospectus even though it is not printed here). This
Prospectus is available electronically by using our Internet address:
http://www.schwab.com. You can get a free paper copy of this Prospectus or the
SAI by calling Schwab at 800-2 NO-LOAD or by writing Schwab at 101 Montgomery
Street, San Francisco, California 94104.

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION:

INVESTOR SHARES: Contact your local Schwab office, or call 800-2 NO-LOAD
(800-266-5623). TDD users may contact Schwab at 800-345-2550, 24 hours a day.

E.SHARES: Use SchwabLink(TM) to contact Schwab Institutional or The Charles
Schwab Trust Company (the "Trust Company").

PROSPECTUS FEBRUARY 28, 1996
<PAGE> 54

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES are the fees and charges you pay for buying or
selling shares of a fund. You pay no sales fees or charges when you buy or sell
shares of our Fund.

ANNUAL FUND OPERATING EXPENSES include management fees paid to the Investment
Manager, transfer agency fees and other expenses. These expenses cover, for
example, services such as investment research and management of the Fund,
maintaining shareholder records and issuing shareholder statements. Each class
of shares is charged its own annual operating expenses from its income, which is
factored into the dividends paid to shareholders and into the share price of
that class. As a shareholder, you are not charged any of these fees directly.

<TABLE>
<CAPTION>
INVESTOR
SHARES E.SHARES(TM)
-------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Sales Charge on Purchases
and Reinvested
Dividends................. None None
Deferred Sales Charge or
Redemption Fees........... None None
Exchange Fees............... None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE DAILY NET
ASSETS)
Management Fee
(after fee
reduction)1............. 0.13% 0.13%
12b-1 Fees................ None None
Other Expenses (after fee
reduction and expense
reimbursement)2,3....... 0.36% 0.15%
-------- ---------
TOTAL FUND OPERATING
EXPENSES (AFTER FEE
REDUCTION AND EXPENSE
REIMBURSEMENT)3,4......... 0.49% 0.28%
</TABLE>

1 This amount reflects a reduction guaranteed by the Investment Manager through
at least February 28, 1997. If there were no such reduction, the maximum
management fee would be 0.36% of the Fund's average daily net assets.

2 "Other Expenses" are based on estimated amounts for the current fiscal year
for the Fund after fee reductions and expense reimbursements. If there were no
such reduction, the estimated other expenses of the Investor Shares and the
e.Shares would be 0.40% and 0.19%, respectively, of the average daily net
assets of that class of shares. See "Organization and Management of Our Fund -
Operating Fees and Expenses" for information regarding the differing expenses
for the Fund's multiple classes of shares.

3 This amount reflects the guarantee by Schwab and the Investment Manager that,
through at least February 28, 1997, the total operating expenses of each class
will not exceed 0.49% and 0.28% of the average daily net assets of the
Investor Shares and the e.Shares, respectively. After that, the guarantee may
be terminated, modified or continued. If there were no such guarantee, the
estimated total operating expenses of the Investor Shares and the e.Shares
would be 0.76% and 0.55%, respectively, of the average daily net assets of
that class of shares.

4 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage or Schwab One(R) account. Schwab Individual Retirement
Accounts with balances of $10,000 or more by September 15, 1996 will not be
charged Schwab's $29 annual IRA account fee for the life of the account.
Schwab Keogh plans are currently charged an annual fee of $45. See "Investing
in Our Fund" for information regarding minimum balance and investment
requirements.

2
<PAGE> 55

EXAMPLES. You would pay the following expenses on a $1,000 investment in each
class of the Fund's shares assuming: (1) 5% annual return and (2) redemption at
the end of the period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Investor Shares.............. $5 $16
e.Shares(TM)................. $3 $ 9
</TABLE>

THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by Schwab and the Investment Manager that,
through at least February 28, 1997, total operating expenses of each class will
not exceed 0.49% and 0.28% of the average daily net assets of the Investor
Shares and the e.Shares, respectively. Please remember that, while this example
assumes a 5% annual return on investment, the actual returns of each class may
be more or less than the 5% used in this example.

The purpose of the table above is to help you understand the various costs and
expenses you will bear directly or indirectly when you invest in the Fund. (See
"Organization and Management of Our Fund - Operating Fees and Expenses.")

KEY FEATURES OF OUR FUND

INVESTMENT OBJECTIVE: seeks to track the price and dividend performance (total
return) of common stocks of United States companies as represented by the S&P
500. The S&P 500 is a widely recognized, unmanaged index of the prices of 500
large company common stocks selected by Standard & Poor's ("Index Stocks").
These stocks represent approximately 70% of the market value of all common
stocks publicly traded in the United States.*

The Index Stocks of the 50 largest companies of the S&P 500 account for
approximately 46% of the Index. Total returns for the S&P 500 assume
reinvestment of dividends and do not include fees such as those charged by the
Investment Manager. Total returns for the S&P 500 also do not reflect taxes,
brokerage commissions or other fees that you would pay if you invested directly
in all the Index Stocks.

The Fund seeks investment results that track, rather than beat, the total return
of the S&P 500. Thus, it does not "actively" choose investments in the same way
as actively managed stock funds do. Those funds choose investments based on
economic, financial and market factors and investment judgment. In contrast, the
Fund uses a "passive" or "indexing" strategy. It buys and sells stocks primarily
to match the Index, to invest cash from Fund share purchases or to obtain cash
for redemptions of Fund shares. Thus, the Fund and the Investment Manager
normally do not judge the merits of any particular stock. Under normal market
conditions, the Fund invests at least 80% of its total assets in Index Stocks.
For more detailed information, see "Investment Objective and Policies."

*Source: Standard & Poor's, December 1995.

STRATEGY: to invest in common stocks of companies composing the S&P 500 and to
minimize trading and other costs.

Common stock prices can be volatile in the short term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. You should be comfortable with the volatility of an all-stock
investment and the risks of the stock market. When you sell your shares, they
may be worth more or less than what you paid for them. For more details on the
Fund's invest-

3
<PAGE> 56

ments and the risks associated with them, see "Matching the Fund to Your
Investment Needs - Risk Considerations," "Investment Objective and Policies" and
"Investments and Techniques Used by Our Fund and Related Risks."

MANAGEMENT. The Investment Manager, Charles Schwab Investment Management, Inc.,
currently manages the mutual funds in the SchwabFunds Family(R), a family of 22
mutual funds. The SchwabFunds had aggregate net assets of approximately $33
billion as of January 31, 1996. For more details, see "Organization and
Management of Our Fund."

MARKET PERFORMANCE. For the twenty years ended 1995, the S&P 500 provided an
average annual total return of 14.61%.* Total return figures for the S&P 500
assume reinvestment of all dividends paid by stocks included in the Index. These
figures do not include fees such as those charged by the Fund. They also do not
include taxes, brokerage or other fees that you would pay if you directly
invested in all the stocks of the Index.

*Source: Standard & Poor's, December 1995. Past performance of the S&P 500 does
not necessarily reflect future performance results of the S&P 500 or the Fund.

LOW-COST INVESTING. You pay no sales fees or charges when you buy or sell shares
of the Fund. The Investment Manager and Schwab guarantee that through at least
February 28, 1997, total operating expenses for the Investor Shares and the
e.Shares(TM) will not exceed 0.49% and 0.28%, respectively, of the average daily
net assets of that class of shares. After that, the guarantee may be terminated,
modified or continued. For more details, see
"Investing in Our Fund" and "Operating Fees and Expenses."

REDUCED TAXES. The Fund has adopted trading strategies that will attempt to
minimize capital gains and keep portfolio turnover low. This can help reduce
your current capital gains taxes. See "Investment Objective and Policies."

SHAREHOLDER SERVICES - INVESTOR SHARES. Schwab's professional representatives
are available toll-free 24 hours a day at 800-2 NO-LOAD to serve your account,
or you can visit or call your local Schwab office during regular business hours.

SHAREHOLDER SERVICES - E.SHARES(TM). The e.Shares are available only to clients
of Schwab Institutional and the Trust Company and to certain tax-advantaged
retirement plans who can execute their trading and information requests through
SchwabLink(TM). Transactions in the e.Shares are not available by telephone,
mail or in person. See "Investing in Our Fund."

CONVENIENT REPORTING. You receive regular Schwab statements that combine all
your investment activity, including mutual funds, on one report.

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Investor Shares in amounts and at
intervals that you select. For more details, see "Schwab's Automatic Investment
Plan."

RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans for which the
Fund may be a particularly appropriate investment. For more information, see
"Matching the Fund to Your Investment Needs--Tax Advantaged Retirement Plans."

4
<PAGE> 57

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

We designed the Fund to provide you exposure to the growth potential of the
stock market. In the past, common stocks have outperformed most other securities
over time. The Fund may be appropriate for you if you have a long-term
investment horizon and want the growth potential of stock investments. Typical
uses for the Fund may include saving for retirement or college funding. The Fund
is also appropriate for use in IRAs and other retirement plans. A broadly-based
stock index fund, like the Fund, is also often used as a component of an asset
allocation plan. While the Fund is not a complete investment plan, you may use
it as a "core" equity investment around which you tailor your overall plan.

The Fund offers two different classes of shares - one of which may be
appropriate for you. Although both classes invest in the same portfolio of
stocks, the classes' operating expense ratios, and therefore their return and
per share net asset value, are different. The lower operating expense ratio of
the e.Shares(TM) reflects the substantially lower costs of entering transactions
and communicating with the Fund electronically through SchwabLink(TM).

The e.Shares are available only to clients of Schwab Institutional and the Trust
Company and to certain tax-advantaged retirement plans who can execute their
trading and information requests through SchwabLink. Transactions in e.Shares
are not available by telephone, mail or in person.

The Investor Shares are appropriate for investors who desire to transact or
communicate with the Fund in person, by telephone or by mail or who do not want
to be limited to using a computer for these purposes.

We seek investment results that track, rather than beat, the total return of the
S&P 500. Thus, we do not "actively" choose investments in the same way as
actively managed stock funds do. Those funds choose investments based on
economic, financial and market factors and investment judgment. In contrast, we
use a "passive" or "indexing" strategy. This means that we buy and sell stocks
primarily to match the Index, to invest cash from purchases or to obtain cash
for redemptions of Fund shares. The Fund and the Investment Manager normally do
not judge the merits of any particular stock. Thus, you should not expect our
Fund to match the potential returns of funds that aggressively seek growth.

We designed the Fund for long-term investors. You should not use the Fund to
speculate on short-term market movements. Doing so can disrupt our investment
strategy and operations. It also raises costs for other Fund investors. As a
result, we may refuse any purchase or exchange order that we deem to be
disruptive to the Fund or its investments.

TAX-ADVANTAGED RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans
for which the Fund may be a particularly appropriate investment. Schwab's
retirement plans allow participants to defer taxes while helping them build
their retirement savings. The Schwab IRA is a retirement plan with a wide choice
of investments offering individuals with earned income the opportunity to
compound earnings on a tax-deferred basis. The Schwab Keogh is a tax-advantaged
plan for self-employed individuals and their employees that permits the employer
to make annual tax-deductible contributions of up $30,000. Schwab also offers
Corporate Retirement Plans to help a company attract and retain valuable

5
<PAGE> 58

employees. Call your local Schwab office or 800-2 NO-LOAD, 24 hours a day for
more information.

RISK CONSIDERATIONS. Because we invest in substantially all of the 500 common
stocks composing the Index, investing in our Fund will expose you to stock risk.
Prices of many stocks or of a single stock may decline over short or even long
periods. However, diversity of stock holdings tends to reduce stock risk.
Because we own so many different stocks, our Fund is less sensitive to the
decline of any one of them than if it invested in fewer stocks. Their wide range
of industries also tends to lessen the impact of one industry's decline. Even
so, these factors cannot protect you from all possible losses.

Also, to better track the investment results of the S&P 500, we may engage in
certain stock futures contracts and options, which are types of derivative
transactions. Their potential return and risk can vary widely from type to type.
See "Investments and Techniques Used By Our Fund and Related Risks" in this
Prospectus and "Investment Securities" in the SAI for details about the
derivatives that we use and the limits on them. You should pay special attention
to these descriptions of derivatives, for these investments carry more risk
potential than the Fund's other investments.

INVESTING IN OUR FUND

You may purchase shares through an account maintained with Schwab or through any
other entity that has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Investor Shares and
e.Shares(TM) through a Schwab account relates solely to transactions through
Schwab accounts and should not be read to apply to transactions through other
designated entities. For more information, see "Purchase and Redemption of
Shares" in the SAI.

NEW INVESTORS TO SCHWAB need to open a Schwab account by completing and signing
an account application. Mail it, together with your check, to the address
indicated on the application. You may also open your account in person as
described in the table on pages 7 and 8.

EXISTING SCHWAB INVESTORS must have funds in their Schwab account to buy shares
in the Fund. Schwab will charge your account a $15 service fee for any check
returned because of insufficient or uncollected funds or because of a stop
payment order.

Within your Schwab account, you have access to other investments available at
Schwab, such as stocks, bonds and other mutual funds. The Securities Investor
Protection Corporation (known as "SIPC") will provide account protection in an
amount up to $500,000 for your securities, including Fund shares, that you hold
in a Schwab account. Of course, SIPC account protection does not protect you
from share price fluctuations.

SCHWAB ACCOUNT AND FUND MINIMUMS AND FEES
- ------------------------------------------------------

<TABLE>
<S> <C>
SCHWAB ACCOUNT MINIMUM BALANCE
Brokerage account................. $1,000
Custodial account................. $500
FUND INITIAL PURCHASE
Brokerage account................. $1,000
IRA, other retirement plan and
custodial account.............. $500
FUND ADDITIONAL PURCHASE
Any type of account............... $100
</TABLE>

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<PAGE> 59

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

A quarterly fee of $7.50 will be charged on Schwab brokerage accounts that fall
below the minimum. This fee, if applicable, will be charged at the end of each
quarter and will be waived if there has been at least one commissionable trade
within the last six months or if the shareholder's combined account balances at
Schwab total $10,000 or more. Schwab currently imposes no fee for opening a
Schwab One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.

SPECIAL SUBSCRIPTION OFFERING

The distributor, Charles Schwab & Co., Inc., is soliciting subscriptions for
both Investor Shares and e.Shares of the Fund during an initial offering period,
which is currently scheduled to end April 30, 1996, subject to extension by the
Fund and the distributor. Shares of each class are being offered at the initial
net asset value of $10 per share. The Fund and its distributor reserve the right
to withdraw, cancel or modify the offering without notice and to refuse any
order in whole or in part. The Fund expects to commence continuous offerings of
its Investor Shares and e.Shares(TM) immediately following the settlement of the
subscription offerings.

The Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change the minimum investment
requirements and to withdraw or suspend any part of the offering made by this
Prospectus. Orders to buy shares must be accepted by the Fund to be effective
and are not binding until the Fund confirms or accepts them in writing.

HOW TO BUY INVESTOR SHARES

You may place Investor Shares purchase and redemption orders as well as request
exchanges at any one of over 200 Schwab offices nationwide or by calling 800-2
NO-LOAD, where trained representatives are available to answer questions about
the Investor Shares and your account. The privilege to initiate transactions by
telephone, as discussed below, is automatically available through your Schwab
account.

We will follow reasonable procedures to confirm that your telephone instructions
are genuine. If we do not follow reasonable procedures to confirm that your
telephone order is genuine, we may be liable for any losses you may suffer from
unauthorized or fraudulent orders. These procedures may include requiring a form
of personal identification, providing written confirmation of your telephone
instructions and recording all telephone transactions. You should be aware that
telephone transactions may be difficult to implement during periods of drastic
economic or market changes. If you experience difficulties in reaching us by
telephone, you can mail your orders or place them in person as set forth below.

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

Whether by phone, mail or in person, you must always provide the following
information:
- - your Schwab account number.
- - the name of the Fund and class of shares you wish to buy.
- - the amount you wish to invest.

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<PAGE> 60

BY PHONE
- - Call 800-2 NO-LOAD.
- - Place a buy order for your account.
- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.

BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.
- - Make your check payable to Charles Schwab & Co., Inc.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - After you mail your letter, it is irrevocable and may not be modified or
canceled.

ELECTRONICALLY
- - For more information regarding how to purchase Investor Shares electronically
using StreetSmart(TM), The Equalizer(R), TeleBroker(R) and SchwabLink(TM),
call 800-2 NO-LOAD.

IN PERSON
- - Deposit your check at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.

BY WIRE
- - Contact your local Schwab office for instructions.

AUTOMATICALLY (INVESTOR SHARES ONLY)
- - Use Schwab Automatic Investment Plan.
- - Sign up for this service when opening your account.
- ------------------------------------------------------

SCHWAB'S AUTOMATIC INVESTMENT PLAN ("AIP") allows you to make periodic
investments in the Investor Shares and other non-money market SchwabFunds(R)
(and certain other funds available through Schwab) automatically and
conveniently. You can make automatic investments in any amount, from $100 to
$50,000, once you meet the Fund's investment minimum. You may make investments
automatically from your Schwab account. You may use the uninvested cash in your
Schwab account or the proceeds of the redemption of shares of the Schwab Money
Fund linked to your Schwab account. In addition, you may use the Schwab
MoneyLink(R) Transfer Service. For more detailed information about this service
or to establish your AIP, call your local Schwab office or 800-2 NO-LOAD, 24
hours a day.

As long as you are purchasing Investor Shares through AIP, all distributions
paid by the Investor Shares must be reinvested in additional Investor Shares and
may not be received in cash.

HOW TO BUY E.SHARES(TM)

The e.Shares are available to clients of Schwab Institutional and the Trust
Company and to certain tax-advantaged retirement plans who can communicate with
Schwab through SchwabLink(TM). Transactions in e.Shares are not available by
telephone, mail or in person.

To enter your transactions, follow the specific transaction instructions in the
SchwabLink user manual.

In the event you experience electronic or mechanical difficulties with
SchwabLink, you should contact the Schwab Institutional trading desk at
800-367-5198 for assistance.

HOW TO SELL OR EXCHANGE YOUR SHARES

You can sell your Investor Shares and your e.Shares at any time as described
below. When you sell your shares, you may receive more or less than the amount
you invested.

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<PAGE> 61

The exchange privilege allows you to exchange your SchwabFunds shares for shares
of any other SchwabFunds class or series available to investors in your state if
your purchase meets the Fund's eligibility requirements. Thus, you can
conveniently modify your investments if your goals or market conditions change.
An exchange of shares between Funds will be treated as a sale of the shares for
federal income tax purposes, while an exchange of shares between classes of
shares of the same Fund should not be treated as a sale of the shares. Note that
you must meet the minimum investment requirements applicable to the shares you
wish to receive in an exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.

HOW TO SELL OR EXCHANGE INVESTOR SHARES
- ------------------------------------------------------

Whether by phone, mail or in person, the following information is always needed:

When Selling Shares:
- - your Schwab account number.
- - the name of the Fund and class from which you wish to sell shares.
- - the number of shares you wish to sell.

When Exchanging Shares:
- - your Schwab account number.
- - the number of shares you wish to exchange.
- - the name of the Fund and class from which you wish to exchange shares.
- - the name of the Fund and class (if any) into which shares are to be exchanged.
- - the distribution option you select.

BY PHONE
- - Call 800-2 NO-LOAD.
- - Place a sell or exchange request for your account.
- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.

BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - Once your letter is mailed, it is irrevocable and may not be modified or
canceled.

ELECTRONICALLY
- - For more information regarding how to sell or exchange Investor Shares
electronically using StreetSmart(TM), The Equalizer(R), TeleBroker(R) and
SchwabLink(TM), call 800-2 NO-LOAD.

IN PERSON
- - Place your sell or exchange request at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.
- ------------------------------------------------------

HOW TO SELL OR EXCHANGE E.SHARES(TM)
- ------------------------------------------------------

To sell or exchange your e.Shares through SchwabLink the following information
is always needed:

When Selling Shares:
- - Your SchwabLink master account number and subaccount number.
- - the name of the Fund and class from which you wish to sell shares.
- - the number of shares you wish to sell.

When Exchanging Shares:
- - Your SchwabLink master account number and subaccount number.

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<PAGE> 62

- - the name of the Fund and class from which you wish to exchange shares.
- - the number of shares you wish to exchange.
- - the name of the Fund and class (if any) into which shares are to be exchanged.
- - the distribution option you select.
- ------------------------------------------------------

To enter your transaction, follow the specific transaction instructions in the
SchwabLink user manual. Transactions in e.Shares are not available by telephone,
mail or in person. In the event you experience electronic or mechanical
difficulties with SchwabLink, you should contact the Schwab Institutional
trading desk at 800-367-5198 for assistance.

Payment for redeemed shares will be credited directly to your Schwab account no
later than 7 days after Schwab's Mutual Fund Transfer Agency Department or its
authorized agent receives your sell instructions in proper form. Proceeds will
then be held there or mailed to you depending on the account standing
instructions you have selected. For information on how to wire funds from your
Schwab account to your bank, contact your local Schwab office for additional
information.

If you purchased shares by check, your sales proceeds may be held in your Schwab
account until your check clears (which may take up to 15 days). Depending on the
type of Schwab account you have, your money may earn interest during any holding
period.

The Fund may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange (the "Exchange") is restricted, the Exchange is closed
for any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the SEC exist or for such other circumstances as
the SEC may permit. The Fund may also elect to invoke a 7-day period for cash
settlement of individual redemption requests in excess of $250,000 or 1% of the
Fund's net assets, whichever is less. (See "Purchase and Redemption of Shares"
in the SAI.)

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the S&P 500.

Under normal market conditions, the Fund invests at least 80% of its total
assets in Index Stocks. The Fund generally tries to match its Index Stock
holdings to those Stocks' weightings in the Index. In extraordinary
circumstances, the Fund may exclude an Index Stock from its holdings or include
a similar stock in its place if it believes that doing so will help achieve its
investment objective. The Fund may purchase securities of companies with which
it may be affiliated to the extent that these companies are represented in the
Index.

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<PAGE> 63

TAX EFFICIENCY. The Fund is managed to minimize the Fund's current capital gains
tax liability. This feature can make a real difference in your after-tax return,
especially if you are in a high tax bracket. The Fund has adopted a number of
policies that help reduce its portfolio turnover ratio and minimize the level of
current realized capital gains. These policies include selling the highest tax
cost securities first, not automatically rebalancing the portfolio to reflect
changes in the Index and trading only round-lots or large blocks of securities.
These policies will be utilized only to the extent they do not have a material
effect on the Fund's ability to track the performance of the Index.

Although the Fund focuses on Index Stocks, it may buy and sell other equity
securities and other types of instruments. It also buys and sells short-term
debt securities for cash management purposes. In addition, the Fund may use
options and futures contracts to adjust its correlation to the S&P 500.

The Fund typically will not track the performance of the S&P 500 perfectly. Fund
costs, fees and expenses impair the Fund's correlation, as do the amounts and
timing of Fund cash inflows and outflows. Changes in the securities markets can
also inhibit the match. The Fund's strategy of minimizing capital gains taxes
and portfolio turnover also may cause differences. Over the long term, the Fund
will attempt to achieve a correlation between its performance and that of the
S&P 500 of 0.9 or better. A figure of 1.0 would indicate perfect correlation.
The Investment Manager monitors performance of the Fund and the S&P 500 on a
regular basis. In the unlikely event that the Fund cannot achieve a long-term
correlation of 0.9 or better, the Board of Trustees will consider alternative
arrangements.

INVESTMENTS AND TECHNIQUES
USED BY OUR FUND AND
RELATED RISKS

In seeking its objective, the Fund may buy and sell the investments and employ
the techniques described below. Please see the SAI for more details. The Fund's
investment policies and restrictions apply at the time the Fund makes an
investment. Except with respect to futures and options, later changes, such as
changed market values, do not require the Fund to sell the investment even if
the Fund could not then make the same investment.

The Fund's investment objective is fundamental and cannot be changed without
shareholder approval. The Fund's investment policies and techniques discussed
below are non-fundamental, unless otherwise noted. See "Investment Restrictions"
in the SAI for details. Because any investment involves risk, we cannot
guarantee achieving the Fund's objective.

EQUITY SECURITIES. Equity securities are ownership interests in the net worth of
a corporation. They include common stocks, preferred stocks, convertible
securities and warrants. In the past, they have outperformed most other
securities over time, though their prices can be volatile in the short term.
Market conditions or other company, political and economic news often can cause
large changes in a stock's price for the short term or long term. Smaller
company securities are especially sensitive to these factors.

SHORT-TERM DEBT SECURITIES. While the Fund tries to remain invested in Index
Stocks as fully as possible, it must manage cash flows resulting from the
purchase and sale of Fund shares. Thus, the Fund also may invest in U.S. Dollar
denominated short-term bonds and money

11
<PAGE> 64

market instruments. The Fund may buy debt securities of or guaranteed by the
U.S. government, its agencies or related bodies. It also may use certificates of
deposit, time deposits and bankers' acceptances. The Fund may also buy
commercial paper if the commercial paper has one of an NRSRO's top two ratings
or has comparable quality if it is unrated. The Fund may enter into repurchase
agreements using any of these debt securities. It also may buy and sell shares
of other mutual funds to manage its cash flows.

THE FUND MAY USE FUTURES CONTRACTS AND OPTIONS. To track the Index in an
efficient and cost-effective manner, the Fund may use stock futures contracts
and options, which are types of derivative transactions. Specifically, the Fund
may enter into futures contracts and options on futures contracts provided that
the aggregate deposits required on these contracts do not exceed 5% of the
Fund's total assets. In addition, certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), may limit the Fund's use of futures
contracts and options.

The Fund may use futures contracts and options for several reasons: to more
closely track the performance of the S&P 500(R); to reallocate the Fund's assets
among Index Stocks while minimizing transaction costs; to maintain cash reserves
while simulating full investment; to facilitate trading; or to seek higher
investment returns or simulate full investment when a futures contract is priced
more attractively or is otherwise considered more advantageous than the
underlying security or index.

Trading costs for futures contracts and options often are less than the costs of
direct investments. Thus, the Fund may use these instruments to reduce the
Fund's total trading costs. Also, futures contracts only require a small initial
margin deposit. That way, the Fund often is able to keep a cash reserve for
future redemptions but in effect remain fully invested. The Fund sells futures
contracts upon net redemptions to avoid leverage.

Futures contracts and options pose certain risks. The values of futures
contracts and options may not perfectly track changes in the Index Stocks'
holdings. The secondary market for a futures contract also may not be liquid,
resulting in the Fund's inability to close a futures position before it settles.
The Fund seeks to avoid the risk of tracking error by careful selection of the
futures and options to match the Fund's holdings. It also buys and sells on a
national exchange that has an active and liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial. Low required margin deposits and the extremely high degree of
leverage of some contracts contribute to this risk. Thus, a relatively small
price change in a security or index linked to a futures contract may result in
immediate and substantial loss (or gain). When investing in futures contracts,
the Fund will segregate cash, cash-equivalents or liquid, high-quality debt
instruments in the amount of the underlying obligation.

Since the Fund will not use futures and options contracts for the purposes of
leveraging its portfolio, the Investment Manager does not believe that the Fund
is subject to the degree of risk frequently associated with futures and options
transactions.

ILLIQUID SECURITIES. As a fundamental policy, the Fund may invest up to 10% of
its net assets, in illiquid securities. Generally, an "illiquid security" is any
security that cannot

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<PAGE> 65

be disposed of promptly and in the ordinary course of business at approximately
the amount at which the Fund has valued the instrument.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, the Fund will not pay for securities or start earning interest
on them until the Fund receives them. Securities purchased on a when-issued or
delayed delivery basis are recorded as assets. During the period between the
agreement date and the settlement date, the value of such securities may change
as the prices of securities in the stock market increase or decrease or as
interest rates change. Default by the other party to the agreement may result in
a loss to the Fund.

REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreements. In a
repurchase agreement, the Fund buys a security at one price and agrees to sell
it back at a higher price. In the event of a bankruptcy or other default of a
repurchase agreement counterparty, the Fund may incur expenses in enforcing its
rights and could experience losses, including a decline in the value of the
underlying securities and loss of income.

BORROWING POLICY. The Fund may borrow money only for temporary purposes to meet
redemption requests that it cannot otherwise meet without immediately selling
portfolio securities. The Fund may borrow up to one-third of its total assets
and pledge up to one-third of its total assets to secure such borrowings. The
Fund may not borrow to leverage. The Fund's borrowing and pledging policies are
fundamental.

SECURITIES LENDING: As a means of increasing income, the Fund may lend
securities it owns worth up to one-third of its total assets. Any loan must be
fully collateralized by the borrower at all times. If the borrower defaults or
becomes insolvent, the Fund may incur expenses or losses. The Fund may not
recover the loaned securities immediately and may even lose them entirely.

INVESTMENT COMPANIES. The Fund may buy shares of other investment companies,
including those managed by CSIM, the Investment Manager. These purchases will be
subject to the limitations imposed by the 1940 Act, and the Fund will make these
purchases only after obtaining any required regulatory approvals. Investment by
the Fund in other investment companies may cause you to bear duplicative fees
for certain services.

PORTFOLIO TURNOVER. The Fund anticipates that its annual portfolio turnover rate
will not exceed 100%.

IMPORTANT INFORMATION ABOUT
YOUR INVESTMENT

DIVIDENDS AND OTHER DISTRIBUTIONS

DISTRIBUTION OPTIONS. When you first buy shares in our Fund, you may choose one
of the three following distribution options:

1. AUTOMATIC REINVESTMENT: We will reinvest all distributions in additional
shares of the Fund. The Fund chooses this option automatically unless you
specify otherwise. If you are purchasing Investor Shares through Schwab's AIP,
you must choose this distribution option for this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: We will pay you income dividends in
cash and

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<PAGE> 66

invest capital gains for you in additional Fund shares.

3. ALL CASH: We will pay you both income dividends and any capital gain
distributions in cash.

The Fund reinvests distributions at the NAV determined on the declaration date.
We credit your cash distributions to your Schwab account on the date
distributions are payable. We leave them there or mail them to you, depending on
your standing account instructions.

To change the distribution option you have selected, call your local Schwab
office or 800-2 NO-LOAD.

The Fund will distribute substantially all of its net investment income each
year, as determined by the Board of Trustees. The Fund will distribute net
investment income and capital gains, if any, annually in December. You should be
aware that your per share equity in undistributed net investment income and
capital gains may be diluted by the continuing purchases and redemptions of the
Fund's shares. We will automatically reinvest all your distributions in
additional class shares unless you elect otherwise.

FEDERAL INCOME TAX INFORMATION

The following is only a very brief summary of how some of the federal income tax
laws affect you and the Fund. Thus, you must consult with your own tax adviser
about your particular tax situation.

The Fund intends to qualify as a regulated investment company under the Code. To
qualify, we will distribute substantially all of our investment company taxable
income and our capital gain net income (if any) each year. In addition, we will
meet certain other Code requirements. As a regulated investment company, we will
pay no federal income taxes insofar as we distribute our earnings to our
shareholders. Income we receive from certain foreign sources, however, may be
subject to foreign income taxes and withholding.

Dividends that the Fund pays to you from net investment income generally are
taxable to you as ordinary income. So are payments of the Fund's net short-term
capital gains in excess of any net long-term capital losses. Distributions that
the Fund designates as long-term capital gains (net of capital losses) are
generally taxable to you as long-term capital gains no matter how long you own
your Fund shares. These tax rules apply whether the Fund pays distributions in
cash or in reinvested shares.

If you are not subject to tax on your income, you may have different tax
treatment. In general, you will not pay tax on the Fund's distributions to you.

You should be aware that an exchange of Fund shares for shares of other
SchwabFunds(R) will be treated as a taxable event for federal income tax
purposes. However, an exchange between the Investor Shares and the e.Shares(TM)
should not be treated as a taxable event.

We will provide you with a record of all distributions, purchases and sales on
your regular Schwab brokerage account statement. Each year we will notify you of
the federal income tax treatment of all distributions made that year to your
account.

HOW WE DETERMINE THE PRICE OF YOUR SHARES

The price of a single Investor Share or e.Share of the Fund on any given day is
the net asset value per share of that class of shares. We

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<PAGE> 67

determine NAVs each Business Day at the close of trading on the Exchange,
generally at 4:00 p.m. Eastern time. We determine the price of each class of
shares by first valuing the total assets of the Fund attributable to that class,
then subtracting that class's share of any liabilities and dividing the balance
by the number of shares outstanding of that class.

The Fund values its portfolio securities based on market quotes if they are
readily available. If they are not readily available, the Investment Manager
assigns fair values to its assets in good faith under Board of Trustees
guidelines. The Fund values illiquid and restricted securities in this way. The
Board of Trustees regularly reviews these values. The Fund uses prices furnished
by pricing services if it believes that they reflect market values.

Purchase or redemption orders and exchange requests will be executed at the NAV
next determined after receipt by Schwab's Mutual Fund Transfer Agency Department
or its authorized agent.

HOW OUR FUND REPORTS PERFORMANCE

From time to time the Fund may advertise the total return and yield of each
class of shares. These figures reflect past results and are not intended to
predict future performance. We will often compare our performance to the S&P
500(R) and other indices.

Total return measures the percentage change in the value of an investment in a
class of shares over time. It reflects all share price movements, distributions
and expenses. It assumes the reinvestment of all distributions. Average annual
total return is a measure of the yearly changes in the value of the investment.
It is the constant compound rate of return, which, if applied to the investment
each year, would result in the actual total return over that time. Other total
return figures we show may differ. We may base them on non-standard periods. We
may also show aggregate or cumulative returns.

Yield refers to the income generated by an investment in a class of shares over
a given period. It is expressed as an annualized percentage rate. Each class of
shares calculates yields according to an SEC standard for all stock and bond
funds. Because this differs from other accounting methods, each class of shares
may quote a yield not equal to the income that class actually pays to you.

The Investor Shares and the e.Shares(TM) are subject to different expenses. As a
result, their performances will differ.

ANNUAL AND SEMI-ANNUAL REPORT MAILINGS

Twice a year, the Fund provides you a report showing the performance of the Fund
and each class of its shares and outlining its investments. To reduce mailing
costs, we combine these mailings by household. If a household has multiple
accounts and the same record address for all the accounts, we send mailings for
all accounts at that address in a single package. If you do not want to combine
mailings for your account, please write to Schwab at the address on the front of
this Prospectus. To request a free copy of the Fund's Annual or Semi-Annual
Reports, call your local Schwab office or call 800-2 NO-LOAD.

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ORGANIZATION AND
MANAGEMENT OF OUR FUND

MANAGEMENT FUNCTIONS AND RESPONSIBILITIES

GENERAL OVERSIGHT OF OUR FUND. The Board of Trustees and officers meet regularly
to review the Fund's investments, performance, expenses and other business
affairs.

THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc. or CSIM, manages the Fund's business affairs. Its actions are
subject to the authority of the Board of Trustees and officers of the Trust. The
Investment Manager also manages the Fund's investments. It places all orders for
the Fund's securities transactions. The Investment Manager, founded in 1989, is
a wholly owned subsidiary of The Charles Schwab Corporation. It also acts as
investment manager and administrator to the mutual funds in the SchwabFunds
Family(R), a family of 22 mutual funds. As of January 31, 1996, the
SchwabFunds(R) had aggregate net assets of approximately $33 billion.

Geri Hom is the Fund's portfolio manager. She joined Schwab in March 1995 as
Portfolio Manager -- Equities and currently manages the four Schwab index funds
and the equity portions of the three Schwab Asset Director(R) Funds with
combined assets of over $1.7 billion. For four years before joining Schwab, she
was a Principal for Wells Fargo Nikko Investment Advisors. For the prior seven
years, she was Vice President and Manager of the Domestic Equity Portfolio
Management Group for Wells Fargo Nikko.

Stephen B. Ward, Senior Vice President and Chief Investment Officer, also
participates in the management of the Fund. Before April 1991, Mr. Ward was Vice
President and Portfolio Manager for Federated Investors.

TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent for the Fund. Schwab was established in 1971
and is America's largest discount broker. Schwab provides low-cost securities
brokerage and related financial services to approximately 3.3 million active
customer accounts and has over 200 branch offices. Schwab also offers convenient
access to financial information services and provides products and services that
help investors make investment decisions. Schwab is a wholly owned subsidiary of
The Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman and
Chief Executive Officer, and a director of The Charles Schwab Corporation and,
as of January 31, 1996, the beneficial owner of approximately 20.1% of the
outstanding shares of that corporation. Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.

OPERATING FEES AND EXPENSES

The Investment Manager provides investment management services under the terms
of its Investment Advisory and Administration Agreement with the Trust. For
these services, it is entitled to a graduated annual fee payable monthly from
the Fund. The rate is 0.36% of the first $1 billion of the Fund's average daily
net assets; 0.33% of the next $1 billion; and 0.31% of net assets over $2
billion.

The Investment Manager guarantees that, through at least February 28, 1997, the
management fees for each class of the Fund's shares will not exceed 0.13% of the
Fund's average daily net assets.

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<PAGE> 69

For its services as Transfer Agent, Schwab is entitled to receive an annual fee
from each class of shares of 0.05% of its average daily net assets. In addition,
for shareholder services provided, Schwab is entitled to receive from the
Investor Shares and the e.Shares(TM) an annual fee of 0.20% and 0.05%,
respectively, of the average daily net assets of that class of shares. Schwab
may absorb certain expenses incurred by each class of shares for these services
in order to limit its ratio of operating expenses.

The Investment Manager and Schwab also guarantee that, through at least February
28, 1997, total operating expenses of the Fund allocable to the Investor Shares
and the e.Shares will not exceed 0.49% and 0.28%, respectively, of the average
daily net assets of that class of shares. For purposes of this guarantee,
"operating expenses" do not include interest expenses, taxes, foreign taxes
withheld and capital items such as costs of purchase or sale of portfolio
securities, including brokerage fees or commissions. The effect of this
voluntary expense limitation is to maintain or increase each class's total
return to shareholders.

Schwab serves as the distributor for the Fund but receives no compensation for
this service.

OTHER EXPENSES. The Trust pays the expenses of the Fund's operations. These
expenses include the fees and expenses for independent auditors, legal counsel
and custodians; the cost of maintaining books and records of account;
registration fees; the fees and expenses of qualifying the Trust and its shares
for distribution under federal and state securities laws; and industry
association membership dues. The Fund seeks to keep transaction costs and other
expenses low.

These expenses will generally be allocated among the Trust's investment
portfolios or classes on the basis of relative net assets at the time the
expense is incurred. However, such expenses directly attributable to a
particular Fund or class will be charged to that Fund or class. The differing
expenses applicable to the Investor Shares and the e.Shares(TM) of the Fund will
cause the performance of the classes to differ.

PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager uses its judgment to obtain the best price and execution.
It considers the full range and quality of brokerage services available in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab or other qualified affiliated
brokers or dealers to execute the Fund's transactions. To do so, it must
reasonably believe that commissions or prices paid to and transaction quality
received from Schwab or other qualified affiliated brokers or dealers will be at
least comparable to those available from qualified non-affiliated brokers or
dealers.

OTHER INFORMATION ON THE OPERATION OF OUR FUND

The Trust is a business trust formed under the laws of Massachusetts on May 7,
1993. It may issue an unlimited number of shares of beneficial interest in one
or more Series or classes. Currently it offers shares of six Series. The Board
of Trustees may authorize the issuance of shares of additional Series or classes
if it deems it desirable. Shares within each Series have equal, noncumulative
voting rights and have equal rights as to distributions, assets and liquidation
of such Series except to the extent that such voting rights or rights as to
distribu-

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<PAGE> 70

tions, assets and liquidation vary among classes of a Series.

The Fund's two classes of shares represent ownership of the same investment
portfolio. The differing expenses applicable to the two classes cause their
distributions and share prices to differ.

Due to the relatively high cost of maintaining accounts with smaller holdings,
the Fund reserves the right to redeem your shares if, as a result of
redemptions, the aggregate value of your account drops below the Fund's $500
minimum balance requirement ($250 in the case of IRAs, other retirement plans
and custodial accounts). You will be given 30 days' advance written notice and a
chance to increase your Fund balance to the minimum requirement before the Fund
redeems your shares. Fund shares will be automatically redeemed should the
Schwab account in which they are carried be closed.

SHAREHOLDER MEETINGS. The Trust is not required to hold annual shareholders'
meetings and does not intend to do so. It may, however, hold special meetings in
connection with certain matters. These include a change in a Fund's fundamental
policies, election or removal of Trustees or approval of or amendment to any
investment advisory agreement. In addition, shareholders may remove a Trustee at
a special meeting called upon written request of shareholders owning in the
aggregate at least 10% of the outstanding shares of the Trust.

YOUR VOTING RIGHTS. If we were to make changes to the Fund's management or
fundamental policies, we would ask you to vote as a shareholder. If we hold a
meeting and you cannot attend, you can vote by proxy. Before the meeting, the
Fund will send you proxy materials that explain the issues to be decided and
include a voting card for you to return. Shareholders have one vote for each
share owned. Unless permitted by the 1940 Act, shareholders will vote by Series
and not in the aggregate. For example, when voting to approve an investment
advisory agreement for a Series, only shareholders of that Series may vote. When
voting to elect Trustees, shareholders of all the Series vote in the aggregate.
In addition, holders of each class of shares will vote exclusively as a class on
any matter relating solely to their arrangement as a class and on any matter in
which the interest of that class differs from the interest of any other class in
that Fund.

SHARE CERTIFICATES. To assist in minimizing administrative costs, share
certificates will not be issued. Records regarding share ownership are
maintained by the Transfer Agent.

S&P 500 LICENSE. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the shareholders of the Fund or any member of the public regarding
the advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the Fund is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is determined,
composed and calculated by S&P without regard to the Fund. S&P has no obligation
to take the needs of the Fund or its shareholders into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
Fund shares, the timing of the issuance or sale of Fund shares or in the
determination or calculation of the equation by which the Fund's shares are to
be converted into cash.

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<PAGE> 71

S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund's shares.

S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein, and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Fund, its shareholders or any other person
or entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.

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<PAGE> 72

GLOSSARY OF IMPORTANT TERMS

ANNUALIZED: calculated to represent a year; a statement produced by calculating
financial results covering less than a year to show what would happen if the
results were hypothetically extended to cover an entire year.

BOND: a debt obligation that requires the issuer to pay a fixed sum of money
each year (the interest payments) until maturity. Upon maturity, the bond comes
due and the principal (the amount borrowed) must be paid. Floating or variable
rate bonds have an interest rate that rises or falls if general interest rates
or some other security (such as Treasury bills) rises or falls.

BUSINESS DAY: any day the New York Stock Exchange is open for business. A
Business Day normally begins at 9 a.m. Eastern time when the Exchange opens and
usually ends at 4 p.m. Eastern time when the Exchange closes.

CAPITAL GAIN OR LOSS: the increase or decrease in the value of a security
relative to the original purchase price. A gain is realized when the security
that has increased in value is sold. An unrealized gain or loss occurs when the
value of a security increases or decreases, but the security is not sold. If a
security is held for more than 12 months and then sold at a profit, that profit
is a realized long-term capital gain. If it is sold at a profit after being held
for less than 12 months, that profit is a realized short-term capital gain.

CSIM: The Fund's Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104.

DISTRIBUTION: payment the Fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from the Fund's
investments, and capital gain distributions.

DIVERSIFIED: under the 1940 Act, a diversified fund generally may not invest
more than 5% of its assets in the securities of any one issuer and may not hold
more than 10% of the voting shares of any one issuer with respect to 75% of the
value of its total assets. Certain minor exceptions apply to this policy, which
are described in the SAI.

FUNDAMENTAL: a policy that cannot be changed without the approval of a majority
of the shareholders of the Fund.

INVESTMENT MANAGER: Charles Schwab Investment Management, Inc. (or CSIM), 101
Montgomery Street, San Francisco, CA 94104.

LARGE COMPANY STOCKS: The stocks of companies with the largest market
capitalizations, i.e., market capitalizations above approximately $1.5 billion.

MARKET VALUE: The total value of a company as represented by the share price
times the number of shares outstanding.

MONEY MARKET INSTRUMENT: Short-term liquid debt such as Treasury bills and
commercial paper.

NET ASSET VALUE (NAV): on a per share basis, the value of one share in a fund or
class of a fund. This value is determined by adding the total fund or class
assets, subtracting all liabilities and then dividing the resulting number by
the number of shares outstanding.

1940 ACT: the Investment Company Act of 1940, as amended.

NONCUMULATIVE VOTING RIGHTS: the right of a shareholder to vote only the number
of shares owned at the time of voting.

NRSRO: nationally recognized statistical rating organization.

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<PAGE> 73

PORTFOLIO: the total stocks, bonds and other securities held by an individual
investor, a mutual fund or a financial institution.

RISK: the possibility of losing all or part of your investment, that the value
of your investment will decrease or that you will receive little or no return on
your investment.

S&P 500(R): an index of 500 stocks selected, calculated and published by
Standard & Poor's ("S&P"). S&P is neither an affiliate nor sponsor of the Fund,
and inclusion of a stock in the Index does not necessarily imply that it is a
good investment. "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard &
Poor's 500" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by Schwab Capital Trust.

SAI: the Trust's Statement of Additional Information, as amended from time to
time.

SCHWAB: Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, CA
94104.

SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933, the Investment Company Act of 1940 and other
securities-related laws.

SHORT-TERM: with respect to the Fund's portfolio investments, maturing in 397
days or less.

STOCK RISK: the possibility that stock prices in general or particular will
decline over short or even extended periods.

TOTAL RETURN: the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. Cumulative
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that would have produced
the same cumulative total return if performance had been constant over the
entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.

TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.

TRUST: Schwab Capital Trust.

VOLATILITY: a measure of the magnitude and frequency of changes in securities
values. Statistically, volatility is the measure of the spread of the prices or
yields around the mean of the prices or yields.
- ------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING NOT CONTAINED IN THIS PROSPECTUS. IF ANYONE GIVES ANY OTHER
INFORMATION OR MAKES ANY OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
LAWFULLY BE MADE.
- ------------------------------------------------------

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<PAGE> 74

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 75

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 76

SCHWAB
S&P 500 FUND

Prospectus February 28, 1996

SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104

2591 (2/96) CRS 10268 Printed on recycled paper.

SchwabFunds(R)