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[LOGO OF VANGUARD TAX-MANAGED FUND APPEARS HERE]
P R O S P E C T U S
APRIL 26, 1996; REVISED JULY 26, 1996
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[LOGO OF VANGUARD TAX-MANAGED FUND APPEARS HERE] A Member of The Vanguard Group
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PROSPECTUS--APRIL 26, 1996; REVISED JULY 26, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Tax-Managed Fund, Inc. (the "Fund") is an open-end
OBJECTIVE AND diversified investment company designed for long-term in-
POLICIES vestors seeking to minimize the impact of taxes on their
investment returns. The Fund uses an index-oriented ap-
proach to equity management. The Fund consists of three
Portfolios:
The GROWTH AND INCOME PORTFOLIO seeks to provide growth of
capital and moderate current income from investments in eq-
uity securities. Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500 Index") is the Portfolio's bench-
mark index.
The CAPITAL APPRECIATION PORTFOLIO seeks to provide growth
of capital with nominal current income from investments in
equity securities. The Russell 1000 Index is the Portfo-
lio's benchmark index.
The BALANCED PORTFOLIO seeks to provide a balance between
capital growth and income exempt from federal income taxes.
The Portfolio invests 50-55% of its net assets in municipal
securities and 45-50% of its net assets in common stocks.
The Russell 1000 is the benchmark index for the equity por-
tion of the Portfolio.
THE FUND IS NOT A TAX-EXEMPT FUND, AND, IN FACT, MAY BE EX-
PECTED TO EARN AND DISTRIBUTE TAXABLE INCOME AND MAY ALSO
REALIZE AND DISTRIBUTE CAPITAL GAINS FROM TIME TO TIME.
There is no assurance that the Portfolios will achieve
their stated objective. Shares of the Fund are neither in-
sured nor guaranteed by any agency of the U.S. Government,
including the FDIC.
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OPENING AN Please complete and return the Account Registration Form.
ACCOUNT If you need assistance in completing this Form, please call
our Investor Information Department, Monday through Friday,
from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). This Fund is designed for taxable
investors and is not appropriate for Individual Retirement
Accounts (IRAs) and other tax-deferred retirement plans.
The minimum initial investment is $10,000. The Fund is of-
fered on a no-load basis (i.e., there are no sales commis-
sions or 12b-1 fees). However, the Fund incurs expenses for
investment advisory, management, administrative, and dis-
tribution services. SHAREHOLDERS WILL BE ASSESSED A 2% FEE
ON SHARES REDEEMED IF HELD FOR LESS THAN ONE YEAR AND A 1%
FEE ON SHARES REDEEMED IF HELD AT LEAST ONE YEAR BUT LESS
THAN FIVE YEARS. THE REDEMPTION FEES ARE PAYABLE TO THE
PORTFOLIOS. SEE "FUND EXPENSES."
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ABOUT THIS This Prospectus is designed to set forth concisely the in-
PROSPECTUS formation you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and Ex-
change Commission. This Statement is dated April 26, 1996
and has been incorporated by reference into this Prospec-
tus. It may be obtained, without charge, by writing to the
Fund or by calling the Investor Information Department.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Highlights........... 2
Introduction......... 4
Fund Expenses........ 5
Financial Highlights. 7
Yield and Total
Return.............. 7
FUND INFORMATION
Investment
Objectives.......... 8
Investment Policies.. 9
Investment Risks..... 10
Who Should Invest.... 12
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies............ 13
Investment
Limitations......... 18
Management of the
Fund................ 18
Investment Adviser... 19
Dividends, Capital
Gains and Taxes..... 20
The Share Price of
Each Portfolio...... 22
General Information.. 23
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares.............. 24
When Your Account
Will Be Credited.... 27
Selling Your Shares.. 27
Exchanging Your
Shares.............. 29
Important
Information About
Telephone
Transactions........ 31
Transferring
Registration........ 31
Other Vanguard
Services............ 32
</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 COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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HIGHLIGHTS
OBJECTIVES AND The Fund is an open-end diversified investment company de-
POLICIES signed for long-term investors seeking to minimize the im-
pact of taxes on their investment returns. Shares of the
Fund are offered on a no-load basis, although the Fund in-
curs certain distribution expenses. The Fund consists of
three separate Portfolios, two of which invest in common
stocks and one which invests in both common stocks and mu-
nicipal bonds. The Fund uses an index-oriented approach to
equity management. PAGE 8
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THREE SEPARATE Investors may choose to invest in any of three Portfolios
PORTFOLIOS of the Fund:
GROWTH AND INCOME PORTFOLIO--seeks to provide long-term
growth of capital and moderate current income from invest-
ments in equity securities. The S&P 500 Index is the Port-
folio's benchmark index.
CAPITAL APPRECIATION PORTFOLIO--seeks to provide growth of
capital and moderate current income from investments in eq-
uity securities. The Russell 1000 Index is the Portfolio's
benchmark index.
BALANCED PORTFOLIO--seeks to provide a balance between cap-
ital growth and reasonable current income (nominal taxable
income and moderate income exempt from federal taxes). The
Portfolio invests 50-55% of its net assets in municipal se-
curities and 45-50% of its net assets in common stocks. The
Russell 1000 Index is the benchmark index for the equity
portion of the Portfolio.
There is no assurance that the Portfolios will meet their
stated objectives.
PAGE 8
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RISK As mutual funds investing in common stocks, all three Port-
CHARACTERISTICS folios are subject to market risk, which is the possibility
that common stock prices will decline, sometimes substan-
tially, over short or extended periods. In addition, in-
vestments in municipal securities expose the Balanced Port-
folio to interest rate risk and credit risk. Credit risk is
expected to be low due to the quality and diversification
of the bonds held by the Portfolio. PAGE 10
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THE VANGUARD The Fund is a member of The Vanguard Group of Investment
GROUP Companies, a group of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution, and shareholder accounting services on an at-
cost basis to the Funds in the Group. PAGE 18
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INVESTMENT The Fund receives investment advisory services for its eq-
ADVISER uity investments from Vanguard's Core Management Group. The
bond portion of the Balanced Portfolio receives investment
advisory services from Vanguard's Fixed Income Group. All
investment advisory services are provided to the Fund on an
at-cost basis. As a result, the Fund receives investment
advisory services at a substantially lower cost than would
be possible if the Fund paid an investment advisory fee to
an external investment adviser. PAGE 19
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2
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FEES AND In order to discourage short-term trading activity, a re-
EXPENSES demption fee of 2% will be assessed on shares redeemed if
held less than one year, and a redemption fee of 1% will be
assessed on shares redeemed if held for at least one year
but less than five years. The fees help cover transaction
costs including the tax costs long-term investors may bear
when a Portfolio realizes capital gains as a result of
selling securities to meet redemptions. By being paid di-
rectly to the Portfolios, the fees tend to be more advanta-
geous to long-term investors and less advantageous to
short-term investors. PAGE 13
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DIVIDEND POLICY The Fund distributes substantially all of its net invest-
ment income in the form of dividends. The Growth and Income
and Balanced Portfolios distribute dividends quarterly,
whereas the Capital Appreciation Portfolio distributes div-
idends annually. In all three Portfolios, net capital
gains, if any, are distributed annually. PAGE 20
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TAXES A sale of shares of a Portfolio is a taxable event and may
result in a capital gain or loss. While each Portfolio
seeks to minimize taxable distributions, such distributions
will nevertheless occur. Dividend distributions, capital
gains distributions, and capital gains or losses from re-
demptions and exchanges may be subject to federal, state,
and local taxes. PAGE 20
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PURCHASING You may purchase shares by mail, wire, or exchange from an-
SHARES other Vanguard Fund. The minimum initial investment is
$10,000; the minimum for subsequent investments is $100.
There are no sales commissions or 12b-1 fees. Telephone ex-
changes from other Vanguard Funds are not permitted.
PAGE 24
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SELLING SHARES You may redeem shares of each Portfolio in writing or by
telephone. The share price of each Portfolio is expected to
fluctuate, and may at redemption be more or less than at
the time of initial purchase, resulting in a gain or loss.
PAGE 27
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OTHER VANGUARD The Fund offers two special services: Fund Express, for
SERVICES electronic transfers between the Fund and your bank ac-
count; and Tele-Account, for round-the-clock telephone ac-
cess to your Fund account balance and certain
transactions. PAGE 32
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SPECIAL (1) Each Portfolio may invest a portion of its assets in
CONSIDERATIONS futures contracts, options, convertible securities and swap
agreements. PAGE 16
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 15
(3) Each Portfolio may lend its securities. PAGE 17
(4) Each Portfolio may borrow money. PAGE 18
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3
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AN INTRODUCTION Vanguard Tax-Managed Fund consists of three Portfolios each
TO VANGUARD TAX- of which seeks to achieve a stated investment objective
MANAGED FUND while minimizing the impact of taxes on shareholders' re-
turns. Today, dividends and short-term capital gains dis-
tributed by mutual funds are taxed at federal income tax
rates as high as 39.6%. Mutual fund distributions of long-
term capital gains are taxed at federal tax rates of up to
28%. State taxes on mutual fund distributions also reduce
after-tax returns.
THE FUND IS Yet, most stock and balanced mutual funds are managed to
DESIGNED FOR maximize PRE-TAX total return, without regard to the tax
LONG-TERM consequences of portfolio activity that may result in tax-
INVESTORS able distributions. Vanguard Tax-Managed Fund has been de-
SEEKING TO signed for investors who seek to participate in broadly di-
MINIMIZE THE versified funds for the long-term (five years or longer)
IMPACT OF TAXES and to minimize the impact of taxes on their return. The
ON THEIR RETURN Fund offers three Portfolios: two equity Portfolios--the
Growth and Income Portfolio and the Capital Appreciation
Portfolio--and a Portfolio combining stocks and municipal
bonds, the Balanced Portfolio.
The Fund employs various techniques to minimize the impact
of taxes:
. First, each Portfolio employs an index-oriented approach
to equity management designed to provide low portfolio
turnover. By seeking to reduce turnover, the Portfolio
endeavors to defer the realization and minimize the dis-
tributions of capital gains.
. Second, each Portfolio is designed ONLY for long-term in-
vestors who expect to own the Portfolio for five years or
longer. A redemption fee of 2% will be assessed on shares
redeemed if held for less than one year, and a redemption
fee of 1% will be assessed on shares redeemed if held for
at least one year but less than five years. The fees will
help to cover transaction costs incurred by the Portfo-
lios when purchasing and selling securities and will in-
directly help to offset tax costs long-term investors
bear when a Portfolio is forced to realize capital gains
as a result of short-term investor activity. By being
paid directly to the Portfolios, the fees tend to be ad-
vantageous to long-term investors and disadvantageous to
short-term investors.
. Third, each Portfolio, when making sales of specific se-
curities, will select the shares on which it has the
highest cost basis in order to minimize capital gains
distributions. Additionally, each Portfolio may, when
prudent, sell securities in order to realize capital
losses. Realized capital losses can be used to offset re-
alized capital gains thus reducing capital gains distri-
butions.
. Finally, the Capital Appreciation and the Balanced Port-
folios seek to minimize taxable dividend income by empha-
sizing stocks with low dividend yields. The Balanced
Portfolio also invests at least 50% of its assets in tax-
exempt municipal bonds to provide tax-free income.
While each Portfolio seeks to minimize the realization of
capital gains, the Portfolios may nevertheless realize tax-
able gains from time to time. Additionally, while the Capi-
tal Appreciation and Balanced Portfolios seek to minimize
taxable dividend distributions, the two Portfolios will
distribute some taxable income. Of course, shareholders may
also be required to pay taxes on capital gains realized, if
any, upon redemption of shares of the Fund.
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4
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FUND EXPENSES The following table illustrates ALL expenses and fees you
would incur as a shareholder of the Growth and Income, Cap-
ital Appreciation, and Balanced Portfolios. The annual
Portfolio operating expenses set forth below are for the
1995 fiscal year.
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases. None None None
Sales Load Imposed on Reinvested
Dividends...................... None None None
Redemption Fees*:
shares held less than 1 year... 2% 2% 2%
shares held at least 1 but less
than 5 years.................. 1% 1% 1%
shares held 5 years or more.... None None None
Exchange Fees**................. None None None
</TABLE>
*The fees withheld from redemption proceeds are paid to the
Portfolios.
**Exchanges will be treated as redemptions for purposes of
imposing the redemption fees.
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
ANNUAL PORTFOLIO INCOME APPRECIATION BALANCED
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses......... 0.07% 0.11% 0.00%
Investment
Advisory Fees.... 0.04 0.03 0.12
12b-1 Fees........ None None None
Other Expenses
Distribution
Costs........... 0.02% 0.02% 0.02%
Miscellaneous
Expenses........ 0.07 0.04 0.06
----- ------ ----
Total Other
Expenses......... 0.09 0.06 0.08
----- ------ ----
TOTAL OPERATING
EXPENSES....... 0.20% 0.20% 0.20%
===== ====== ====
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Growth and Income, Cap-
ital Appreciation, and Balanced Portfolios.
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REDEMPTION FEE Each Portfolio of the Vanguard Tax-Managed Fund is intended
for long-term investors who expect to own shares for at
least five years. A 2% fee will be assessed on shares re-
deemed if held less than one year and a fee of 1% will be
assessed on shares redeemed if held at least one but less
than five years. The fees help to cover transaction costs
including the tax costs long-term investors may bear when a
Portfolio realizes capital gains as a result of selling se-
curities to meet redemptions. By being paid directly to the
Portfolios, the fees tend to be advantageous to long-term
investors and disadvantageous to short-term investors.
Only the "first-in, first-out" (FIFO) method will be used
for the purpose of calculating the holding period of
shares. Under this method, the date of a
5
<PAGE>
redemption or exchange will be compared to the earliest
purchase date of shares in the account. If this holding pe-
riod is less than one year, a 2% fee will be assessed. If
this holding period is at least one year but less than five
years, a 1% fee will be assessed. The fee will be prorated
if the shares redeemed or exchanged have been held for time
periods subject to differing fees. The fee will not apply
to shares purchased through reinvestment of dividends or
capital gains.
ILLUSTRATION OF The following example illustrates the expenses that you
EXPENSES would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$13 $18 $11 $26
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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6
<PAGE>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to the pe-
riod ended December 31, 1995, have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in
conjunction with the Fund's financial statements and notes
thereto, which, together with the remaining portions of the
Fund's 1995 Annual Report to Shareholders, are incorporated
by reference in the Statement of Additional Information and
in this Prospectus, and which appear, along with the report
of Price Waterhouse LLP, in the Fund's 1995 Annual Report
to Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1995 Annual Re-
port to Shareholders which may be obtained without charge
by writing to the Fund or by calling our Investor Informa-
tion Department at 1-800-662-7447.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- ---------------------- -------------------
JULY 25+, JULY 25+, JULY 25+
YEAR ENDED TO YEAR ENDED TO YEAR ENDED TO
DECEMBER 31, DEC. 31, DECEMBER 31, DEC. 31, DECEMBER 31, DEC. 31,
1995 1994 1995 1994 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 9.77 $10.00 $ 9.95 $10.00 $ 9.79 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .25 .09 .08 .04 .31 .09
Net Realized and
Unrealized Gain (Loss)
on Investments ....... 3.39 (.23) 3.34 (.05) 2.07 (.21)
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 3.64 (.14) 3.42 (.01) 2.38 (.12)
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DISTRIBUTIONS
Dividends from Net
Investment Income..... (.25) (.09) (.09) (.04) (.32) (.09)
Distributions from Re-
alized Net Gain....... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.25) (.09) (.09) (.04) (.32) (.09)
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NET ASSET VALUE, END OF
PERIOD................. $13.16 $ 9.77 $13.28 $ 9.95 $11.85 $ 9.79
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TOTAL RETURN**.......... 37.53% (1.70)% 34.38% (0.50)% 24.52% (1.40)%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Pe-
riod (Millions)........ $ 98 $31 $ 254 $70 $ 39 $17
Ratio of Expenses
toAverage Net Assets... .20% .20%* .20% .20%* .20% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 2.37% 2.82%* .97% 1.26%* 3.06% 2.88%*
Portfolio Turnover Rate. 6% 0% 7% 1% 5% 0%
</TABLE>
+Commencement of operations.
*Annualized.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year. Subscription period for each Portfolio was July 25, 1994, to Septem-
ber 5, 1994, during which time all assets were held in money market instru-
ments. Performance measurement began September 6, 1994.
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YIELD AND From time to time a Portfolio of the Fund may advertise its
TOTAL RETURN yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to
indicate future performance. The "total return" of a Port-
folio refers to the average annual compounded rates of re-
turn over one-, five- and ten-year periods or for the life
of the Portfolio (as stated in the
7
<PAGE>
advertisement) that would equate an initial amount invested
at the beginning of a stated period to the ending redeem-
able value of the investment, assuming the reinvestment of
all dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day yield"
of a portfolio is calculated by dividing the net investment
income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net
investment income includes interest and dividend income
earned on a Portfolio's securities; it is net of all ex-
penses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield calcu-
lation assumes that net investment income earned over 30
days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by a
Portfolio to maintain its books and records, and so the ad-
vertised 30-day yield may not fully reflect the income paid
to an investor's account.
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INVESTMENT The Fund is an open-end diversified investment company of-
OBJECTIVES fering three Portfolios which seek to minimize the impact
of taxes on investors' returns.
. The GROWTH AND INCOME PORTFOLIO seeks to minimize capital
gains distributions while providing long-term capital
growth and a moderate level of taxable current income.
The Portfolio invests in common stocks using an index-
oriented investment approach to minimize portfolio turn-
over and the realization of capital gains within the
Portfolio. Its benchmark index is the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index") which
emphasizes large capitalization companies. Large capital-
ization stocks, on average, have moderate dividend yields
(the distribution yield of the S&P 500 Index was 2.24% on
December 31, 1995).
. The CAPITAL APPRECIATION PORTFOLIO seeks to minimize cap-
ital gains and dividend distributions while providing
long-term growth of capital. The Portfolio may be ex-
pected to provide a nominal, or relatively low level of
taxable income compared to traditionally managed or even
indexed Portfolios. Because of the Portfolio's tax-man-
aged policies the level of taxable income to be distrib-
uted is expected to be less than half of what it would
otherwise be if the Portfolio was managed as a tradi-
tional index fund. The Portfolio invests in common stocks
using an index-oriented strategy in an effort to minimize
portfolio turnover and the realization of capital gains
within the Portfolio. The Portfolio's benchmark index is
the Russell 1000 Index, an Index of large and medium cap-
italization stocks. The Portfolio emphasizes low yielding
stocks; therefore, its return will vary from the return
of the Russell 1000 Index.
. The BALANCED PORTFOLIO seeks to minimize capital gains
and taxable dividend distributions while providing a com-
bination of reasonable current income (nominal taxable
income and moderate tax-exempt income) and long-term
growth of capital. The Portfolio invests 50-55% of its
assets in intermediate-term municipal securities which
provide income that is exempt from federal income taxes.
The dollar-weighted average maturity of
8
<PAGE>
the municipal securities is targeted to be between 7 and
12 years. The Portfolio invests the remaining 45-50% of
its assets in common stocks using an index-oriented strat-
egy in an effort to minimize portfolio turnover and the
realization of capital gains within the Portfolio. The
benchmark index for the equity portion of the Portfolio is
the Russell 1000 Index; however, the Portfolio emphasizes
low yielding stocks, therefore, the return of the equity
component will vary from the return of the Russell 1000
Index.
There is no assurance that the Portfolios will achieve
their stated objectives.
These investment objectives are not fundamental and so may
be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to
a material change in a Portfolio's objective.
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INVESTMENT The three Portfolios of the Fund are managed in order to
POLICIES minimize the impact of taxes on investors' returns. Each
Portfolio employs an index-oriented approach to equity man-
agement by attempting to approximate the performance of a
benchmark index. Indexing is appropriate for achieving each
Portfolio's objective for two reasons: (1) indexing is a
very cost-effective method of providing broadly diversified
equity returns; and (2) indexing is tax efficient because
it incorporates a buy and hold philosophy and, therefore,
an indexed portfolio rarely realizes capital gains, which,
by definition, is tax efficient.
The GROWTH AND INCOME PORTFOLIO invests in substantially
all 500 stocks in the S&P 500 Index, an index which empha-
sizes large capitalization companies. Management techniques
used to minimize the realization of capital gains might
from time to time cause the proportion of the Portfolio's
assets invested in each stock to differ from the proportion
found in the S&P 500 Index. As a result, the Portfolio's
return will deviate from the return of the S&P 500 Index.
The CAPITAL APPRECIATION PORTFOLIO invests in a statistical
sample of the stocks included in the Russell 1000 Index.
Stocks are selected for inclusion in the Portfolio based on
their contribution to the Portfolio's market capitaliza-
tion, industry weightings and other fundamental character-
istics such as price earnings ratios, dividend yields,
price-to-book ratios and financial leverage. To minimize
taxable dividend distributions, the Portfolio emphasizes
stocks with low dividend yields. As a result of the low
dividend emphasis and management techniques used to mini-
mize the realization of capital gains, the returns of the
Portfolio will deviate from the returns of the Russell 1000
Index.
The BALANCED PORTFOLIO invests 50-55% of its assets in in-
termediate-term municipal securities which provide interest
income exempt from federal income taxes. At least 95% of
the municipal securities held by the Portfolio will be of
investment grade quality--i.e., those rated at least Baa by
Moody's Investors Services, Inc. ("Moody's") or BBB by
Standard & Poor's Corporation ("Standard & Poor's"). Secu-
rities rated Baa or BBB are considered as medium grade ob-
ligations. Interest payments and principal are regarded as
adequate for the present but certain protective elements
found in higher rated bonds
9
<PAGE>
may be lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteris-
tics as well. No more than 5% of the municipal securities
of the Portfolio may be lower rated or unrated. The Portfo-
lio may invest in municipal securities rated as low as C by
Moody's or CC by Standard & Poor's or comparable unrated
securities as determined by the adviser. In the event that
a particular obligation held by the Balanced Portfolio is
downgraded below the minimum investment level permitted by
the investment policies of the Portfolio, the directors and
officers of the Fund will carefully assess the creditwor-
thiness of the obligation to determine whether it continues
to meet the policies and objectives of the Portfolio. The
securities will target a dollar-weighted average maturity
of 7-12 years.
The municipal bond portion of the Balanced Portfolio is
managed according to a traditional management style which
involves selection of securities based upon economic, fi-
nancial and market analysis and investment judgment. In
managing the municipal bond component of the Balanced Port-
folio, portfolio turnover will be kept low in order to min-
imize the realization of capital gains. The Portfolio in-
vests the remaining 45-50% of its assets in a statistical
sample of the stocks included in the Russell 1000 Index.
The equity portion of the Portfolio will follow the same
investment policies as the Capital Appreciation Portfolio
(see page 9).
Each Portfolio may, when prudent, sell securities in order
to realize capital losses. Realized capital losses can be
used to offset realized capital gains thus reducing capital
gains distributions. As a result of such techniques to min-
imize the realization of capital gains, and, in the case of
the Capital Appreciation and Balanced Portfolios, the em-
phasis on lower-yielding stocks, the Portfolios should not
be expected to track their target benchmarks with the same
precision as conventional index funds.
The Fund is responsible for voting the shares of all secu-
rities it holds.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without share-
holder approval. However, shareholders would be notified
prior to a material change.
- --------------------------------------------------------------------------------
INVESTMENT RISKS Like any investment program, the Fund entails certain
risks. Because the Growth and Income and Capital Apprecia-
EACH PORTFOLIO tion Portfolios both invest 100% of their assets in stocks
IS SUBJECT TO and the Balanced Portfolio invests 45-50% of its assets in
STOCK MARKET stocks, all three Portfolios are subject to STOCK MARKET
RISK RISK--i.e., the possibility that common stock prices will
decline over short or even extended periods. The U.S. stock
market tends to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally de-
cline.
10
<PAGE>
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to
1995, as measured by the S&P 500 Composite Stock Price In-
dex:
U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 +23.9 +20.1 +16.9
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1995. Average
return may not be useful for forecasting future returns in
any particular period, as stock returns are quite volatile
from year to year.
This table of U.S. Stock market returns should not be
viewed as a representation of future returns from the Fund
or the U.S. stock market. The illustrated returns represent
the historical investment performance, which may be a poor
guide to future returns. Also, stock market indexes such as
the S&P 500 are based upon unmanaged portfolios of securi-
ties, before transaction costs and other expenses. Such
costs will reduce the relative investment performance of
the Fund and other "real world" portfolios.
Historically, medium capitalization stocks, such as the
smallest 50% of those found in the Russell 1000 Index on
December 31, 1995, have been more volatile in price than
the larger capitalization stocks included in the S&P 500
Index. Besides exhibiting greater price volatility, the
price of medium company stocks may, to a degree, fluctuate
independently of larger company stocks. Medium company
stocks are expected to constitute approximately 11% of the
investments of the Capital Appreciation Portfolio and the
equity portion of the Balanced Portfolio.
Additionally, the Capital Appreciation Portfolio and the
equity portion of the Balanced Portfolio emphasize low
yielding stocks which may give these Portfolio's "growth"
characteristics. Stocks that emphasize particular invest-
ment characteristics, such as "growth," may fluctuate di-
vergently from the broad stock market as represented by a
given market benchmark. Further, these stocks may also dem-
onstrate greater volatility than the broad market index
over short or extended periods of time.
THE BALANCED The Balanced Portfolio invests a larger portion of its as-
PORTFOLIO IS sets in intermediate-term municipal securities (50-55% of
SUBJECT TO assets) than in stocks. Therefore, the Balanced Portfolio
INTEREST RATE will be subject to INTEREST RATE RISK--i.e., fluctuations
RISK in the market value of bonds due to changing interest
rates. Bond prices are influenced primarily by changes in
the level of interest rates. When interest rates rise, the
prices of bonds generally fall; conversely, when interest
rates fall, bond prices generally rise. While bonds nor-
mally fluctuate less in price than stocks, there have been
extended periods of cyclical increases in interest rates
that have caused significant declines in bond prices. For
example, bond prices fell 48% from December 1976 to Septem-
ber 1981.
11
<PAGE>
THE BALANCED The Balanced Portfolio is also subject to CREDIT RISK--
PORTFOLIO IS i.e., the likelihood that a bond issuer will fail to make
SUBJECT TO timely payments of interest and principal. Such credit risk
CREDIT RISK is expected to be low, however, due to the credit quality
and diversification of the Portfolio's bond investments.
From time to time, the stock and bond markets may fluctuate
independently of one another. In other words, a decline in
the stock market may in certain instances be offset by a
rise in the bond market, or vice versa. As a result, the
Balanced Portfolio, with its balance of common stock and
bond investments, is expected to entail less investment
risk (and a potentially lower return) than mutual funds in-
vesting exclusively in common stocks.
Each Portfolio may use futures contracts, options and war-
rants, convertible securities and swap agreements which may
pose certain risks as described in the section "Implementa-
tion of Policies."
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is designed for long-term taxable investors who
INVEST seek to minimize receipt of taxable distributions. The Fund
is not suitable for Individual Retirement Accounts (IRAs)
LONG-TERM or other tax-deferred retirement plans such as 401(k),
TAXABLE 403(b)(7), or money purchase pension plans.
INVESTORS
SEEKING TO The three Portfolios of the Fund are designed for investors
MINIMIZE TAXABLE seeking low taxable distributions, low costs, and high pre-
DISTRIBUTIONS dictability of return relative to the underlying index
through an index-oriented management approach.
The GROWTH AND INCOME PORTFOLIO is designed for investors
seeking long-term capital growth and moderate current in-
come from a diversified portfolio of common stocks.
The CAPITAL APPRECIATION PORTFOLIO is designed for invest-
ors seeking long-term growth of capital with nominal cur-
rent income from common stocks as compared to traditionally
managed or even indexed portfolios.
The BALANCED PORTFOLIO is designed for investors seeking a
balance between long-term capital growth and moderate tax-
exempt income from municipal bonds, and nominal taxable in-
come from common stocks.
The share prices of the Growth and Income Portfolio and the
Capital Appreciation Portfolio are expected to be volatile,
and investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investments.
The Balanced Portfolio is expected to be less volatile than
the Growth and Income Portfolio and the Capital Apprecia-
tion Portfolio. However, investors in the Balanced Portfo-
lio should also be able to tolerate sudden fluctuations in
the value of their investment. No assurance can be given
that the Portfolios will achieve their stated objectives or
that shareholders will be protected from the risks inherent
in the markets in which they invest. Investors may wish to
purchase shares on a regular, periodic basis (dollar-cost
averaging) rather than investing in one lump sum in order
to reduce the risk of investing at a particularly unfavor-
able time.
THE FUND IS DESIGNED ONLY FOR LONG-TERM INVESTORS WHO EX-
PECT TO OWN SHARES OF THE FUND FOR FIVE YEARS OR MORE. The
Fund is not intended to provide investors with a means of
speculating on short-term market movements.
12
<PAGE>
Investors who engage in excessive account activity generate
additional costs and may cause a Portfolio to recognize
capital gains which are borne by the Portfolio's remaining
shareholders.
In order to discourage short-term trading activity the Fund
has adopted the following policies: the Fund will charge a
2% fee on redemptions of shares held less than one year and
will charge a 1% fee on redemptions of shares held at least
one year but less than five years. The Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard funds) that is reasonably
deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
Investors should not consider the Fund a complete invest-
ment program, but should maintain holdings of securities
with different risk characteristics--including common
stocks, bonds and money market instruments. Investors may
also wish to complement an investment in the Fund with
other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION The GROWTH AND INCOME PORTFOLIO holds substantially all the
OF POLICIES stocks included in the S&P 500 Index in approximately the
same proportions as they are represented in the Index.
THE GROWTH AND
INCOME PORTFOLIO The S&P 500 Index is composed of 500 common stocks, which
INVESTS IN are chosen by Standard & Poor's Corporation on a statisti-
COMMON STOCK cal basis to be included in the Index. The inclusion of a
stock in the S&P 500 Index in no way implies that Standard
& Poor's Corporation believes the stock to be an attractive
investment. The 500 securities, most of which trade on the
New York Stock Exchange, represented, as of December 31,
1995, approximately 70% of the market value of all U.S.
common stocks. Each stock in the S&P 500 Index is weighted
by its market value.
Because of the market-value weighting, the 50 largest com-
panies in the S&P 500 Index currently account for approxi-
mately 44% of the capitalization of the Index. Typically,
companies included in the S&P 500 Index are the largest and
most dominant firms in their respective industries. As of
December 31, 1995, the five largest companies in the Index
were: General Electric (2.6%), American Telephone and Tele-
graph (2.2%), Exxon Corporation (2.2%), Coca Cola (2.0%),
and Merck & Co. (1.8%). The largest industry categories
were: telephone companies (8.5%), banks (6.4%), pharmaceu-
tical companies (6.3%), international oil companies (6.0%),
and medical supplies (4.2%).
The GROWTH AND INCOME PORTFOLIO is not sponsored, endorsed,
sold or promoted by Standard & Poor's Corporation ("S&P").
S&P makes no representations or warranty, implied or ex-
pressed, to the purchasers of the Portfolio or any member
of the public regarding the advisability of investing in
index funds or the ability of the S&P 500 to track general
stock market performance. S&P does not guarantee the accu-
racy and/or the completeness of the S&P 500, or any data
included herein.
13
<PAGE>
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO
BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, ANY PERSON OR
ANY ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE USE LICENSED HEREUNDER, OR
FOR ANY OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED WARRAN-
TIES, AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE
WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN.
S&P's only relationship to the Portfolio is the licensing
of the S&P marks, and the S&P 500 Index which is deter-
mined, composed and calculated by S&P without regard to the
Growth and Income Portfolio.
THE CAPITAL The CAPITAL APPRECIATION PORTFOLIO holds a statistical sam-
APPRECIATION ple of the stocks included in the Russell 1000 Index. The
PORTFOLIO sampling technique emphasizes stocks with low dividend
EMPHASIZES yields. Because of this low dividend bias and management
COMMON STOCKS techniques used to minimize the realization of capital
WITH LOW gains, returns from the Portfolio will differ from the Rus-
DIVIDEND YIELDS sell 1000 Index.
The Russell 1000 Index is composed of stocks from the larg-
est 1000 U.S. companies. The largest company in the index
has a market value of approximately $120 billion; the
smallest company's market capitalization is approximately
$50 million. The 1000 securities represented, as of Decem-
ber 31, 1995, approximately 85% of the market value of all
U.S. common stocks.
THE BALANCED The BALANCED PORTFOLIO will invest 45-50% of its assets in
PORTFOLIO a statistical sample of the 1000 stocks included in the
INVESTS 45-50% Russell 1000 Index. This equity portion of the Balanced
OF ITS ASSETS IN Portfolio will implement investment policies in the same
COMMON STOCK manner as the Capital Appreciation Portfolio (see above).
As of December 31, 1995, the five largest companies in the
index were: General Electric (2.8%), AT&T (2.5%), Exxon
Corporation (1.6%), Coca-Cola (1.4%) and Merck & Company
(1.3%). The largest industry categories were: technology
(20.2%), consumer discretionary and services (16.9%),
health care (13.6%), consumer staples (9.4%), and financial
services (8.9%).
The CAPITAL APPRECIATION and the BALANCED PORTFOLIOS are
neither sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the Portfo-
lios is the licensing of the use of the Russell 1000 Index.
Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell Indexes.
THE BALANCED The BALANCED PORTFOLIO invests the remaining 50-55% of its
PORTFOLIO assets in intermediate-term tax-exempt municipal securities
INVESTS 50-55% issued by state and local governments and regional govern-
OF ITS ASSETS IN ment authorities. Municipal securities include both munici-
MUNICIPAL BONDS pal bonds (those securities with maturities of five years
or more) and municipal notes (those securities with maturi-
ties of less than five years).
Municipal bonds are issued for a wide variety of reasons:
to construct public facilities; to obtain funds for operat-
ing expenses; to refund outstanding municipal obligations;
and to loan funds to various public institutions and facil-
ities. Certain industrial development bonds are also con-
sidered municipal bonds if their interest is exempt from
federal income tax. Industrial development bonds are issued
on behalf of public authorities to obtain funds for
14
<PAGE>
various privately-operated manufacturing facilities, hous-
ing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewage works.
General obligation municipal bonds are secured by the is-
suer's pledge of full faith, credit and taxing power. Reve-
nue or special tax bonds are payable from the revenues de-
rived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax reve-
nue. Industrial development bonds are ordinarily dependent
on the credit quality of a private user, not the public is-
suer.
Municipal notes are issued to meet the short-term funding
requirements of local, regional and state governments. Mu-
nicipal notes include tax anticipation notes, bond antici-
pation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term
discount notes, tax-exempt commercial paper, demand notes,
and similar instruments. Demand notes permit an investor
(such as the Fund) to demand from the issuer payment of
principal plus accrued interest upon a specified number of
days' notice.
Over time, the correlation between the performance of
Growth and Income Portfolio, the Capital Appreciation Port-
folio and the equity portion of the Balanced Portfolio,
with their respective benchmarks, is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset
value of a Portfolio, including the value of its dividend
and capital gains distributions, increases or decreases in
exact proportion to changes in the respective target bench-
mark.
Due to the use of the sampling technique, neither the Capi-
tal Appreciation Portfolio or the equity portion of the
Balanced Portfolio is expected to track its benchmark index
with the same degree of accuracy as evidenced by the high
degree of correlation between the Growth and Income Portfo-
lio and its benchmark. However, the principal advantage of
this technique is to provide an efficient means to invest
in the universe of stocks and to emphasize those stocks
with low dividend yields. In particular, the three Portfo-
lios are expected to provide broad diversification, and
should operate at low costs due both to their index-ori-
ented approach to portfolio management and low portfolio
turnover rate.
EACH PORTFOLIO When selling securities, each Portfolio will select the
WILL SELECT THE highest cost shares of the specific security in order to
HIGHEST COST minimize the realization of capital gains. In certain
SHARES OF A cases, the highest cost shares may produce a short-term
SECURITY BEING capital gain. Since, for tax payers in the highest tax
SOLD IN ORDER TO brackets, short-term capital gains are taxed at higher tax
MINIMIZE THE rates than long-term capital gains, the highest cost shares
REALIZATION OF with a long-term holding period may be selected if the re-
CAPITAL GAINS alization of capital gains is sufficiently small. Addition-
ally, each Portfolio may, when prudent, sell securities in
order to realize capital losses. Realized capital losses
can be used to offset realized capital gains thus reducing
capital gains distributions.
EACH PORTFOLIO The Growth and Income and Capital Appreciation Portfolios
MAY INVEST IN attempt to remain fully invested in common stocks. The Bal-
SHORT-TERM FIXED anced Portfolio attempts to remain fully invested in common
INCOME stocks and municipal securities. The three Portfolios of
SECURITIES the Fund may invest temporarily in certain short-term fixed
15
<PAGE>
income securities for defensive purposes. Such securities
may be used to invest uncommitted cash balances or to main-
tain liquidity to meet shareholder redemptions. These secu-
rities include: obligations of the United States Government
and its agencies or instrumentalities; commercial paper,
bank certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most com-
mon and conventional types of derivative securities are
futures and options.
EACH PORTFOLIO Each Portfolio of the Fund may utilize stock futures con-
MAY USE FUTURES tracts (bond futures contracts for the bond portion of the
CONTRACTS, Balanced Portfolio), options, including puts and calls,
OPTIONS AND warrants, convertible securities and swap agreements to a
WARRANTS, limited extent. Each Portfolio may use over-the-counter op-
CONVERTIBLE tions when exchange-traded options do not exist. Specifi-
SECURITIES AND cally, each Portfolio may enter into futures contracts and
SWAP AGREEMENTS options provided that not more than 3% of its assets are
required as a margin deposit for futures contracts or op-
tions and provided that not more than 5% of a Portfolio's
assets are invested in futures and options at any time. Ad-
ditionally, each Portfolio's investment in warrants will
not exceed more than 5% of its assets (2% with respect to
warrants not listed on the New York or American Stock Ex-
changes). Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several rea-
sons: to simulate full investment in the benchmark index
while retaining a cash balance for fund management purpos-
es, to facilitate the Portfolio management process, or to
reduce transaction costs. While each of these instruments
can be used as leveraged investments, the Portfolios may
not use them to leverage its net assets. Since the Fund
seeks to minimize taxable distributions, futures contracts
will only be incorporated into the Portfolio to a very lim-
ited extent.
FUTURES The risk of loss associated with futures contracts in some
CONTRACTS, strategies can be substantial due both to the low margin
OPTIONS, deposits required and the extremely high degree of leverage
WARRANTS, involved in futures pricing. As a result, a relatively
CONVERTIBLE small price movement in a futures contract may result in an
SECURITIES AND immediate and substantial loss or gain. However, the Port-
SWAP AGREEMENTS folios will not use futures contracts, options, warrants,
POSE CERTAIN convertible securities and swap agreements for speculative
RISKS purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts,
options, including puts and calls, warrants, convertible
securities and swap agreements by the Portfolios are: (i)
imperfect correlation between the change in market value of
the stocks held by a Portfolio and the prices of futures
contracts, options, warrants, convertible securities and
swap agreements; and (ii) possible lack of a liquid second-
ary market for a futures contract and the resulting inabil-
ity to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by in-
vesting only in those contracts whose behavior is expected
to resemble that of a Portfolio's underlying securities.
The risk that a Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on an exchange with an active and liquid sec-
ondary market. However options, warrants, convertible secu-
rities and
16
<PAGE>
swap agreements purchased or sold over-the-counter may be
less liquid than exchange-traded securities. Illiquid secu-
rities, in general, may not represent more than 15% of the
net assets of a Portfolio.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations there-
under, the Portfolios will minimize this risk by entering
into agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the
Portfolios will not be able to meet their obligations to
the counterparty. This risk will be mitigated by having the
Portfolios invest in the specific asset for which they are
obligated to pay a return.
EACH PORTFOLIO Each Portfolio of the Fund may lend its investment securi-
MAY LEND ITS ties to qualified institutional investors for either short-
SECURITIES term or long-term purposes of realizing additional income.
Loans of securities by a Portfolio will be collateralized
by cash, letters of credit, or securities issued or guaran-
teed by the U.S. Government or its agencies. The collateral
will equal at least 100% of the current market value of the
loaned securities, and such loans may not exceed 33 1/3% of
the value of the Portfolio's net assets.
EACH PORTFOLIO Each Portfolio of the Fund may own restricted securities to
MAY OWN a limited extent. Restricted securities are securities
RESTRICTED which are not freely marketable or which are subject to re-
SECURITIES strictions upon sale under the Securities Act of 1933. Each
Portfolio may invest up to 15% of its net assets in re-
stricted securities. (Included within this limit are re-
stricted securities and, other securities for which price
quotations are not readily available.) From time to time,
the Fund's Board of Directors may determine that certain
restricted securities known as Rule 144A securities are
liquid and not subject to the 15% limitation described
above.
PORTFOLIO Although each Portfolio generally seeks to invest for the
TURNOVER IS long term, the three Portfolios of the Fund retain the
EXPECTED TO BE right to sell securities irrespective of how long they have
LOW been held. However, because of the index-oriented invest-
ment management approach of the Fund and because of the
management techniques employed to reduce the realization of
capital gains, it is anticipated that the annual Portfolio
turnover rate for the Growth and Income and Capital Appre-
ciation Portfolios and the equity portion of the Balanced
Portfolio will not exceed 10%. The portion of the Balanced
Portfolio which is invested in municipal bonds also retains
the right to sell securities irrespective of how long they
have been held. It is anticipated that the annual portfolio
rate for the bond portion of the Balanced Portfolio will
not exceed 40%.
- --------------------------------------------------------------------------------
17
<PAGE>
INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, each Portfolio of the Fund will
not:
THE FUND HAS (a) with respect to 75% of its assets, purchase securities
ADOPTED CERTAIN of any issuer (except obligations of the U.S.
FUNDAMENTAL Government and its instrumentalities) if, as a result,
LIMITATIONS more than 5% of the value of the Portfolio's assets
would be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
and
(d) borrow money, except that a Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value
of the Portfolio's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of a
Portfolio's net assets, the Portfolio will not make any
additional investments.
These investment limitations are considered at the time in-
vestment securities are purchased. The limitations de-
scribed here and in the Statement of Additional Information
may be changed only with the approval of a majority of a
Portfolio's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment
THE FUND Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
VANGUARD excess of $190 billion. Through their jointly- owned sub-
ADMINISTERS AND sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
DISTRIBUTES THE and the other funds in the Group obtain at cost virtually
FUND all of their corporate management, administrative and dis-
tribution services. Vanguard also provides investment advi-
sory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate struc-
ture, the Vanguard funds have costs substantially lower
than those of most competing mutual funds. In 1995, the av-
erage expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by Lipper
Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and ad-
ministrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's total expenses, which are
allocated among the
18
<PAGE>
funds under methods approved by the Board of Directors of
each fund. In addition, each fund bears its own direct ex-
penses, such as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). How-
ever, each fund bears its share of the Group's distribution
costs.
- --------------------------------------------------------------------------------
INVESTMENT The Growth and Income and Capital Appreciation Portfolios
ADVISER and the equity portion of the Balanced Portfolio receive
all investment advisory services on an at-cost basis from
VANGUARD MANAGES VANGUARD'S CORE MANAGEMENT GROUP. The Core Management Group
THE FUND ON AN also provides investment advisory services to several other
AT-COST BASIS Vanguard Funds, including Vanguard Index Trust, Vanguard
International Equity Index Fund, Vanguard Institutional In-
dex Fund, Vanguard Balanced Index Fund, Vanguard Variable
Insurance Fund--Equity Index Portfolio, the Aggressive
Growth Portfolio of Vanguard Horizon Fund, and a portion of
Vanguard/Windsor II and Vanguard/Morgan Growth Fund, as
well as to several indexed separate accounts. Total assets
under management by the Core Management Group were $33 bil-
lion as of December 31, 1995. The Core Management Group is
supervised by the Officers of the Fund.
In placing portfolio transactions, the Core Management
Group uses its best judgment to choose the broker most ca-
pable of providing the brokerage services necessary to ob-
tain the best available price and most favorable execution
at the lowest commission rate. The full range and quality
of brokerage services available are considered in making
these determinations. In those instances where it is rea-
sonably determined that more than one broker can offer the
services needed to obtain the best available price and most
favorable execution, consideration may be given to those
brokers which supply statistical information and provide
other services in addition to execution services to the
Fund.
The municipal securities portion of the Balanced Portfolio
receives all investment advisory services on an at-cost ba-
sis from VANGUARD'S FIXED INCOME GROUP. The Group also pro-
vides investment advisory services to more than 40 Vanguard
money market and bond portfolios, both taxable and tax-ex-
empt. Total assets under management by Vanguard's Fixed In-
come Group were approximately $66 billion as of December
31, 1995. The Fixed Income Group is supervised by the Offi-
cers of the Fund.
Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Group since its inception in 1981. Mr
MacKinnon is responsible for setting the broad investment
strategies employed by the Fund, and for overseeing the
portfolio manager who implements those strategies on a day-
to-day basis.
Jerome J. Jacobs, Principal, serves as portfolio manager of
the municipal securities portion of the Balanced Portfolio.
Associated with the Fixed Income Group since 1984, Mr. Ja-
cobs currently manages the Long-Term and High-Yield Portfo-
lios of Vanguard Municipal Bond Fund. Previously he managed
the Short-Term, Limited-Term and Intermediate-Term Portfo-
lios of Vanguard Municipal Bond Fund.
19
<PAGE>
The Fixed Income Group manages the investment and reinvest-
ment of its portion of the assets of the Balanced Portfolio
and continuously reviews, supervises and administers its
investment program, subject to the maturity and quality
standards specified in this Prospectus and supplemental
guidelines approved by the Fund's Board of Directors. The
Fixed Income Group's selection of investments for the Port-
folio is based on: (a) continuing credit analysis of those
instruments held in the Portfolio and those being consid-
ered for inclusion therein; (b) possible disparities in
yield relationships between different fixed income securi-
ties; and (c) actual or anticipated movements in the gen-
eral level of interest rates.
Vanguard's Fixed Income Group places all orders for pur-
chases and sales of portfolio securities. Purchases of
portfolio securities are made either directly from the is-
suer or from municipal securities dealers. The investment
management staff may sell portfolio securities prior to
their maturity if circumstances and considerations warrant
and if it believes such dispositions advisable. The staff
seeks to obtain the best available net price and most fa-
vorable execution for the portfolio transactions. The full
range and quality of brokerage services are considered in
making these determinations.
- --------------------------------------------------------------------------------
DIVIDENDS, While the Fund seeks to minimize taxable distributions,
CAPITAL GAINS each Portfolio of the Fund may be expected to earn and dis-
AND TAXES tribute taxable income and may also be expected to realize
and distribute capital gains from time to time. The Fund
TWO PORTFOLIOS distributes substantially all of its net investment income
PAY DIVIDENDS in the form of dividends. The Growth and Income and Bal-
QUARTERLY, ONE anced Portfolios pay dividends quarterly from ordinary in-
PORTFOLIO PAYS come, while the Capital Appreciation Portfolio pays annual
DIVIDENDS dividends. For all three Portfolios, net capital gains, if
ANNUALLY any, are distributed annually.
A Portfolio's dividend and capital gains distributions may
be reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.
In order to satisfy certain distribution requirements of
the Tax Reform Act of 1986, a Portfolio may declare special
year-end dividend and capital gains distributions during
December. Such distributions, if received by shareholders
by January 31, are deemed to have been paid by the Portfo-
lio and received by shareholders on December 31 of the
prior year.
Each Portfolio of the Fund intends to continue to qualify for
taxation as a "regulated investment company" under the
Internal Revenue Code so that each Portfolio will not be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by the Growth and
Income Portfolio, the Capital Appreciation Portfolio, and the
equity portion of the Balanced Portfolio from net investment
income and net short-term capital gains, whether received in
cash or reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corpo-rate investors,
dividends from net investment income will generally qualify
in part for the intercorporate dividends-received deduction.
However, the portion of the dividends so qualified depends on
the aggregate taxable qualifying dividend income received by
a Portfolio from domestic (U.S.) sources.
20
<PAGE>
THE BALANCED In addition, the Balanced Portfolio intends to invest a
PORTFOLIO sufficient portion of its assets in municipal bonds and
INTENDS TO PAY notes so that it will qualify to pay "exempt-interest divi-
TAX-EXEMPT dends" to shareholders. Such exempt-interest dividends dis-
DIVIDENDS tributed to shareholders are excluded from a shareholder's
gross income for federal tax purposes. The Revenue Recon-
ciliation Act enacted during 1993 provides that market dis-
count on tax-exempt bonds, purchased after April 30, 1993
must be taxed as ordinary income. Accordingly, to the ex-
tent that the Fund purchases such discounted securities
taxable income may result. Taxable income will also result
from the Portfolio's equity investments.
In addition, any capital loss realized from municipal secu-
rities held for six months or less is disallowed to the ex-
tent of tax-exempt dividend income received. In other
words, if you held shares in a Portfolio for six months or
less, and sold those shares (or a portion of those shares)
at a loss, the capital loss you report is reduced by the
tax-exempt dividends paid by these shares.
Tax-exempt dividends from a Portfolio, capital gains dis-
tributions from a Portfolio, and any capital gains or
losses realized from the sale or exchange of shares may be
subject to state and local taxes. However, some states al-
low shareholders to exclude from state income tax that por-
tion of a Portfolio's tax-exempt income that is attribut-
able to municipal securities issued within the sharehold-
er's own state. To assist shareholders of these states, the
Fund will provide a breakdown of each Portfolio's tax-ex-
empt interest income on a state-by-state basis at year-end.
Up to 85% of an individual's Social Security benefits may
be subject to federal income tax. Along with other factors,
total tax-exempt income, including any tax-exempt dividend
income from the Balanced Portfolio, is used to calculate
the portion of Social Security benefits that is taxed.
EACH PORTFOLIO Distributions paid by a Portfolio from long-term or short-
IS MANAGED IN term capital gains, whether received in cash or reinvested
ORDER TO in additional shares, are taxable as long-term or short-
MINIMIZE THE term capital gains, regardless of the length of time you
REALIZATION OF have owned shares in the Portfolio. Capital gains distribu-
CAPITAL GAINS tions are made when a Portfolio realizes net capital gains
on sales of portfolio securities during the year. Each
Portfolio is managed in order to minimize the amount of
capital gains realized during a particular year. However,
the realization of capital gains is not entirely within the
Fund's control and is dependent on shareholder purchase and
redemption activity. Capital gains distributions may vary
considerably from year-to-year; there will be no capital
gains distributions in years when a Portfolio realizes net
capital losses.
Note that if you elect to receive capital gains distribu-
tions in cash, instead of reinvesting them in additional
shares, you are in effect reducing the capital at work for
you in a Portfolio. Also, keep in mind that if you purchase
shares in a Portfolio shortly before the record date for a
dividend or capital gains distribution, a portion of your
investment will be returned to you as a taxable distribu-
tion, regardless of whether you are reinvesting your dis-
tributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by each Port-
folio.
21
<PAGE>
A CAPITAL GAIN A sale of shares of a Portfolio is a taxable event, and may
OR LOSS MAY BE result in a capital gain or loss. A capital gain or loss
REALIZED UPON may be realized from an ordinary redemption of shares or an
EXCHANGE OR exchange of shares between two mutual funds (or two portfo-
REDEMPTION lios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
Each Portfolio of the Fund is required to withhold 31% of
taxable dividends, capital gains distributions, and redemp-
tions paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account Reg-
istration Form your proper Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Portfolios are exempt
from Pennsylvania personal property taxes.
The tax discussion set forth on pages 20, 21 and this page
is included for general information only. Prospective in-
vestors should consult their own tax advisers concerning
the tax consequences of an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE The share price or "net asset value" per share of each
OF EACH Portfolio is determined by dividing the total market value
PORTFOLIO of the Portfolio's investments and other assets, less any
liabilities, by the number of outstanding shares of the
Portfolio. Net asset value per share is determined as of
the close of the New York Stock Exchange (generally 4:00
p.m. Eastern time) on each day the Exchange is open for
trading.
Portfolio securities that are listed on a securities ex-
change are valued at the last quoted sales price on the day
the valuation is made. Price information on listed securi-
ties is taken from the exchange where the security is pri-
marily traded. Securities which are listed on an exchange
and which are not traded on the valuation date are valued
at the mean of the bid and ask prices. For the Growth and
Income Portfolio, unlisted securities are valued at the
latest quoted bid price. For the Capital Appreciation Port-
folio and the equity portion of the Balanced Portfolio, un-
listed securities are valued at the mean of the bid and ask
prices. Temporary cash investments are valued at amortized
cost which approximates market value. Equity securities may
be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities. Equity securities for
which no current quotations are readily available are val-
ued at fair market value as determined in good faith by the
Board of Directors.
When approved by the Board of Directors, bonds and other
fixed income securities of the Balanced Portfolio may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities. (Since the majority of municipal
bond issues do not trade each day, current prices are gen-
erally not available for many securities. In estimating a
security's price, a pricing service takes into account
22
<PAGE>
institutional-size trading in similar groups of securities
and any developments related to specific securities.) The
methods used by the pricing service and the valuations so
established are reviewed by the officers of the Fund under
policies determined by the Directors. There are a number of
pricing services available and the Directors, as part of an
ongoing evaluation of these services, may authorize the use
of other pricing services or discontinue the use of any
service in whole or in part.
Securities not priced in this manner are priced at the most
recent quoted bid price provided by investment dealers.
Short-term instruments maturing within 60 days of the valu-
ation date may be valued at cost, plus or minus any amor-
tized discount or premium. Other assets and securities for
which no quotations are readily available will be valued in
good faith at their fair value using methods determined by
the Directors.
Each Portfolio's share price can be found daily in the mu-
tual fund listings of most major newspapers under the head-
ing of Vanguard.
- --------------------------------------------------------------------------------
GENERAL The Fund is organized as a Maryland corporation. The Arti-
INFORMATION cles of Incorporation permit the Directors to issue
750,000,000 shares of common stock with a $.001 par value.
The Board of Directors has the power to designate one or
more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering shares of three
series.
The shares of each series are fully paid and non-assessa-
ble; have no preference as to conversion, exchange, divi-
dends, retirement or other features; and have no pre-
emptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Directors can elect 100%
of the Directors if they so choose. Annual meetings of
shareholders will not be held except as required by the In-
vestment Company Act of 1940 and other applicable law. An
annual meeting will be held to vote on the removal of a Di-
rector or Directors of the Fund if requested in writing by
the holders of not less than 10% of the outstanding shares
of the Fund.
All securities and cash are held by Morgan Guaranty Trust
Company, New York, NY. CoreStates Bank, N.A., holds daily
cash balances that are used by the Fund's Portfolios to in-
vest in repurchase agreements or securities acquired in
these transactions. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent accoun-
tants for the Fund and will audit its financial statements
annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
23
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open an account, either by mail or wire. Simply
ACCOUNT AND complete and return an Account Registration Form and any
PURCHASING required legal documentation, indicating the amount you
SHARES wish to invest. Your purchase must be equal to or greater
than the $10,000 minimum initial investment requirement for
each Portfolio. If you need assistance with the forms or
have any questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For other
types of account registrations (e.g., corporations, associ-
ations, other organizations, trusts or powers of attorney),
please call us to determine which additional forms you may
need. The Fund is not appropriate for Individual Retirement
Accounts (IRAs) and other types of tax-deferred retirement
plans.
IMPORTANT NOTE Shares of each Portfolio generally are purchased at the
ON EXPENSES next-determined net asset value per share after your in-
vestment has been received. Potential investors should note
that a 2% fee is charged on redemptions and exchanges out
of all Portfolios of shares held for less than one year and
a 1% fee is charged on redemptions and exchanges of shares
held at least one but less than five years. In the event of
an early redemption due to a shareholder's death, all re-
demption fees will be waived. In order to substantiate the
death, a certified copy of the death certificate must be
provided. Please see "Fund Expenses" for more information.
The Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
PURCHASE (1) Because of the risks associated with common stock in-
RETRICTIONS vestments, the Fund is intended to be a long-term in-
vestment vehicle and is not designed to provide invest-
ors with a means of speculating on short-term market
movements. Consequently, each Portfolio reserves the
right to reject any specific purchase (and exchange
purchase) request. Each Portfolio also reserves the
right to suspend the offering of shares for a period of
time.
(2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable of the Vanguard Group.
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), written ex-
change from another Vanguard Fund account ($100 minimum),
or Vanguard Fund Express. However, the Fund reserves the
right to reject any specific purchase request, whether it
be made by check, wire, exchange from another Vanguard Fund
account, or Vanguard Fund Express.
------------------------------------------------------------
24
<PAGE>
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
NEW ACCOUNT
PURCHASING BY Please include the Additional investments
MAIL Complete amount of your initial should include the In-
and sign the investment and indi- vest-by-Mail remit-
enclosed Account cate the Portfolio(s) tance form attached to
Registration you have selected on your Fund confirmation
Form the registration form, statements. Please
make your check pay- make your check pay-
able to The Vanguard able to The Vanguard
Group--(Portfolio Num- Group--(Portfolio Num-
ber), see below for ber), see below for
the appropriate port- the appropriate port-
folio number, and mail folio number, write
to: your account number on
your check and, using
VANGUARD FINANCIAL the return envelope
CENTER P.O. BOX 2600 provided, mail to the
VALLEY FORGE, PA 19482 address indicated on
the Invest-by-Mail Form.
For express or VANGUARD FINANCIAL All requests should be
registered mail, CENTER 455 DEVON PARK mailed to one of the
send to: DRIVE WAYNE, PA 19087 addresses indicated
for new accounts. Do
not send registered or
express mail to the
post office box ad-
dress.
VANGUARD TAX-MANAGED FUND:
Growth and Income Portfolio--101
Capital Appreciation Portfolio--102
Balanced Portfolio--103
------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Money should be CORESTATES NO. 01019897
wired to: ATTN VANGUARD
BEFORE WIRING: VANGUARD TAX-MANAGED FUND
Please contact NAME OF PORTFOLIO
our Client ACCOUNT NUMBER
Services ACCOUNT REGISTRATION
Department (1-
800-662-2739)
You should notify our Client Services Department of your
intended wire purchase, including the federal wire number
to be used, by 12:00 noon (Eastern time). To assure proper
receipt, please be sure your bank includes the Portfolio
name, the account number Vanguard has assigned to you and
the eight-digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form and
mail it to the "New Account" address after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Banks are
open for business.
------------------------------------------------------------
25
<PAGE>
PURCHASING BY You may open a new account or purchase additional shares by
EXCHANGE (from a making an exchange from an existing Vanguard account. How-
Vanguard ever, the Fund reserves the right to refuse any exchange
account) purchase request. Call our Client Services Department (1-
800-662-2739). The new account will have the same registra-
tion as the existing account.
------------------------------------------------------------
PURCHASING BY The Fund Express Automatic Investment option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
the schedule (monthly, bimonthly (every other month), quar-
Automatic terly or yearly) you select. To establish this Fund Express
Investment option, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express enrollment; please wait three weeks
before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capi-
tal gains distributions will be reinvested in additional
shares. This option will be selected for you automati-
cally unless you specify one of the other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in
cash and your capital gains will be reinvested in addi-
tional shares.
3. ALL CASH OPTION--Both dividend and capital gains distri-
butions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund ac-
count is available. Please call our Client Services Depart-
ment (1-800-662-2739) for information. You may also elect
Vanguard Dividend Express which allows you to transfer your
cash dividends and/or capital gains distributions automati-
cally to your bank account. Please see "Other Vanguard
Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS SHOULD These distributions are made to all shareholders who own
ASK ABOUT THE Fund shares as of the distribution's record date, regard-
TIMING OF less of how long the shares have been owned. Purchasing
CAPITAL GAINS shares just prior to the record date could have a signifi-
AND DIVIDEND cant impact on your tax liability for the year. For exam-
DISTRIBUTIONS ple, if you purchase shares immediately prior to the record
BEFORE INVESTING date of a sizable capital gain or taxable income dividend
distribution, you will be assessed taxes on the amount of
the capital gain and/or dividend distribution later paid
even though you owned the Fund shares for just a short pe-
riod of time. (Taxes are due on the distributions even if
the dividend or gain is reinvested in additional Fund
shares.) While the total value of your investment will be
the same after the distribution--the amount of the distri-
bution will offset the drop in the net asset value of the
shares--you should be aware of the tax implications the
timing of your purchase may have.
Prospective investors should, therefore, inquire about po-
tential distributions before investing. Each Portfolio's
annual capital gains are normally distrib-
26
<PAGE>
uted in December. Income dividends for the Growth and In-
come and Balanced Portfolios are generally paid quarterly
in March, June, September and December, while income divi-
dends for the Capital Appreciation Portfolio are generally
paid annually in December. For additional information on
distributions and taxes, see the section titled "Dividends,
Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
ESTABLISHING OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH ADDI-
OPTIONAL TIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE CALL
SERVICES OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guar-
GUARANTEES antee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature and
may be obtained from banks, brokers and any other guarantor
that Vanguard deems acceptable. A SIGNATURE GUARANTEE CAN-
NOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will not be available for the Fund.
BROKER/DEALER If you purchase shares in Vanguard Funds through a regis-
PURCHASES tered broker-dealer or investment adviser, the broker-
dealer or adviser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been
received.
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you
elect to do so, you may also receive a paper copy of the
prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is cred-
ACCOUNT WILL BE ited. If your purchase is made by check, Federal Funds wire
CREDITED or exchange, and is received by the close of regular trad-
ing the New York Stock Exchange (generally 4:00 p.m. East-
ern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your
trade date is the next business day. Shares of the Growth
and Income, Capital Appreciation, and Balanced Portfolios
are purchased at the net asset value determined on your
trade date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account
SHARES by redeeming shares at any time. You generally may initiate
a request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days after
the receipt of the request in Good Order.
------------------------------------------------------------
27
<PAGE>
IMPORTANT NOTE A redemption fee of 2% of the value of shares redeemed will
be deducted from the redemption proceeds if shares held for
less than one year are redeemed. A redemption fee of 1% of
the value of shares redeemed will be deducted from the re-
demption proceeds if shares held for at least one year but
less than five years are redeemed. These fees are paid di-
rectly to the Portfolio. Please see "Fund Expenses" for
more information.
------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD TAX-MANAGED FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Tax-Managed Fund,
455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired, in the case of estates, corporations, trusts and
certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739).
------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10 calendar
days following any expedited address change to your ac-
count. An expedited address change is one that is made by
telephone, by Vanguard Online or, in writing, without the
signatures of all account owners. Please see "Important In-
formation About Telephone Transactions."
------------------------------------------------------------
SELLING BY FUND With the Fund Express Automatic Withdrawal option, money
EXPRESS will be automatically moved from your Vanguard Fund account
to your bank account according to the schedule you have se-
Automatic lected. You may elect Fund Express on the Account Registra-
Withdrawal tion Form or call our Investor Information Department (1-
800-662-7447) for a Fund Express application.
------------------------------------------------------------
SELLING BY You may sell shares by making an exchange to another Van-
EXCHANGE guard Fund account. Exchanges to or from the following
funds may only be made by mail: VANGUARD BALANCED INDEX
FUND, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND AND VANGUARD QUANTITATIVE PORTFOLIOS. Please see
"Exchanging Your Shares" for details.
- --------------------------------------------------------------------------------
TAX CAUTION When redeeming or exchanging shares of the Fund, you may
realize taxable capital gains.
------------------------------------------------------------
28
<PAGE>
Shares purchased by check or Fund Express may be redeemed
IMPORTANT at any time. However, your redemption proceeds will not be
REDEMPTION paid until payment for the purchase is collected, which may
INFORMATION take up to ten calendar days.
------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION close of the New York Stock Exchange (generally 4:00 p.m.
PROCEEDS Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as de-
scribed above in "Important Redemption Information."
If you experience difficulty in making a telephone redemp-
tion during periods of drastic economic or market changes,
your redemption request may be made by regular or express
mail. It will be implemented at the net asset value next
determined after your request has been received by Vanguard
in Good Order. The Fund reserves the right to revise or
terminate the telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone pay-
ment at times when the New York Stock Exchange is closed or
under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
If the Board of Directors determines that it would be det-
rimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay re-
demption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Van-
AVERAGE COST guard will send you an Average Cost Statement which pro-
STATEMENT vides you with the tax basis of the shares you redeemed.
Please see "Statements and Reports" for additional informa-
tion.
------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller ac-
BALANCE counts, the Fund reserves the right to redeem shares in any
REQUIREMENT account that is below $10,000. It is the Fund's current
policy that, at any time your total investment in the
Growth and Income, Capital Appreciation, or Balanced Port-
folios falls below $10,000 you may be notified that the
value of your account is below the Portfolio's minimum ac-
count balance requirement. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the share-
holder.
- --------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Tax-Managed Fund for those of other
available Vanguard Funds.
------------------------------------------------------------
IMPORTANT NOTE A redemption fee of 2% of the value of shares exchanged out
will be deducted from the exchange proceeds if shares held
for less than one year are ex-
29
<PAGE>
changed. A redemption fee of 1% of the value of shares ex-
changed out will be deducted from exchange proceeds if
shares held at least one year but less than five years are
exchanged. These fees are paid directly to the Portfolios.
- --------------------------------------------------------------------------------
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security number of
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Call Client Only the registered shareholder may complete such an ex-
Services change. Requests for telephone exchanges received prior to
(1-800-662-2739) the close of the regular trading on the New York Stock Ex-
change (generally 4:00 p.m. Eastern time) are processed at
the close of business that same day. Requests received af-
ter the close of regular trading on the Exchange are proc-
essed the next day. TELEPHONE EXCHANGES ARE NOT ACCEPTED
INTO OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VAN-
GUARD QUANTITATIVE PORTFOLIOS. If you experience difficulty
in making a telephone exchange, your exchange request may
be made by regular or express mail, and it will be imple-
mented at the closing net asset value on the date received
by Vanguard provided the request is received in Good Order.
------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Portfolio, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD TAX-MANAGED FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Tax-Managed Fund,
455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the fol-
EXCHANGE lowing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you
may have, call our Investor Information Department (1-
800-662-7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
. Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
. The shares to be exchanged must be on deposit and not
held in certificate form.
. New accounts are not currently accepted in the
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
. The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
30
<PAGE>
Every effort will be made to maintain the exchange privi-
lege. However, the Fund reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states
and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive ex-
change activity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST
30 DAYS APART) from a Portfolio of the Fund during any
twelve-month period. Notwithstanding these limitations, the
Fund reserves the right to reject any purchase request (in-
cluding exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient
portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemp-
INFORMATION tions) by telephone is automatically established on your
ABOUT TELEPHONE account unless you request in writing that telephone trans-
TRANSACTIONS actions on your account not be permitted.
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard ad-
heres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name and ad-
dress used in the registration; and (iv) the Social Secu-
rity or Employer Identification number listed on the ac-
count.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by tele-
phone, provided that reasonable security procedures have
been followed. Vanguard believes that the security proce-
dures described above are reasonable, and that if such pro-
cedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone trans-
actions on your account. If Vanguard fails to follow rea-
sonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482 ATTENTION: TRANSFER DEPART-
31
<PAGE>
MENT. The request must be in Good Order. To obtain a trans-
fer form and full instructions, please call our Client
Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market ac-
counts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The fourth-
quarter statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Financial reports on the Fund will be mailed to you semi-
annually, according to the Fund's fiscal year-end.
Vanguard's Average Cost Statement provides you with the av-
erage cost of shares redeemed from your account, using the
average cost single category method. This service is avail-
able for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their Av-
erage Cost Statement along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Govern-
DEPOSIT SERVICE ment checks (including Social Security and military pension
checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Govern-
ment and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE SERVICE instance, the service can be used to "dollar-cost average"
from a money market portfolio into a stock or bond fund.
Please contact our Client Services Department at 1-800-662-
2739 for additional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money be-
EXPRESS tween your Fund account and your account at a bank, savings
and loan association, or a credit union that is a member of
the Automated Clearing House (ACH) system. You may elect
this service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Fund
Express application.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your
DIVIDEND EXPRESS dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the Au-
tomated Clearing House (ACH) system. You may elect this
service on the Account Registration
32
<PAGE>
Form or call the Investor Information Department (1-800-
662-7447) for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quota-
tions on Vanguard Funds through any TouchTone (TM) tele-
phone. This service also lets you obtain information about
your account balance, your last transaction, and your most
recent dividend or capital gains payment. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-
800-662-6273). A brochure offering detailed operating in-
structions is available from our Investor Information De-
partment (1-800-662-7447).
- --------------------------------------------------------------------------------
33
<PAGE>
[LOGO OF VANGUARD TAX-MANAGED FUND APPEARS HERE]
- -----------------
THE VANGUARD GROUP OF INVESTMENT COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR 24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF VANGUARD GROUP APPEARS HERE]
P087