1
 
TAX-EXEMPT NEW YORK MONEY MARKET FUND
120 South LaSalle Street
Chicago, Illinois 60603
 

TABLE OF CONTENTS
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Summary                                        1
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Summary of Expenses                            2
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Financial Highlights                           2
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Investment Objective and Policies              3
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Municipal Securities and Investment
Techniques                                     4
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Net Asset Value                                6
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Purchase of Shares                             7
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Redemption of Shares                           8
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Special Features                              10
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Dividends and Taxes                           10
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Investment Manager and Services               12
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Performance                                   13
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Capital Structure                             14
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This Prospectus contains information about the Fund that a prospective investor
should know before investing and should be retained for future reference. A
Statement of Additional Information dated July 31, 1995, has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. It
is available upon request without charge from the Fund at the address or
telephone number on this cover or the firm from which this prospectus was
received.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
TAX-EXEMPT
NEW YORK
MONEY MARKET
FUND
 
PROSPECTUS July 31, 1995
 
TAX-EXEMPT NEW YORK MONEY MARKET
FUND
 
120 South LaSalle Street, Chicago, Illinois 60603 1-800-231-8568. The objective
of the Fund is maximum current income that is exempt from federal, New York
State and New York City income taxes to the extent consistent with stability of
capital. The Fund pursues its objective primarily through a professionally
managed, non-diversified portfolio of short-term, high quality New York
Municipal Securities. The Fund currently is offered for sale only in New York,
Connecticut, New Jersey and Pennsylvania.
 
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY AND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
   2
 
TAX-EXEMPT NEW YORK MONEY MARKET FUND
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603, TELEPHONE 1-800-231-8568
 
SUMMARY
 
INVESTMENT OBJECTIVES.  Tax-Exempt New York Money Market Fund (the "Fund") is an
open-end, non-diversified management investment company. The Fund invests in a
portfolio of short-term high quality municipal obligations issued by or on
behalf of New York State, its political subdivisions, authorities and
corporations, and territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal, New York
State and New York City income taxes. The Fund seeks maximum current income that
is exempt from federal, New York State and New York City personal income taxes
to the extent consistent with stability of capital. The Fund seeks to maintain a
net asset value of $1.00 per share. There is no assurance that the objective of
the Fund will be achieved or that the Fund will be able to maintain a net asset
value of $1.00 per share. See "Investment Objectives and Policies."
 
INVESTMENT MANAGER AND SERVICES.  Kemper Financial Services, Inc. ("KFS") is the
investment manager for the Fund and provides the Fund with continuous
professional investment supervision. KFS is paid an annual investment management
fee, payable monthly, on a graduated basis of .22 of 1% of the first $500
million of average daily net assets, .20 of 1% of the next $500 million, .175 of
1% of the next $1 billion, .16 of 1% of the next $1 billion and .15 of 1% of
average daily net assets over $3 billion. Kemper Distributors, Inc. ("KDI"), an
affiliate of KFS, is the primary administrator, distributor and principal
underwriter of the Fund and, as such, provides information and services for
existing and potential shareholders and acts as agent of the Fund in the sale of
its shares. KDI receives a distribution services fee, payable monthly, at an
annual rate of .50 of 1% of average daily net assets of the Fund. As
distributor, KDI normally pays financial services firms that provide cash
management and other services for their customers at a maximum annual rate of
 .50 of 1% of average daily net assets of those accounts that they maintain and
service. See "Investment Manager and Services."
 
PURCHASES AND REDEMPTIONS.  Shares of the Fund are available at net asset value
through selected financial services firms. The minimum initial investment is
$1,000 and the minimum subsequent investment is $100. See "Purchase of Shares."
Shares may be redeemed at the net asset value next determined after receipt by
the Fund's Shareholder Service Agent of a request to redeem in proper form.
Shares may be redeemed by written request or by using one of the Fund's
expedited redemption procedures. See "Redemption of Shares."
 
DIVIDENDS. Dividends are declared daily and paid monthly. Dividends are
automatically reinvested in additional shares, unless the shareholder makes a
different election. See "Dividends and Taxes."
 
GENERAL INFORMATION AND CAPITAL.  The Fund is organized as a business trust
under the laws of Massachusetts and may issue an unlimited number of shares of
beneficial interest. Shares are fully paid and nonassessable when issued, are
transferable without restriction and have no preemptive or conversion rights.
The Fund is not required to hold annual shareholder meetings; but will hold
special meetings as required or deemed desirable for such purposes as electing
trustees, changing fundamental policies or approving an investment management
agreement. See "Capital Structure."
 
                                        1
   3
 
SUMMARY OF EXPENSES
 
                                                                                              
SHAREHOLDER TRANSACTION EXPENSES(1)...........................................................   None
ANNUAL FUND OPERATING EXPENSES (after fee waiver and expense absorption) (as a percentage of
  average net assets)
Management Fees...............................................................................   None
12b-1 Fees(2).................................................................................    .37 %
Other Expenses................................................................................    .43 %
                                                                                                 -----
Total Operating Expenses......................................................................    .80 %
                                                                                                 ======


 
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(1) Investment dealers and other firms may independently charge shareholders
    additional fees.
 
(2) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
    more than the economic equivalent of the maximum front-end sales charges
    permitted by the National Association of Securities Dealers.
 
EXAMPLE
 


                                                                         1          3           5           10
                                                                        YEAR       YEARS       YEARS       YEARS
                                                                        ---        ----        ----        ----
                                                                                               
 
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and
(2) redemption at the end of each time period:                          $ 8        $ 26        $ 44        $ 99

 
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The Example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
the Fund. As discussed more fully under "Investment Manager and Services," KFS
has agreed to temporarily waive its management fee and reimburse or pay
operating expenses of the Fund to the extent, if any, that "Total Operating
Expenses", as defined, exceed .80% of average daily net assets of the Fund.
Without such waiver and expense reimbursement during the fiscal year ended March
31, 1995, "Management Fees" would have been .22%, "12b-1 Fees" would have been
 .50%, "Other Expenses" would have been .43% and "Total Operating Expenses" would
have been 1.15%. The Example should not be considered to be a representation of
past or future expenses. Actual expenses may be greater or lesser than those
shown.
 
FINANCIAL HIGHLIGHTS
 
The table below shows financial information expressed in terms of one share
outstanding throughout the period. The information in the table is covered by
the report of the Fund's independent auditors. The report is contained in the
Fund's Registration Statement and is available from the Fund. The financial
statements contained in the Fund's 1995 Annual Report to Shareholders are
incorporated herein by reference and may be obtained by writing or calling the
Fund.
 


                                                              YEAR ENDED MARCH 31,              DECEMBER 13, 1990
                                                     ---------------------------------------           TO
                                                       1995       1994       1993      1992      MARCH 31, 1991
                                                     --------    -------    ------    ------    -----------------
                                                                                 
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year                      $1.00       1.00      1.00      1.00           1.00
- -----------------------------------------------------------------------------------------------------------------
Net investment income and dividends declared              .02        .02       .02       .04            .01
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Net asset value, end of period                          $1.00       1.00      1.00      1.00           1.00
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TOTAL RETURN (%):                                        2.40       1.63      1.90      3.77            .97
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RATIOS TO AVERAGE NET ASSETS (%):
Expenses after expense absorption                         .80        .80       .80       .42            .54
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Net investment income                                    2.44       1.61      1.88      3.52           3.77
- -----------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (%):
Expenses                                                 1.15       1.25      1.53      1.45           1.00
- -----------------------------------------------------------------------------------------------------------------
Net investment income                                    2.09       1.16      1.15      2.49           3.31
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands)            $14,090     10,762     8,424     8,243          2,108
- -----------------------------------------------------------------------------------------------------------------

 
NOTE: KFS has agreed to temporarily waive its management fee and reimburse or
pay certain operating expenses to the extent necessary to limit expenses to
specific levels. The Other Ratios to Average Net Assets are computed without
this expense absorption. Ratios have been determined on an annualized basis.
Total return is not annualized.
 
                                        2
   4
 
INVESTMENT OBJECTIVE AND POLICIES
 
The investment objective of the Fund is maximum current income that is exempt
from federal, New York State and New York City income taxes to the extent
consistent with stability of capital. The Fund pursues its objective primarily
through a professionally managed, non-diversified portfolio of short-term high
quality municipal obligations issued by or on behalf of New York State, its
political subdivisions, authorities and corporations, and territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities the interest from which is, in the opinion of bond counsel to
the issuer, exempt from federal, New York State and New York City income taxes
("New York Municipal Securities").
 
The Fund is a money market mutual fund that has been designed to provide
investors with professional management of short-term investment dollars. The
Fund pools individual and institutional investors' money which it uses to buy
tax-exempt money market instruments. Because the Fund combines its shareholders'
money, it can buy and sell large blocks of securities, which reduces transaction
costs and increases yields. The Fund is managed by investment professionals who
analyze market trends to take advantage of changing conditions. Its investments
are subject to price fluctuations resulting from rising or declining interest
rates and are subject to the ability of the issuers of such investments to make
payment at maturity. Because of their short maturities, liquidity and high
quality ratings, high quality money market instruments, such as those in which
the Fund invests, are generally considered among the safest available. There can
be no assurance that the Fund will achieve its objective or that it will
maintain a net asset value of $1.00 per share.
 
Dividends representing net interest income received by the Fund on New York
Municipal Securities will be exempt from federal, New York State and New York
City personal income taxes. Such dividend income may be subject to other state
and local taxes. To the extent New York Municipal Securities are at any time
unavailable or unattractive for investment by the Fund, it will invest in other
debt securities the interest from which is exempt from federal income tax. Under
normal market conditions, as a non-fundamental policy, the Fund will maintain at
least 65% of its total assets in New York Municipal Securities. In addition, as
a fundamental investment policy, the Fund will under normal market conditions
maintain at least 80% of its investments in obligations issued by or on behalf
of states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
income from which is exempt from federal income taxes ("Municipal Securities").
As indicated under "Dividends and Taxes," the Fund may invest in "private
activity bonds." In compliance with the position of the staff of the Securities
and Exchange Commission ("SEC"), the Fund does not consider "private activity"
bonds as Municipal Securities for purposes of the 80% limitation. This is a
fundamental policy so long as the SEC staff maintains its position, after which
it would become non-fundamental. The Fund's assets will consist of Municipal
Securities and temporary investments as described below and cash.
 
The Fund will invest only in Municipal Securities that at the time of purchase:
(a) are rated within the two highest ratings of municipal securities (Aaa or Aa)
assigned by Moody's Investors Service, Inc. ("Moody's"), or (AAA or AA) assigned
by Standard & Poor's Corporation ("S&P"); (b) are guaranteed or insured by the
U.S. Government as to the payment of principal and interest; (c) are fully
collateralized by an escrow of U.S. Government securities; (d) have at the time
of purchase a Moody's short-term municipal securities rating of MIG-2 or higher
or a municipal commercial paper rating of P-2 or higher, or S&P's municipal
commercial paper rating of A-2 or higher; (e) are unrated, if longer term
municipal securities of that issuer are rated within the two highest rating
categories by Moody's or S&P; or (f) are determined by the Board of Trustees or
its delegate to be at least equal in quality to one or more of the above
categories. In addition, the Fund limits its portfolio investments to securities
that meet the quality requirements of Rule 2a-7 under the Investment Company Act
of 1940. See "Net Asset Value."
 
Certain risks result from the financial condition of New York State, certain of
its public bodies and municipalities and New York City. Beginning in early 1975,
New York State, New York City and other related entities faced serious financial
difficulties that jeopardized the credit standing and impaired the borrowing
abilities of these entities and contributed to high interest rates on, and lower
market prices for, debt obligations issued by them. A recurrence of such
financial difficulties or a failure of certain financial recovery programs could
result in defaults or declines in the
 
                                        3
   5
 
market values of various New York Municipal Securities in which the Fund may
invest. If there were a default or other financial crisis relating to New York
State, New York City, a State or City agency, or other municipality, the market
value and marketability of Municipal Securities in the Fund's portfolio and the
interest income to the Fund could be adversely affected. Additional information
concerning the risks associated with investment in New York Municipal Securities
is set forth in the Statement of Additional Information under "Municipal
Securities".
 
From time to time, as a defensive measure, including during periods when
acceptable short-term Municipal Securities are not available, the Fund may
invest in taxable "temporary investments" that include: obligations of the U.S.
Government, its agencies or instrumentalities; debt securities rated within the
two highest grades by Moody's or S&P; commercial paper rated in the two highest
grades by either of such rating services; certificates of deposit of domestic
banks with assets of $1 billion or more; and any of the foregoing temporary
investments subject to repurchase agreements. Under a repurchase agreement the
Fund acquires ownership of a security from a broker-dealer or bank that agrees
to repurchase the security at a mutually agreed upon time and price (which price
is higher than the purchase price), thereby determining the yield during the
Fund's holding period. Repurchase agreements with broker-dealer firms will be
limited to obligations of the U.S. Government, its agencies or
instrumentalities. Maturity of the securities subject to repurchase may exceed
one year. Interest income from temporary investments is taxable to shareholders
as ordinary income. Although the Fund is permitted to invest in taxable
securities (limited under normal market conditions to 20% of the Fund's total
assets), it is the Fund's primary intention to generate income dividends that
are not subject to federal, New York State and New York City income taxes. See
"Dividends and Taxes." For a description of the ratings, see "Appendix--Ratings
of Investments" in the Statement of Additional Information.
 
The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the value of
its total assets, in order to meet redemption requests without immediately
selling any portfolio securities. Any such borrowings under this provision will
not be collateralized. The Fund will not borrow for leverage purposes. The Fund
will not purchase illiquid securities, including repurchase agreements maturing
in more than seven days, if, as a result thereof, more than 10% of the Fund's
net assets valued at the time of the transaction would be invested in such
securities. Up to 25% of the total assets of the Fund may be invested at any
time in debt obligations of a single issuer or of issuers in a single industry,
and the Fund may invest without limitation in Municipal Securities the income on
which may be derived from projects of a single type.
 
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of an
issuer, subject to the diversification requirements of Subchapter M of the
Internal Revenue Code applicable to the Fund. This allows the Fund, as to 50% of
its assets, to invest more than 5% of its assets, but not more than 25%, in the
securities of an individual issuer. Since the Fund may invest a relatively high
percentage of its assets in the obligations of a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence than a diversified investment company. See "Investment Restrictions"
in the Statement of Additional Information.
 
The Fund has adopted certain investment restrictions that are presented in the
Statement of Additional Information, and that, together with the investment
objective and fundamental policies of the Fund, cannot be changed without
approval by holders of a majority of its outstanding voting shares. As defined
in the Investment Company Act of 1940, this means the lesser of the vote of (a)
67% of the shares of the Fund present at a meeting where more than 50% of the
outstanding shares are present in person or by proxy; or (b) more than 50% of
the outstanding shares of the Fund.
 
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES
 
The two principal classifications of Municipal Securities consist of "general
obligation" and "revenue" issues. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as
 
                                        4
   6
 
the user of the facility being financed. Industrial development bonds held by
the Fund are in most cases revenue bonds and are not payable from the
unrestricted revenues of the issuer. Among other types of instruments, the Fund
may purchase tax-exempt commercial paper, warrants and short-term municipal
notes such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes, construction loan notes, warrants and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax payments, the proceeds of bond placements or
other revenues. A more detailed discussion of Municipal Securities and the
Moody's and S&P ratings outlined above under "Investment Objective and Policies"
is contained in the Statement of Additional Information.
 
The Fund may purchase securities which provide for the right to resell them to
an issuer, bank or dealer at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
referred to as a "Standby Commitment." Securities may cost more with Standby
Commitments than without them. Standby Commitments will be entered into solely
to facilitate portfolio liquidity. A Standby Commitment may be exercised before
the maturity date of the related Municipal Security if the Fund's investment
adviser revises its evaluation of the creditworthiness of the underlying
security or of the entity issuing the Standby Commitment. The Fund's policy is
to enter into Standby Commitments only with issuers, banks or dealers which are
determined by the Fund's investment adviser to present minimal credit risks. If
an issuer, bank or dealer should default on its obligation to repurchase an
underlying security, the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere. For purposes of
valuing the Fund's securities at amortized cost, the maturity of Municipal
Securities will not be considered shortened by any Standby Commitment to which
such security is subject.
 
The Fund may invest in certain Municipal Securities having rates of interest
that are adjusted periodically or that "float" continuously according to
formulae intended to minimize fluctuations in values of the instruments
("Variable Rate Notes"). The interest rate on Variable Rate Notes ordinarily is
determined by reference to or is a percentage of a bank's prime rate, the 90 day
U.S. Treasury bill rate, the rate of return on commercial paper or bank
certificates of deposit, or some similar objective standard. Generally, the
changes in the interest rate on Variable Rate Notes reduce the fluctuation in
the market value of such notes. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or capital depreciation is less
than for fixed rate obligations. The Fund currently intends to invest a
substantial portion of its assets in Variable Rate Notes. Variable Rate Demand
Notes have a demand feature which entitles the purchaser to resell the
securities at amortized cost. The rate of return on Variable Rate Demand Notes
also varies according to some objective standard, such as an index of short-term
tax-exempt rates. Variable rate instruments with a demand feature enable the
Fund to purchase instruments with a stated maturity in excess of one year. The
Fund determines the maturity of variable rate instruments in accordance with SEC
rules which allow the Fund to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
 
The Fund may purchase high quality Certificates of Participation in trusts that
hold Municipal Securities. A Certificate of Participation gives the Fund an
undivided interest in the Municipal Security in the proportion that the Fund's
interest bears to the total principal amount of the Municipal Security. These
Certificates of Participation may be variable rate or fixed rate with remaining
maturities of one year or less. A Certificate of Participation may be backed by
an irrevocable letter of credit or guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Fund's investment manager considers these factors as well as others,
such as any quality ratings issued by the rating services identified above, in
reviewing the credit risk presented by a Certificate of Participation and in
determining whether the Certificate of Participation is appropriate for
investment by the Fund. It is anticipated by the Fund's investment manager that,
for most publicly offered Certificates of Participation, there will be a liquid
 
                                        5
   7
 
secondary market or there may be demand features enabling the Fund to readily
sell its Certificates of Participation prior to maturity to the issuer or a
third party. As to those instruments with demand features, the Fund intends to
exercise its right to demand payment from the issuer of the demand feature only
upon a default under the terms of the Municipal Security, as needed to provide
liquidity to meet redemptions, or to maintain a high quality investment
portfolio. While the Fund may invest without limit in Certificates of
Participation, it is currently anticipated that such investments will not exceed
25% of the Fund's assets.
 
The Fund may purchase and sell Municipal Securities on a when-issued or delayed
delivery basis. A when-issued or delayed delivery transaction arises when
securities are bought or sold for future payment and delivery to secure what is
considered to be an advantageous price and yield to the Fund at the time it
enters into the transaction. In determining the maturity of portfolio securities
purchased on a when-issued or delayed delivery basis, the Fund will consider
them purchased on the date when it commits itself to the purchase.
 
A security purchased on a when-issued basis, like all securities held in the
Fund's portfolio, is subject to changes in market value based upon changes in
the level of interest rates and investors' perceptions of the creditworthiness
of the issuer. Generally such securities will appreciate in value when interest
rates decline and depreciate in value when interest rates rise. Therefore if, in
order to achieve higher interest income, the Fund remains substantially fully
invested at the same time that it has purchased securities on a when-issued
basis, there will be a greater possibility that the net asset value of the
Fund's shares will vary from $1.00 per share, since the value of a when-issued
security is subject to market fluctuation and no interest accrues to the
purchaser prior to settlement of the transaction. See "Net Asset Value."
 
The Fund will only make commitments to purchase Municipal Securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities, but the Fund reserves the right to sell these securities before
the settlement date if deemed advisable. The sale of securities may result in
the realization of gains that are not exempt from federal, New York State and
New York City income tax.
 
Yields on Municipal Securities are dependent on a variety of factors, including
the general conditions of the money market and the municipal bond market, and
the size, maturity and rating of the particular offering. The ratings of Moody's
and S&P represent their opinions as to the quality of the Municipal Securities
which they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, Municipal
Securities with the same maturity, coupon and rating may have different yields.
 
In seeking to achieve its investment objective, the Fund may invest all or any
part of its assets in Municipal Securities that are industrial development
bonds. Moreover, although the Fund does not currently intend to do so on a
regular basis, it may invest more than 25% of its assets in Municipal Securities
which are repayable out of revenue streams generated from economically related
projects or facilities, if such investment is deemed necessary or appropriate by
the Fund's investment manager. To the extent that the Fund's assets are
concentrated in Municipal Securities payable from revenues on economically
related projects and facilities, the Fund will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the Fund's
assets were not so concentrated.
 
NET ASSET VALUE
 
Fund shares are sold at their net asset value next determined after an order and
payment are received in the form described under "Purchase of Shares." The net
asset value of a Fund share is calculated by dividing the total assets of the
Fund less its liabilities by the total number of shares outstanding. The net
asset value per share of the Fund is determined on each day the New York Stock
Exchange ("Exchange") is open for trading, at 11:00 a.m. and 3:00 p.m. Chicago
time, and on each other day on which there is a sufficient degree of trading in
the Fund's investments that its net asset value might be affected, except that
the net asset value will not be computed on a day on which no orders to purchase
shares were received and no shares were tendered for redemption. The Fund seeks
to maintain a net asset value of $1.00 per share.
 
                                        6
   8
 
The Fund values its portfolio instruments at amortized cost in accordance with
Rule 2a-7 under the Investment Company Act of 1940, which means that they are
valued at their acquisition cost, as adjusted for amortization of premium or
accretion of discount, rather than at current market value. Calculations are
made to compare the value of the Fund's investments, valued at amortized cost,
with market-based values. Market-based valuations are obtained by using actual
quotations provided by market makers, estimates of market value, or values
obtained from yield data relating to classes of money market instruments
published by reputable sources at the mean between the bid and asked prices for
the instruments. If a deviation of 1/2 of 1% or more were to occur between the
net asset value per share calculated by reference to market-based values and the
Fund's $1.00 per share net asset value, or if there were any other deviation
that the Board of Trustees of the Fund believed would result in a material
dilution to shareholders or purchasers, the Board of Trustees would promptly
consider what action, if any, should be initiated. In order to value its
investments at amortized cost, the Fund purchases only securities with a
maturity of 397 days or less and maintains a dollar-weighted average portfolio
maturity of 90 days or less. In addition, the Fund limits its portfolio
investments to securities that meet the quality requirements of Rule 2a-7. Under
these requirements, the Fund may only purchase U.S. Dollar-denominated
instruments that are determined to present minimal credit risks and that are at
the time of acquisition "Eligible Securities" as defined in Rule 2a-7. "Eligible
Securities" under Rule 2a-7 include only securities that are rated in the top
two rating categories by the required number of nationally recognized
statistical rating organizations (at least two or, if only one such organization
has rated the security, that one organization) or, if unrated, are deemed
comparable in quality.
 
PURCHASE OF SHARES
 
Shares are sold at net asset value with no sales charge through selected
financial services firms, such as broker-dealers and banks ("firms"). The
minimum initial investment is $1,000 and the minimum subsequent investment is
$100 but such minimum amounts may be changed at any time in management's
discretion. Firms offering Fund shares may set higher minimums for accounts they
service and may change such minimums at their discretion.
 
The Fund seeks to be as fully invested as possible at all times in order to
achieve maximum income. Since the Fund will be investing in instruments that
normally require immediate payment in Federal Funds (monies credited to a bank's
account with its regional Federal Reserve Bank), the Fund has adopted procedures
for the convenience of its shareholders and to ensure that it receives
investable funds. Orders for purchase of shares received by wire transfer in the
form of Federal Funds will be effected at the next determined net asset value.
Shares purchased by wire will receive that day's dividend if effected at or
prior to the 11:00 a.m. Chicago time net asset value determination, otherwise
such shares will receive the dividend for the next business day. Orders for
purchase accompanied by a check or other negotiable bank draft will be accepted
and effected as of 3:00 p.m. Chicago time on the next business day following
receipt and such shares will receive the dividend for the next business day
following the day when the purchase is effected. If an order is accompanied by a
check drawn on a foreign bank, funds must normally be collected on such check
before shares will be purchased. See "Purchase and Redemption of Shares" in the
Statement of Additional Information.
 
If payment is wired in Federal Funds, the payment should be directed to State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110,
the sub-custodian for the Fund. If payment is to be wired, call the firm from
which you received this prospectus for proper instructions.
 
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of Fund shares and the confirmation
thereof. Such firms are responsible for the prompt transmission of purchase and
redemption orders. Some firms may establish higher minimum investment
requirements than set forth above. A firm may arrange with its clients for other
investment or administrative services. Such firms may independently establish
and charge additional amounts to their clients for such services, which charges
would reduce the clients' yield or return. Firms may also hold Fund shares in
nominee or street name as agent for and on behalf of their clients. In such
instances, the Fund's transfer agent will have no information with respect to or
control over the accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about
 
                                        7
   9
 
their accounts only from their firm. Certain of these firms may receive
compensation from the Fund's Shareholder Service Agent for recordkeeping and
other expenses relating to these nominee accounts. In addition, certain
privileges with respect to the purchase and redemption of shares (such as check
writing redemptions) or the reinvestment of dividends may not be available
through such firms or may only be available subject to conditions and
limitations. Some firms may participate in a program allowing them access to
their clients' accounts for servicing including, without limitation, transfers
of registration and dividend payee changes; and may perform functions such as
generation of confirmation statements and disbursement of cash dividends. The
prospectus should be read in connection with such firm's material regarding its
fees and services.
 
OTHER INFORMATION. The Fund reserves the right to withdraw all or any part of
the offering made by this prospectus or to reject purchase orders without prior
notice. All orders to purchase shares are subject to acceptance by the Fund and
are not binding until confirmed or accepted in writing. Any purchase that would
result in total account balances for a single shareholder in excess of $3
million is subject to prior approval by the Fund. Share certificates are issued
only on request to the Fund. A $10 service fee will be charged when a check for
purchase of Fund shares is returned because of insufficient or uncollected funds
or a stop payment order.
 
Shareholders should direct their inquiries to the firm from which this
prospectus was obtained or to Kemper Service Company, the Fund's "Shareholder
Service Agent," 811 Main Street, Kansas City, Missouri 64105-2005.
 
REDEMPTION OF SHARES
 
GENERAL. Upon receipt by the Shareholder Service Agent of a request in the form
described below, shares will be redeemed by the Fund at the next determined net
asset value. If processed at 3:00 p.m. Chicago time, the shareholder will
receive that day's dividend. A shareholder may use either the regular or
expedited redemption procedures. Shareholders who redeem all their shares of the
Fund will receive the net asset value of such shares and all declared but unpaid
dividends on such shares.
 
If shares of the Fund to be redeemed were purchased by check or through an
Automated Clearing House ("ACH") transaction, the Fund may delay transmittal of
redemption proceeds until it has determined that collected funds have been
received for the purchase of such shares, which will be up to 15 days from
receipt by the Fund of the purchase amount. Shareholders may not use expedited
redemption procedures (wire transfer or Redemption Check) until the shares being
redeemed have been owned for at least 15 days and shareholders may not use such
procedures to redeem shares held in certificated form. There is no delay when
shares being redeemed were purchased by wiring Federal Funds.
 
If shares being redeemed were acquired from an exchange of shares of a mutual
fund that were offered subject to a contingent deferred sales charge as
described in the prospectus for that other fund, the redemption of such shares
by the Fund may be subject to a contingent deferred sales charge as explained in
such prospectus.
 
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions, ACH transactions and exchange transactions for individual
and institutional accounts and pre-authorized telephone redemption transactions
for certain institutional accounts. Shareholders may choose these privileges on
the account application or by contacting the Shareholder Service Agent for
appropriate instructions. Please note that the telephone exchange privilege is
automatic unless the shareholder refuses it on the account application. Neither
the Fund nor its agents will be liable for any loss, expense or cost arising out
of any telephone request pursuant to these privileges, including any fraudulent
or unauthorized request, and THE SHAREHOLDER WILL BEAR THE RISK OF LOSS, so long
as the Fund or its agent reasonably believes, based upon reasonable verification
procedures, that the telephonic instructions are genuine. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
 
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem an account that falls below the minimum investment level,
currently $1,000. Thus, a shareholder who makes only the minimum initial
investment and then redeems any portion thereof might have the account redeemed.
A shareholder will be notified
 
                                        8
   10
 
in writing and will be allowed 60 days to make additional purchases to bring the
account value up to the minimum investment level before the Fund redeems the
shareholder account.
 
Firms provide varying arrangements for their clients to redeem Fund shares. Such
firms may independently establish and charge amounts to their clients for such
services.
 
REGULAR REDEMPTIONS.  When shares are held for the account of a shareholder by
the Fund's transfer agent, the shareholder may redeem them by sending a written
request with signatures guaranteed to Kemper Service Company, P.O. Box 419153,
Kansas City, Missouri 64141-6153. When certificates for shares have been issued,
they must be mailed to or deposited with the Shareholder Service Agent, along
with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
 
TELEPHONE REDEMPTIONS.  If the proceeds of the redemption are $50,000 or less
and the proceeds are payable to the shareholder of record at the address of
record, normally a telephone request or a written request by any one account
holder without a signature guarantee is sufficient for redemptions by individual
or joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors) provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-231-8568. Shares purchased by check or through an ACH
transaction may not be redeemed under this privilege of redeeming shares by
telephone request until such shares have been owned for at least 15 days. This
privilege of redeeming shares by telephone request or by written request without
a signature guarantee may not be used to redeem shares held in certificated form
and may not be used if the shareholder's account has had an address change
within 30 days of the redemption request. During periods when it is difficult to
contact the Shareholder Service Agent by telephone, it may be difficult to use
the telephone redemption privilege, although investors can still redeem by mail.
The Fund reserves the right to terminate or modify this privilege at any time.
 
EXPEDITED WIRE TRANSFER REDEMPTIONS.  If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares can be redeemed and proceeds sent by a federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to 11:00 a.m. Chicago time will result in shares
being redeemed that day and normally the proceeds will be sent to the designated
account that day. Once authorization is on file, the Shareholder Service Agent
will honor requests by telephone at 1-800-231-8568 or in writing, subject to the
limitations on liability described under "General" above. The Fund is not
responsible for the efficiency of the federal wire system or the account
holder's financial services firm or bank. The Fund currently does not charge the
account holder for wire transfers. The account holder is responsible for any
charges imposed by the account holder's firm or bank. There is a $1,000 wire
redemption minimum. To change the designated account to receive wire redemption
proceeds, send a written request to the Shareholder Service Agent with
signatures guaranteed as described above, or contact the firm through which
shares of the Fund were purchased. Shares purchased by check or through an ACH
transaction may not be redeemed by wire transfer until the shares have been
owned for at least 15 days. Account holders may not use this procedure to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder
 
                                        9
   11
 
Service Agent by telephone, it may be difficult to use the expedited redemption
privilege. The Fund reserves the right to terminate or modify this privilege at
any time.
 
EXPEDITED REDEMPTIONS BY DRAFT.  Upon request, shareholders will be provided
with drafts to be drawn on the Fund ("Redemption Checks"). These Redemption
Checks may be made payable to the order of any person for not more than $5
million. Shareholders should not write Redemption Checks in an amount less than
$250 since a $10 service fee will be charged as described below. When a
Redemption Check is presented for payment, a sufficient number of full and
fractional shares in the shareholder's account will be redeemed as of the next
determined net asset value to cover the amount of the Redemption Check. This
will enable the shareholder to continue earning dividends until the Fund
receives the Redemption Check. A shareholder wishing to use this method of
redemption must complete and file an Account Information Form which is available
from the Fund or firms through which shares were purchased. Redemption Checks
should not be used to close an account since the account normally includes
accrued but unpaid dividends. The Fund reserves the right to terminate or modify
this privilege at any time. This privilege may not be available through some
firms that distribute shares of the Fund. In addition, firms may impose minimum
balance requirements in order to obtain this feature. Firms may also impose fees
to investors for this privilege or establish variations of minimum check amounts
if approved by the Fund.
 
Unless one signer is authorized on the Account Information Form, Redemption
Checks must be signed by all account holders. Any change in the signature
authorization must be made by written notice to the Shareholder Service Agent.
Shares purchased by check or through an ACH transaction may not be redeemed by
Redemption Check until the shares have been on the Fund's books for at least 15
days. Shareholders may not use this procedure to redeem shares held in
certificated form. The Fund reserves the right to terminate or modify this
privilege at any time.
 
The Fund may refuse to honor Redemption Checks whenever the right of redemption
has been suspended or postponed, or whenever the account is otherwise impaired.
A $10 service fee will be charged when a Redemption Check is presented to redeem
Fund shares in excess of the value of a Fund account or in an amount less than
$250; when a Redemption Check is presented that would require redemption of
shares that were purchased by check or ACH transaction within 15 days; or when
"stop payment" of a Redemption Check is requested.
 
SPECIAL FEATURES
 
Certain firms that offer shares of the Fund also provide special redemption
features through charge or debit cards and checks that redeem Fund shares.
Various firms have different charges for their services. Shareholders should
obtain information from their firm with respect to any special redemption
features, applicable charges, minimum balance requirements and any special rules
of the cash management program being offered.
 
Information about the following special features is contained in the Statement
of Additional Information; and further information may be obtained without
charge from KDI: Exchange Privilege; Systematic Withdrawal Program and Automated
Clearing House Programs.
 
DIVIDENDS AND TAXES
 
DIVIDENDS. Dividends are declared daily and paid monthly. Shareholders may
select one of the following ways to receive dividends:
 
1. REINVEST DIVIDENDS at net asset value into additional shares of the Fund.
Dividends are normally reinvested on the 21st day of each month if a business
day, otherwise on the next business day. Dividends will be reinvested unless the
shareholder elects to receive them in cash.
 
2. RECEIVE DIVIDENDS IN CASH if so requested. Checks will be mailed monthly,
within five business days of the reinvestment date, to the shareholder or any
person designated by the shareholder.
 
                                       10
   12
 
TAXES. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be subject to federal income taxes to the extent its
earnings are distributed. The Fund also intends to meet the requirements of the
Code applicable to regulated investment companies distributing tax-exempt
interest dividends and, therefore, dividends representing net interest received
on Municipal Securities will not be includable by shareholders in their gross
income for federal income tax purposes, except to the extent such interest is
subject to the alternative minimum tax as discussed hereinafter. Dividends
representing taxable net investment income (such as net interest income from
temporary investments in obligations of the U.S. Government) and net short-term
capital gains, if any, are taxable to shareholders as ordinary income.
 
Dividends declared in October, November or December to shareholders of record as
of a date in one of those months and paid during the following January are
treated as paid on December 31 of the calendar year in which declared for
federal income tax purposes. The Fund may adjust its schedule for dividend
reinvestment for the month of December to assist it in complying with reporting
and minimum distribution requirements contained in the Code.
 
Net interest on certain "private activity bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may, therefore, be subject to
both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from the Fund are to be treated as interest on private
activity bonds in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions.
 
Exempt-interest dividends, except to the extent of interest from "private
activity bonds," are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
other alternative minimum taxable income with certain adjustments will be a
tax-preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.
 
Shareholders will be required to disclose on their federal income tax returns
the amount of tax-exempt interest earned during the year, including
exempt-interest dividends received from the Fund.
 
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, tax-exempt interest, including
exempt-interest dividends from the Fund, and 50% of Social Security benefits.
 
The tax exemption for federal income tax purposes of dividends from the Fund
does not necessarily result in exemption under the income or other tax laws of
any state or local taxing authority. The laws of the several states and local
taxing authorities vary with respect to the taxation of such income, and
shareholders of the Fund are advised to consult their own tax advisers in that
regard and as to the status of their accounts under state and local tax laws.
Dividends paid by the Fund that represent net interest received on New York
Municipal Securities will be exempt from New York State and New York City
personal income taxes.
 
The Fund is required by law to withhold 31% of taxable dividends paid to certain
shareholders who do not furnish a correct taxpayer identification number (in the
case of individuals, a social security number) and in certain other
circumstances.
 
Shareholders normally will receive monthly confirmations of dividends and of
purchase and redemption transactions. Firms may provide varying arrangements
with their clients with respect to confirmations. Tax information will be
provided annually. Shareholders are encouraged to retain copies of their account
confirmation statements or year-end statements for tax reporting purposes.
However, those who have incomplete records may obtain historical account
transaction information at a reasonable fee.
 
                                       11
   13
 
INVESTMENT MANAGER AND SERVICES
 
INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle
Street, Chicago, Illinois 60603, a wholly-owned subsidiary of Kemper Financial
Companies, Inc. ("KFC"), is the investment manager of the Fund and provides the
Fund with continuous professional investment supervision. KFS is one of the
largest investment managers in the country and has been engaged in the
management of investment funds for more than forty-five years. KFS and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, the Kemper insurance companies, Kemper Corporation and other
corporate, pension, profit-sharing and individual accounts representing
approximately $60 billion under management including $13 billion in money market
fund assets and $9 billion in tax-exempt assets. KFS acts as investment adviser
for 24 open-end and seven closed-end investment companies, with 60 separate
investment portfolios, representing more than 3 million shareholder accounts.
KFC is a financial services holding company that is more than 99% owned by
Kemper Corporation, a diversified insurance and financial services holding
company.
 
Kemper Corporation has entered into a definitive agreement with an investor
group led by Zurich Insurance Company ("Zurich") pursuant to which Kemper
Corporation would be acquired by the investor group in a merger transaction. As
part of the transaction, Zurich or an affiliate would purchase KFS. The Kemper
Corporation and Zurich boards have approved the transaction.
 
Consummation of the transaction is subject to a number of contingencies,
including approval by the stockholders of Kemper Corporation and regulatory
approvals. Because the transaction would constitute an assignment of the Fund's
investment management agreement with KFS, and potentially the Fund's Rule 12b-1
agreement, under the Investment Company Act of 1940, and therefore a termination
of such agreement, KFS has received approval of the new agreements from the
Fund's board and is seeking approval from the Fund's shareholders prior to the
consummation of the transaction. The transaction is expected to close in the
fourth quarter of 1995 or early in 1996.
 
Responsibility for overall management of the Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by KFS.
The investment management agreement provides that KFS shall act as the Fund's
investment adviser, manage its investments and provide it with various services
and facilities. For the services and facilities furnished, the Fund pays an
annual investment management fee, payable monthly, on a graduated basis of .22
of 1% of the first $500 million of average daily net assets, .20 of 1% of the
next $500 million, .175 of 1% of the next $1 billion, .16 of 1% of the next $1
billion and .15 of 1% of average daily net assets over $3 billion. From March
20, 1991 to June 15, 1991, KFS temporarily waived its investment management fee
and distribution services fee (described below) and absorbed all other operating
expenses of the Fund. Thereafter, KFS gradually reinstated the investment
management fee and distribution services fee and reduced its voluntary
absorption of other Fund operating expenses at the aggregate rate (as a
percentage of average daily net assets) of .02 of 1% each week. Effective April
23, 1992, KFS agreed to temporarily waive its management fee and absorb
operating expenses of the Fund to the extent, if any, that such expenses, as
defined below, exceed .80% of average daily net assets of the Fund. For this
purpose, "operating expenses" of the Fund do not include taxes, interest,
extraordinary expenses, brokerage commissions or transaction costs. Upon notice
to the Fund, KFS may at any time terminate this waiver or absorption of
operating expenses. In addition, from time to time, KFS may voluntarily absorb
certain additional operating expenses of the Fund. The level of this voluntary
expense absorption shall be in KFS' discretion and is in addition to KFS'
agreement to absorb certain operating expenses of the Fund described above.
 
DISTRIBUTOR AND ADMINISTRATOR. Pursuant to an administration, shareholder
services and distribution agreement ("distribution agreement"), Kemper
Distributors, Inc. ("KDI"), 120 South LaSalle Street, Chicago, Illinois 60603,
an affiliate of KFS, serves as distributor, administrator and principal
underwriter of the Fund to provide information and administrative and
distribution services for existing and potential shareholders. Before February
1, 1995, KFS was the distributor, administrator and principal underwriter for
the Fund. The distribution agreement provides that KDI shall act as agent for
the Fund for the sale of its shares and shall appoint various financial services
firms ("firms"), such as broker-dealers and banks, to provide a cash management
service for their customers or clients through the Fund. The firms are to
provide such office space and equipment, telephone facilities, personnel and
 
                                       12
   14
 
sales literature distribution as is necessary or appropriate for providing
information and services to the firms' clients. For its services under the
distribution agreement, the Fund pays KDI an annual distribution services fee,
payable monthly, of .50 of 1% of average daily net assets of the Fund. The fee
is accrued daily as an expense of the Fund.
 
KDI has related administrative services and selling group agreements with
various broker-dealer firms to provide cash management and other services for
Fund shareholders. KDI also has services agreements with banking firms to
provide such services, except for certain underwriting or distribution services
which the banks may be prohibited from providing under the Glass-Steagall Act,
for their clients who wish to invest in the Fund. If the Glass-Steagall Act
should prevent banking firms from acting in any capacity or providing any of the
described services, management will consider what action, if any, is
appropriate. Management does not believe that termination of a relationship with
a bank would result in any material adverse consequences to the Fund. Banks or
other financial services firms may be subject to various state laws regarding
the services described above and may be required to register as dealers pursuant
to state law. KDI normally pays the firms at a maximum annual rate of .50 of 1%
of average daily net assets of those accounts that they maintain and service.
KDI may elect to keep a portion of the total distribution services fee to
compensate itself for functions performed for the Fund or to pay for sales
materials or other promotional activities. Since the distribution agreement
provides for fees that are used by KDI to pay for distribution and
administration services, the agreement along with the related administration
services and selling group agreements and the plan contained therein are
approved and reviewed in accordance with Rule 12b-1 under the Investment Company
Act of 1940, which regulates the manner in which an investment company may,
directly or indirectly, bear the expenses of distributing its shares.
 
Since the fee payable to KDI under the distribution agreement is based upon a
percentage of the average daily net assets of the Fund and not upon the actual
expenditures of KDI, the expenses of KDI (which may include overhead expense)
may be more or less than the fees received by it under the distribution
agreement. For example, during the fiscal year ended March 31, 1995, KDI (or KFS
as predecessor to KDI) incurred expenses under the distribution agreement of
approximately $63,000, while it received an aggregate fee under the distribution
agreement of $60,000. If the distribution agreement is terminated in accordance
with its terms, the obligation of the Fund to make payments to KDI pursuant to
the distribution agreement will cease and the Fund will not be required to make
any payments past the termination date. Thus, there is no legal obligation for
the Fund to pay any excess expenses incurred by KDI over its fees under the
distribution agreement if, for any reason, the distribution agreement is
terminated in accordance with its terms. Any cumulative expenses incurred by KDI
in excess of fees received may or may not be recovered through future fees under
the distribution agreement.
 
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Fund.
They attend to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund. IFTC also is
the Fund's transfer and dividend-paying agent. Pursuant to a services agreement
with IFTC, Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105,
an affiliate of KFS, serves as Shareholder Service Agent of the Fund.
 
PERFORMANCE
 
From time to time, the Fund may advertise several types of performance
information including "yield," "effective yield," and "tax equivalent yield."
Each of these figures is based upon historical earnings and is not necessarily
representative of the future performance of the Fund. The yield of the Fund
refers to the net investment income generated by a hypothetical investment in
the Fund over a specific seven-day period. This net investment income is then
annualized, which means that the net investment income generated during the
seven-day period is assumed to be generated each week over an annual period and
is shown as a percentage of the investment. The effective yield is calculated
similarly, but the net investment income earned by the investment is assumed to
be compounded weekly when annualized. The effective yield will be slightly
higher than the yield due to this compounding effect. Tax equivalent yield is
the yield that a taxable investment must generate in order to equal the Fund's
yield for an
 
                                       13
   15
 
investor in a stated federal, New York State and New York City income tax
bracket (normally assumed to be the maximum tax rate). Tax equivalent yield is
based upon, and will be higher than, the portion of the Fund's yield that is
tax-exempt.
 
The performance of the Fund may be compared to that of other money market mutual
funds or mutual fund indexes as reported by independent mutual fund reporting
services such as Lipper Analytical Services, Inc. The Fund's performance and its
relative size may be compared to other money market mutual funds as reported by
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Investors may want to compare the Fund's
performance on an after-tax basis to that of various bank products as reported
by BANK RATE MONITOR(TM), a financial reporting service that weekly publishes
average rates of bank and thrift institution money market deposit accounts and
interest bearing checking accounts or various certificate of deposit indexes.
The performance of the Fund also may be compared to that of U.S. Treasury bills
and notes. Certain of these alternative investments may offer fixed rates of
return and guaranteed principal and may be insured. In addition, investors may
want to compare the Fund's performance to the Consumer Price Index either
directly or by calculating its "real rate of return," which is adjusted for the
effects of inflation.
 
The Fund may quote information from publications such as Morningstar, Inc., The
Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago
Tribune, USA Today, Institutional Investor and Registered Representative. The
Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. The Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
 
The Fund's yield will fluctuate. Shares of the Fund are not insured. Additional
information concerning the Fund's performance appears in the Statement of
Additional Information.
 
CAPITAL STRUCTURE
 
The Fund is an open-end, non-diversified management investment company,
organized as a business trust under the laws of Massachusetts on March 2, 1990.
The Fund may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares, subject to compliance with the
Securities and Exchange Commission regulations permitting the creation of
separate classes of shares. The Fund's shares are not currently divided into
classes. While only shares of a single Portfolio are presently being offered,
the Board of Trustees may authorize the issuance of additional Portfolios if
deemed desirable, each with its own investment objective, policies and
restrictions. Since the Fund may offer multiple Portfolios, it is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio subject to any preferences, rights or privileges of any classes of
shares within the Portfolio. Generally each class of shares issued by a
particular Portfolio would differ as to the allocation of certain expenses of
the Portfolio such as distribution and administrative expenses, permitting,
among other things, different levels of services or methods of distribution
among various classes. Shares are fully paid and nonassessable when issued, are
transferable without restriction and have no preemptive or conversion rights.
The Fund is not required to hold annual shareholders' meetings, and does not
intend to do so. However, it will hold special meetings as required or deemed
desirable for such purposes as electing trustees, changing fundamental policies
or approving an investment management agreement. Subject to the Agreement and
Declaration of Trust of the Fund, shareholders may remove trustees. If shares of
more than one Portfolio or class are outstanding, shareholders will vote by
Portfolio and not in the aggregate or by class except when voting in the
aggregate is required under the Investment Company Act of 1940, such as for the
election of trustees, or when the Board of Trustees determines that voting by
class is appropriate.
 
                                       14
   16
 
                                        TAX-EXEMPT
                                        NEW YORK
                                        MONEY MARKET
                                        FUND
                                        PROSPECTUS
                                        JULY 31, 1995
 
TNYMF-1 7/95   (LOGO)printed on recycled paper
   17
 
                      STATEMENT OF ADDITIONAL INFORMATION
                                 JULY 31, 1995
 
                     TAX-EXEMPT NEW YORK MONEY MARKET FUND
               120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
                                 1-800-231-8568
 
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Tax-Exempt New York Money Market Fund (the
"Fund") dated July 31, 1995. The prospectus may be obtained without charge from
the Fund.
 
                               ------------------
 
                               TABLE OF CONTENTS
 


                                                                     Page
                                                                     -----
                                                                  
Municipal Securities...............................................  B-1
 
Investment Restrictions............................................  B-3
 
Investment Manager and Services....................................  B-4
 
Portfolio Transactions.............................................  B-7
 
Purchase and Redemption of Shares..................................  B-8
 
Dividends, Net Asset Value and Taxes...............................  B-8
 
Performance........................................................  B-9
 
Officers and Trustees..............................................  B-13
 
Special Features...................................................  B-14
 
Shareholder Rights.................................................  B-16
 
Appendix--Ratings of Investments...................................  B-17

 
The financial statements appearing in the Fund's 1995 Annual Report to
Shareholders are incorporated herein by reference. The Fund's Annual Report
accompanies this Statement of Additional Information.
 
TNYMF 33 7/95               [RECYCLE LOGO] printed on recycled paper
   18
 
MUNICIPAL SECURITIES
 
Municipal Securities that the Fund may purchase include, without limitation,
debt obligations issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes for which Municipal
Securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to loan to other public
institutions and facilities.
 
Municipal Securities, such as industrial development bonds, are issued by or on
behalf of public authorities to obtain funds for purposes including privately
operated airports, housing, conventions, trade shows, ports, sports, parking or
pollution control facilities or for facilities for water, gas, electricity or
sewage and solid waste disposal. Such obligations, which may include lease
arrangements, are included within the term Municipal Securities if the interest
paid thereon qualifies as exempt from federal income tax. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues.
 
Municipal Securities generally are classified as "general obligation" or
"revenue." General obligation notes are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Revenue notes are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are Municipal Securities are in most cases revenue bonds and generally do
not constitute the pledge of the credit of the issuer of such bonds.
 
Examples of Municipal Securities which are issued with original maturities of
one year or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds, warrants and tax-free commercial paper.
 
Tax anticipation notes typically are sold to finance working capital needs of
municipalities in anticipation of receiving property taxes on a future date.
Bond anticipation notes are sold on an interim basis in anticipation of a
municipality issuing a longer term bond in the future. Revenue anticipation
notes are issued in expectation of receipt of other types of revenue such as
those available under the Federal Revenue Sharing Program. Construction loan
notes are instruments insured by the Federal Housing Administration with
permanent financing by "Fannie Mae" (the Federal National Mortgage Association)
or "Ginnie Mae" (the Government National Mortgage Association) at the end of the
project construction period. Pre-refunded municipal bonds are bonds which are
not yet refundable, but for which securities have been placed in escrow to
refund an original municipal bond issue when it becomes refundable. Tax-free
commercial paper is an unsecured promissory obligation issued or guaranteed by a
municipal issuer. The Fund may purchase other Municipal Securities similar to
the foregoing that are or may become available, including securities issued to
pre-refund other outstanding obligations of municipal issuers.
 
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse changes in
the rights of holders of obligations issued by such subdivisions or authorities.
 
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
 
The following information as to certain risk factors is given to investors
because the Fund concentrates its investments in New York Municipal Securities
(as defined in the prospectus). Such information constitutes only a
 
                                       B-1
   19
 
summary, does not purport to be a complete description and is based upon
information from official statements relating to securities offerings of New
York issuers. New York is sometimes referred to as the "State."
 
Numerous bonds issued by various State agencies and authorities are either
guaranteed by the State or supported by the State through lease-purchase
arrangements, other contractual obligations or moral obligation provisions.
Moral obligation commitments by the State impose no immediate financial
obligations on the State and require appropriations by the Legislature before
any payments can be made. Failure of the State to appropriate necessary amounts
or to take other action to permit the authorities and agencies to meet their
obligations could result in their default. If a default were to occur, it would
likely have a significant adverse effect on the market value of obligations of
the State and its authorities and agencies. As of December 31, 1994, the
principal amount of New York State general obligation bonds outstanding was $5.4
billion and the principal amount of state-guaranteed and lease-purchase debt
outstanding was $21 billion. In addition, the State has committed itself on
other debt, the outstanding amount of which is $7 billion; much of this debt is
self-supporting from outside revenue sources. The State has had to make large
appropriations in recent years to enable State agencies to meet their financial
obligations and, in some cases, prevent default. Additional assistance will
probably be required in this and later years since certain localities and
authorities, particularly the Metropolitan Transit Authority, continue to
experience financial difficulties.
 
Certain other State agencies, such as the New York State Urban Development
Corporation ("UDC"), the Battery Park City Authority and the Housing Finance
Agency ("HFA") are also dependent upon State legislative appropriations in order
to meet their bond obligations. In February, 1975, UDC defaulted on $1 billion
of its short-term notes and the State appropriated amounts to cure the default.
HFA has a $390 million mortgage on the Co-op City Project located in New York
City. Co-op City has had difficulties in meeting its mortgage payments to HFA
owing to rent strikes by tenants, disputes with the City of New York and other
factors. Yonkers and Buffalo have also experienced financial difficulties, which
have required State appropriations to meet the financial obligations of both
cities. In the case of Yonkers, a State agency that has been monitoring finances
since 1984 took control of all City spending in view of court fines and
financial problems resulting from Yonkers' refusal and delay in implementing a
Court ordered desegregation plan. In addition, counties and other localities on
Long Island have financial problems, including those relating to the Long Island
Lighting Company's construction of its Shoreham nuclear power facility, which
could lead to requests for additional State assistance.
 
Since July 1990, New York has experienced a more severe economic downturn than
most other states, leading to collections of State revenues that were
significantly below projections. After implementing a deficit reduction program,
the State experienced a fiscal year 1991 deficit in its General Fund of $1
billion on a cash basis, which it met by issuing two series of tax and revenue
anticipation notes. On a GAAP basis, the State has an accumulated General Fund
deficit of $6.3 billion at the end of its 1991 fiscal year to $1.6 billion at
the end of its 1994 fiscal year.
 
Constitutional challenges to State laws have limited the amount of taxes that
political subdivisions can impose on real property. In 1979, the State's highest
court declared unconstitutional a State law allowing localities and school
districts to impose a special increase in real estate property taxes in order to
raise funds for pensions and other uses. Additional court actions have been
brought against the State, certain agencies and municipalities relating to
financings, amount of real estate tax, use of tax revenues and other matters
including the validity of treaties by which Indian tribes transferred properties
to the State, which could affect the ability of the State or its political
subdivisions to pay their obligations. Final adverse decisions in such cases
could require extraordinary appropriations or expenditure reductions, or both,
and could have a material adverse effect upon the financial condition of the
State and various of its agencies and subdivisions.
 
In 1975, New York City (the "City") suffered several financial crises. To help
New York City out of its financial difficulties, the State legislature created
the Municipal Assistance Corporation ("MAC") in 1975. MAC has the authority to
issue bonds and notes and pay or lend the proceeds to the City. MAC also has the
authority to exchange its obligations for City obligations. MAC bonds are
payable out of certain State sales and use taxes imposed within the City, State
stock transfer taxes and per capita State aid to the City. The State is not,
however, obligated to
 
                                       B-2
   20
 
continue these taxes, nor to continue appropriating revenues from these taxes,
nor to continue the appropriation of per capita State aid to pay MAC
obligations. MAC does not have taxing powers, and its bonds are not obligations
enforceable against either the City or the State.
 
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "Control Board") and
since 1978 its financial statements have been audited by independent accounting
firms. To be eligible for guarantees and assistance, the City was required to
submit annually to the Control Board a financial plan for the next four fiscal
years covering the City and certain agencies showing balanced budgets determined
in accordance with generally accepted accounting principles. Although the
Control Board's powers of prior approval were suspended effective June 30, 1986
because the City had satisfied certain statutory conditions, the City continues
to submit four year plans to the Control Board for its review. The City
completed fiscal year 1994 with a balanced budget.
 
For decades the State economy has grown more slowly than that of the nation as a
whole, although New York remains one of the country's wealthiest states. The
causes of this decline are varied and complex and some causes reflect
international and national trends beyond the control of the State and City. Some
analysts feel that this long-term decline results from State and local tax
levels, which are among the highest in the nation, and which may cause
corporations to locate outside the State. The current high level of taxes limits
the ability of the State and City to impose higher taxes in the event of future
difficulties.
 
In March 1990, Standard & Poor's Corporation ("S&P") lowered its rating of New
York State's general obligation debt from AA- to A. In addition, S&P and Moody's
Investors Service, Inc. ("Moody's") lowered their ratings of New York State's
short-term notes from SP-1+ to SP-1 and from MIG-1 to MIG-2, respectively. In
its decision to lower New York State's rating, S&P cited the absence of a
credible financial plan to reverse three years of negative financial results as
a sign of New York State's failure to deal responsibly with its financial
troubles. In February 1991, Moody's lowered its rating of New York City's
general obligation debt from A to BAA1 citing uncertainties associated with many
of the major factors that contribute to the City's long-term operating
stability. In January 1992, Moody's lowered its rating of New York State
legislative appropriations bonds from A to Baa1 and S&P lowered its rating of
New York State legislative appropriations bonds from BBB+ to BBB and of New York
State general obligation bonds from A to A-. In July 1995, S&P lowered its
rating of New York City's general obligation debt from A- to BBB+.
 
INVESTMENT RESTRICTIONS
 
The Fund has adopted certain investment restrictions which cannot be changed
without approval by holders of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940, this means the lesser of the vote
of (a) 67% of the Fund's shares present at a meeting where more than 50% of the
outstanding shares are present in person or by proxy; or (b) more than 50% of
the Fund's shares.
 
The Fund may not:
 
(1) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities or of a state or its political subdivisions)
if as a result of such purchase more than 25% of the Fund's total assets would
be invested in any one industry.
 
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer; except that, as to 50% of the value of the Fund's total assets,
the Fund may invest up to 25% of its total assets in the securities of any one
issuer. For purposes of this limitation, the Fund will regard as the issuer the
entity that has the primary responsibility for the payment of interest and
principal.
 
(3) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies).
 
                                       B-3
   21
 
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
money market instruments. (Any such borrowings under this section will not be
collateralized.) If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
 
(5) Make short sales of securities or purchase securities on margin, except to
obtain such short-term credits as may be necessary for the clearance of
transactions.
 
(6) Write, purchase or sell puts, calls or combinations thereof, although the
Fund may purchase Municipal Securities subject to Standby Commitments, Variable
Rate Demand Notes or Repurchase Agreements in accordance with its investment
objective and policies.
 
(7) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
 
(8) Invest for the purpose of exercising control or management of another
issuer.
 
(9) Invest in commodities or commodity futures contracts or in real estate (or
real estate limited partnerships) except that the Fund may invest in Municipal
Securities secured by real estate or interests therein and securities of issuers
that invest or deal in real estate.
 
(10) Invest in interests in oil, gas or other mineral exploration or development
programs or leases, although it may invest in Municipal Securities of issuers
that invest in or sponsor such programs or leases.
 
(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
 
(12) Issue senior securities as defined in the Investment Company Act of 1940.
 
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund may
invest more than 25% of its total assets in industrial development bonds. The
Fund did not borrow money as permitted by investment restriction number 4 in the
latest fiscal period, and it has no present intention of borrowing during the
coming year. In addition, the Fund has agreed with certain state regulators
that, so long as required by any state where the Fund's shares are offered for
sale, the Fund, as a non-fundamental policy that may be changed without
shareholder vote, may not:
 
(i) Invest more than 5% of the Fund's total assets in industrial development
bonds sponsored by companies that with their predecessors have less than three
years' continuous operation.
 
(ii) Invest more than 5% of the Fund's total assets in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933).
 
INVESTMENT MANAGER AND SERVICES
 
INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS") is the Fund's
investment manager. Pursuant to an investment management agreement, KFS acts as
the Fund's investment adviser, manages its investments, administers its business
affairs, furnishes office facilities and equipment, provides clerical,
bookkeeping and administrative services, provides shareholder and information
services and permits any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
The Fund pays the expenses of its operations, including the fees and expenses of
independent auditors, counsel, custodian and transfer
 
                                       B-4
   22
 
agent and the cost of share certificates, reports and notices to shareholders,
costs of calculating net asset value, brokerage commissions or transaction
costs, taxes, registration fees, the fees and expenses of qualifying the Fund
and its shares for distribution under federal and state securities laws and
membership dues in the Investment Company Institute or any similar organization.
 
The agreement provides that KFS shall not be liable for any error of judgment or
of law, or for any loss suffered by the Fund in connection with the matters to
which the agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of KFS in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the agreement.
 
The investment management agreement continues in effect from year to year so
long as its continuation is approved at least annually by a majority vote of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund, cast in person at a
meeting called for such purpose, and by the shareholders or the Board of
Trustees. It may be terminated at any time upon 60 days' notice by either party,
or by a majority vote of the outstanding shares, and will terminate
automatically upon assignment. If additional Fund Portfolios become subject to
the investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a Portfolio by Portfolio basis and the
management fee and the expense limitation shall be computed based upon the
average daily net assets of all Portfolios subject to the agreement and shall be
allocated among such Portfolios based upon the relative net assets of such
Portfolios. Additional Portfolios may be subject to a different agreement.
 
For the services and facilities furnished, the Fund pays an annual investment
management fee, payable monthly, on a graduated basis of .22 of 1% of the first
$500 million of average daily net assets, .20 of 1% of the next $500 million,
 .175 of 1% of the next $1 billion, .16 of 1% of the next $1 billion and .15 of
1% of average daily net assets over $3 billion. KFS has agreed to reimburse the
Fund to the extent required by any applicable state expense limitations should
all operating expenses of the Fund, including the investment management fee of
KFS but excluding taxes, interest, the distribution services fees of KDI
(described below), extraordinary expenses and brokerage commissions or
transaction costs, exceed the applicable state expense limitations. The Fund
believes that there are no state expense limitations currently applicable to the
Fund. For the services and facilities furnished to the Fund pursuant to the
investment management agreement, KFS received fees of $26,000, $20,000 and
$18,000 for the fiscal years ended March 31, 1995, 1994 and 1993, respectively,
after the fee waivers noted below. In addition to the expense limitation
described above, from March 20, 1991 to June 15, 1991, KFS temporarily waived
its investment management fee and distribution services fee and absorbed all
other operating expenses of the Fund. Thereafter, KFS gradually reinstated its
investment management fee and distribution services fee and reduced its
voluntary absorption of other Fund operating expenses at the aggregate rate (as
a percentage of average daily net assets) of .02 of 1% each week. Effective
April 23, 1992, KFS agreed to temporarily waive its management fee and absorb
certain operating expenses of the Fund to the extent described in the
prospectus. See "Investment Manager and Services" in the prospectus. During the
fiscal years ended March 31, 1995, 1994 and 1993, KFS waived or absorbed
$41,000, $41,000 and $59,000, respectively, of the Fund's operating expenses.
 
Certain trustees or officers of the Fund are also directors or officers of KFS
as indicated under "Officers and Trustees."
 
DISTRIBUTOR AND ADMINISTRATOR. Pursuant to an administration, shareholder
services and distribution agreement ("distribution agreement"), Kemper
Distributors, Inc. ("KDI") serves as distributor, administrator and principal
underwriter to the Fund to provide information and services for existing and
potential shareholders. Before February 1, 1995, KFS was the distributor,
administrator and principal underwriter for the Fund. The distribution agreement
provides that KDI shall act as agent for the Fund in the sale of its shares and
shall appoint various firms to provide a cash management service for their
customers or clients through the Fund. The firms are to provide such office
space and equipment, telephone facilities, personnel and sales literature
distribution as is necessary or appropriate for providing information and
services to the firms' clients and prospective clients. The Fund pays for the
prospectus and shareholder reports to be set in type and printed for existing
shareholders and KDI pays for the
 
                                       B-5
   23
 
printing and distribution of copies thereof used in connection with the
continuous offering of shares to prospective investors. KDI pays for
supplementary sales literature and advertising. For its services as distributor,
the Fund pays KDI an annual distribution services fee, payable monthly, of .50
of 1% of average daily net assets of the Fund. The distribution agreement
continues in effect from year to year so long as its continuation is approved at
least annually by a majority of the trustees who are not parties to such
agreement or interested persons of the Fund and who have no direct or indirect
financial interest in the agreement or in any agreement related thereto. The
agreement automatically terminates in the event of its assignment and may be
terminated at any time without penalty by the Fund or by KDI upon six months
notice. Termination by the Fund may be by vote of a majority of the Board of
Trustees, or a majority of the Trustees who are not interested persons of the
Fund and who have no direct or indirect financial interest in the agreement, or
a majority vote of the outstanding shares. The fee payable pursuant to the
distribution agreement may not be increased without shareholder approval and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the agreement. If
additional Portfolios are authorized by the Board of Trustees, the provisions
concerning the continuation, amendment and termination of the distribution
services agreement will be on a Portfolio by Portfolio basis and the
distribution services fee would be charged to the Portfolios based upon their
relative net assets, but the expenditures by KDI under the agreement need not be
made on that same basis.
 
KDI has related administration services and selling group agreements with
various broker-dealer firms to provide cash management and other services for
the Fund shareholders. Such services and assistance may include, but are not
limited to, establishing and maintaining shareholder accounts and records,
processing purchase and redemption transactions, providing automatic investment
in Fund shares of client account balances, answering routine inquiries regarding
the Fund, assisting clients in changing account options, designations and
addresses, and such other services as may be agreed upon from time to time and
as may be permitted by applicable statute, rule or regulation. KDI also has
services agreements with banking firms to provide the above listed services,
except for certain distribution services that the banks may be prohibited from
providing, for their clients who wish to invest in the Fund. KDI also may
provide some of the above services for the Fund. KDI normally pays the firms at
a maximum annual rate of .50 of 1% of average net assets of those accounts that
they maintain and service. KDI may elect to keep a portion of the total
administration fee to compensate itself for functions performed for the Fund or
to pay for sales materials or other promotional activities.
 
Since the distribution agreement provides for fees which are used by KDI to pay
for distribution and administration services, the agreement along with the
related administrative services and selling group agreements are approved and
renewed in accordance with Rule 12b-1 under the Investment Company Act of 1940
which regulates the manner in which an investment company may, directly or
indirectly, bear expenses of distributing its shares.
 
During the fiscal year ended March 31, 1995, the Fund paid a distribution
services fee of $60,000. Pursuant to the related services agreements, KDI (or
KFS as predecessor to KDI) remitted distribution services fees of $60,000 to
various firms, $30,000 of which was paid to broker-dealer firms affiliated with
KDI. During the fiscal year ended March 31, 1995, KDI (or KFS as predecessor to
KDI) incurred underwriting, distribution and administrative expenses in the
approximate amounts noted: service fees to firms ($60,000); advertising and
literature ($1,000); and marketing and sales expenses ($2,000), for a total of
$63,000. A portion of the aforesaid marketing, sales and operating expenses
could be considered overhead expense.
 
CUSTODIAN AND SHAREHOLDER SERVICE AGENT.  Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Fund.
They attend to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund. IFTC is also
the transfer agent of the Fund (see "Purchase of Shares" in the prospectus).
Pursuant to a services agreement with IFTC, Kemper Service Company ("KSvC"), an
affiliate of KFS, serves as "Shareholder Service Agent." IFTC receives an annual
fee as custodian for the Fund, payable monthly, on a graduated basis ranging
from $.40 to $.05 per $1,000 of average monthly net assets of the Fund plus
certain transaction charges and
 
                                       B-6
   24
 
out-of-pocket expense reimbursement. (The effective custodian fee rate is based
upon the average net assets of all Kemper Mutual Funds of the money market type
for which IFTC serves as custodian.) IFTC receives, as transfer agent, and pays
to KSvC annual account fees of a maximum of $13 per year per account plus
out-of-pocket expense reimbursement. During the fiscal year ended March 31,
1995, the Fund incurred custodian and transfer agent fees of $16,000 (excluding
related expenses) to IFTC and IFTC remitted shareholder service fees in the
amount of $14,000 to KSvC as Shareholder Service Agent.
 
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax return, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
 
PORTFOLIO TRANSACTIONS
 
Portfolio transactions are undertaken principally to pursue the Fund's
investment objective in relation to movements in the general level of interest
rates, to invest money obtained from the sale of Fund shares, to reinvest
proceeds from maturing portfolio securities and to meet redemptions of Fund
shares. These transactions may increase or decrease the yield of the Fund
depending upon management's ability to correctly time and execute such
transactions. Since the Fund's assets will be invested in short-term Municipal
Securities, its portfolio will turn over several times a year. However, since
securities with maturities of less than one year are excluded from required
portfolio turnover rate calculations, the Fund's turnover rate for reporting
purposes will be zero.
 
KFS is the investment manager for the Kemper Funds, and KFS and its affiliates
also furnish investment management services to other clients including Kemper
Corporation and the Kemper insurance companies. KFS is the sole shareholder of
Kemper Asset Management Company and Kemper Investment Management Company
Limited. These three entities share some common research and trading facilities.
At times investment decisions may be made to purchase or sell the same
investment security for the Fund and for one or more of the other clients of
KFS. When two or more of such clients are simultaneously engaged in the purchase
or sale of the same security, the transactions are allocated as to amount and
price in a manner considered equitable to each. It is the opinion of the Board
of Trustees that the benefits available because of the investment manager's
organization outweigh any disadvantages that may arise from exposure to
simultaneous transactions.
 
KFS, in effecting purchases and sales of portfolio securities for the account of
the Fund, will implement the Fund's policy of seeking the best execution of
orders, which includes best net prices. Consistent with this policy, orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature of the firm's professional services which
include execution, clearance procedures, reliability and other factors. In
selecting among the firms believed to meet the criteria for handling a
particular transaction, KFS may give consideration to those firms that have sold
or are selling shares of the Kemper Mutual Funds, as well as to those firms that
provide market, statistical and other research information to the Fund and KFS,
although KFS is not authorized to pay higher prices to firms that provide such
services. Any research benefits derived are available for all clients including
clients of affiliated companies. Since it is only supplemental to KFS' own
research efforts and must be analyzed and reviewed by KFS' staff, the receipt of
research information is not expected to materially reduce expenses. The Fund
expects that purchases and sales of portfolio securities usually will be
principal transactions. Portfolio securities will normally be purchased directly
from the issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid by the Fund for such purchases. During
the last three fiscal years the Fund paid no portfolio brokerage commissions.
Purchases from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
will include the spread between the bid and asked prices.
 
                                       B-7
   25
 
PURCHASE AND REDEMPTION OF SHARES
 
Fund shares are sold at their net asset value next determined after an order and
payment are received in the form described in the prospectus. The minimum
initial investment is $1,000 and the minimum subsequent investment is $100 but
such minimum amounts may be changed at any time. The Fund may waive the minimum
for purchases by trustees, directors, officers or employees of the Fund or KFS
and its affiliates. An investor wishing to open an account should use the
Account Information Form available from the Fund or financial services firms.
Orders for the purchase of shares that are accompanied by a check drawn on a
foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars) will
not be considered in proper form and will not be processed unless and until the
Fund determines that it has received payment of the proceeds of the check. The
time required for such a determination will vary and cannot be determined in
advance.
 
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
 
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will pay
the redemption price in whole or in part by a distribution of portfolio
securities in lieu of cash, in conformity with the applicable rules of the
Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurs, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net assets of
the Fund during any 90-day period for any one shareholder of record.
 
DIVIDENDS, NET ASSET VALUE AND TAXES
 
DIVIDENDS.  Dividends are declared daily and paid monthly. Shareholders will
receive dividends in additional shares unless they elect to receive cash.
Dividends will be reinvested monthly in additional shares of the Fund normally
on the twenty-first day of each month, if a business day, otherwise on the next
business day. The Fund will pay shareholders who redeem their entire accounts
all unpaid dividends at the time of redemption not later than the next dividend
payment date. Upon written request to the Shareholder Service Agent, a
shareholder may elect to have Fund dividends invested without sales charge in
shares of another Kemper Mutual Fund offering this privilege at the net asset
value of such other fund on the reinvestment date. See "Special
Features--Exchange Privilege" for a list of such other Kemper Mutual Funds. To
use this privilege of investing Fund dividends in shares of another Kemper
Mutual Fund, shareholders must maintain a minimum account value of $10,000 in
this Fund and must maintain a minimum account value of $250 in the fund in which
dividends are reinvested.
 
The Fund calculates its dividends based on its daily net investment income. For
this purpose, net investment income consists of (a) accrued interest income plus
or minus amortized original issue discount or premium, (b) plus or minus all
short-term realized gains and losses on investments and (c) minus accrued
expenses. Expenses of the Fund are accrued each day. Since the Fund's
investments are valued at amortized cost, there will be no unrealized gains or
losses on such investments. However, should the net asset value so computed
deviate significantly from market value, the Board of Trustees could decide to
value the investments at market value and then unrealized gains and losses would
be included in net investment income above.
 
                                       B-8
   26
 
Dividends are reinvested monthly and shareholders will receive monthly
confirmation of dividends and of purchase and redemption transactions.
 
NET ASSET VALUE. As described in the prospectus, the Fund values its portfolio
instruments at amortized cost, which does not take into account unrealized
capital gains or losses. This involves initially valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the effect of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
Calculations are made to compare the value of the Fund's investments valued at
amortized cost with market values. Market valuations are obtained by using
actual quotations provided by market makers, estimates of market value, or
values obtained from yield data relating to classes of money market instruments
published by reputable sources at the mean between the bid and asked prices for
the instruments. If a deviation of 1/2 of 1% or more were to occur between the
net asset value per share calculated by reference to market values and the
Fund's $1.00 per share net asset value, or if there were any other deviation
that the Board of Trustees of the Fund believed would result in a material
dilution to shareholders or purchasers, the Board of Trustees would promptly
consider what action, if any, should be initiated. If the Fund's net asset value
per share (computed using market values) declined, or were expected to decline,
below $1.00 (computed using amortized cost), the Board of Trustees of the Fund
might temporarily reduce or suspend dividend payments in an effort to maintain
the net asset value at $1.00 per share. As a result of such reduction or
suspension of dividends or other action by the Board of Trustees, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if the Fund's net asset value per share (computed using market values)
were to increase, or were anticipated to increase above $1.00 (computed using
amortized cost), the Board of Trustees of the Fund might supplement dividends in
an effort to maintain the net asset value at $1.00 per share.
 
TAXES. Interest on indebtedness which is incurred to purchase or carry shares of
a mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Fund or are "related
persons" to such users; such persons should consult their tax advisers before
investing in the Fund.
 
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12 percent of the excess of such corporation's
"modified alternative minimum taxable income" over $2 million. A portion of
tax-exempt interest, including exempt-interest dividends from the Fund, may be
includible in modified alternative minimum taxable income. Corporate
shareholders are advised to consult their tax advisers with respect to the
consequences of the Superfund Act.
 
PERFORMANCE
 
As reflected in the prospectus, historical performance calculations for the Fund
may be shown in the form of "yield," "effective yield," and "tax equivalent
yield." These various measures of performance are described below. KFS has
agreed to absorb certain operating expenses of the Fund to the extent described
in the prospectus. Without this expense absorption, the performance results
noted herein would have been lower.
 
The Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Under that method, the yield
quotation is based on a seven-day period and is computed as follows. The first
calculation is net investment income per share, which is accrued interest on
portfolio securities, plus or minus amortized original issue discount or
premium, less accrued expenses. This number is then divided by the price per
share (expected to remain constant at $1.00) at the beginning of the period
("base period return").
 
                                       B-9
   27
 
The result is then divided by 7 and multiplied by 365 and the resulting yield
figure is carried to the nearest one-hundredth of one percent. Realized capital
gains or losses and unrealized appreciation or depreciation of investments are
not included in the calculation. For the seven day period ended March 31, 1995,
the Fund's yield was 3.24%.
 
The Fund's effective yield is determined by taking the base period return
(computed as described above) and calculating the effect of assumed compounding.
The formula for the effective yield is: (base period return +1)365/7 - 1. For
the seven day period ended March 31, 1995, the Fund's effective yield was 3.29%.
 
The tax equivalent yield of the Fund is computed by dividing that portion of the
Fund's yield (computed as described above) which is tax-exempt by (one minus the
stated combined federal, State of New York and New York City income tax rate, as
applicable) and adding the result to that portion, if any, of the yield of the
Fund that is not tax-exempt. Based upon a marginal federal income tax rate of
37.1% and a combined federal, New York State and New York City income tax rate
of 44.3% and the Fund's yield computed as described above for the seven day
period ended March 31, 1995, the Fund's tax equivalent yield for that period was
5.82%. Based upon a marginal federal income tax rate of 37.1%, the Fund's tax
equivalent yield for the seven day period ended March 31, 1995 was 5.15%. For
additional information concerning tax-exempt yields, see "Tax-Exempt versus
Taxable Yield" below.
 
The Fund's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in the Fund will
actually yield for any given future period. Actual yields will depend not only
on changes in interest rates on money market instruments during the period in
which the investment in the Fund is held, but also on such matters as Fund
expenses.
 
Investors have an extensive choice of money market funds and money market
deposit accounts and the information below may be useful to investors who wish
to compare the past performance of the Fund with that of its competitors. Past
performance cannot be a guarantee of future results.
 
As indicated in the prospectus (see "Performance"), the Fund's performance may
be compared to that of other mutual funds tracked by Lipper Analytical Services,
Inc. ("Lipper"). Lipper performance calculations include the reinvestment of all
capital gain and income dividends for the periods covered by the calculations.
The Fund's performance also may be compared to other money market funds as
reported by IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R),
reporting services on money market funds. As reported by IBC/Donoghue's, all
investment results represent total return (annualized results for the period net
of management fees and expenses) and one-year investment results would be
effective annual yields assuming reinvestment of dividends.
 
The following investment comparisons are based upon information reported by
Lipper and Donoghue's. In the comparison of the Fund's performance to
IBC/Donoghue's Money Fund Averages(TM) All Taxable and to Lipper Money Market
Instrument Funds Average, the performance of the Fund has been adjusted on a
taxable equivalent basis assuming a marginal federal income tax rate of 31.0%
and a combined federal, New York State and New York
 
                                      B-10
   28
 
City income tax rate of 39.3% (see "Tax-Exempt versus Taxable Yield" below for
more information concerning taxable equivalent performance).
 


IBC/DONOGHUE'S                                                        LIPPER ANALYTICAL SERVICES, INC.
                                                                      THESE RESULTS ARE NOT ANNUALIZED.

                                              IBC/DONOGHUE'S
                                              MONEY                                                                LIPPER
                                               FUND                                                                 NEW
                             TAX-EXEMPT       AVERAGES(TM)                                         TAX-EXEMPT       YORK
                              NEW             ALL                                                   NEW            TAX-EXEMPT
                              YORK            TAX-FREE                                              YORK           MONEY
                             MONEY            MONEY                                                MONEY           MARKET
                             MARKET           MARKET                                               MARKET          FUNDS
           PERIOD             FUND            FUNDS                              PERIOD             FUND           AVERAGE
- ----------------------------------------------------                  ---------------------------------------------------
                                                                                                    
7 Days Ended 3/27/95.......   3.16%           3.45%                   1 Month Ended 3/31/95......    .26%            .28%
1 Month Ended 3/31/95......   3.02            3.36                    3 Months Ended 3/31/95.....    .73             .77

 


                             TAX-EXEMPT                                                            TAX-EXEMPT
                              NEW                                                                   NEW
                              YORK                                                                  YORK
                             MONEY            IBC/DONOGHUE'S                                       MONEY           LIPPER
                             MARKET           MONEY                                                MARKET          MONEY
                              FUND             FUND                                                 FUND           MARKET
                             TAXABLE          AVERAGES(TM)                                         TAXABLE         INSTRUMENT
                             EQUIVALENT       ALL                                                  EQUIVALENT      FUNDS
           PERIOD            BASIS*           TAXABLE                            PERIOD            BASIS*          AVERAGE
- ----------------------------------------------------                  ---------------------------------------------------
                                                                                                    
7 Days Ended 3/27/95.......   5.21%           5.53%**                 1 Month Ended 3/31/95......    .43%            .44%
1 Month Ended 3/31/95......   4.98            5.52                    3 Months Ended 3/31/95.....   1.20            1.32

 
- --------------------------------------------------------------------------------
 * Source: KFS (not reported in Donoghue's or Lipper).
** As of 3/28/95.
 
The Fund's performance also may be compared on an after-tax basis to various
bank products, including the average rate of bank and thrift institution money
market deposit accounts or interest bearing checking accounts as reported in the
BANK RATE MONITOR National Index(TM) of 100 leading bank and thrift institutions
as published by BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408. The rates
published by the BANK RATE MONITOR National Index(TM) are averages of the
personal account rates offered on the Wednesday prior to the date of publication
by 100 of the leading bank and thrift institutions in the ten largest
Consolidated Standard Metropolitan Statistical Areas. Account minimums range
upward from $2,000 in each institution and compounding methods vary. Interest
bearing checking accounts generally offer unlimited check writing while money
market deposit accounts generally restrict the number of checks that may be
written. If more than one rate is offered, the lowest rate is used. Rates are
determined by the financial institution and are subject to change at any time.
Bank products represent a taxable alternative income producing product. Bank and
thrift institution deposit accounts may be insured. Shareholder accounts in the
Fund are not insured. Bank passbook savings accounts share some liquidity
features with money market mutual fund accounts but they may not offer all the
features available from a money market mutual fund, such as check writing. Bank
passbook savings accounts normally offer a fixed rate of interest while the
yield of the Fund fluctuates. Bank checking accounts normally do not pay
interest but share some liquidity features with money market mutual fund
accounts (e.g., the ability to write checks against the account). Bank
certificates of deposit may offer fixed or variable rates for a set term.
(Normally, a variety of terms are available.) Withdrawal of these deposits prior
to maturity normally will be subject to a penalty. In contrast, shares of the
Fund are redeemable at the net asset value (normally $1.00 per share) next
determined after a request is received, without charge.
 
Investors also may want to compare the Fund's performance on an after-tax basis
to that of U.S. Treasury bills or notes because such instruments represent
alternative income producing products. Treasury obligations are issued in
selected denominations. Rates of U.S. Treasury obligations are fixed at the time
of issuance and payment of principal and interest is backed by the full faith
and credit of the U.S. Treasury. The market value of such instruments generally
will fluctuate inversely with interest rates prior to maturity and will equal
par value at maturity. Generally, the value of obligations with shorter
maturities will fluctuate less than those with longer maturities. The Fund's
yield will fluctuate. Also, while the Fund seeks to maintain a net asset value
per share of $1.00, there is no assurance that it will be able to do so. Any
such comparisons may be useful to investors who wish to compare the Fund's past
performance with that of its competitors. Of course, past performance cannot be
a guarantee of future results.
 
                                      B-11
   29
 
The Fund's performance also may be compared to the Consumer Price Index, as
published by the U.S. Bureau of Labor Statistics, which is an established
measure of change over time in the prices of goods and services in major
expenditure groups.
 
TAX-EXEMPT VERSUS TAXABLE YIELD. You may want to determine which
investment--tax-exempt or taxable--will provide you with a higher after-tax
return. To determine the taxable equivalent yield, simply divide the yield from
the tax-exempt investment by the sum of [1 minus your marginal tax rate]. The
tables below are provided for your convenience in making this calculation for
selected tax-exempt yields and taxable income levels. These yields are presented
for purposes of illustration only and are not representative of any yield that
the Fund may generate. Both tables are based upon current law as to the 1995 tax
rate schedules.
 


              TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS UNDER $114,700
- ----------------------------------------------------------------------------------------------------------------------
      SINGLE                JOINT                YOUR
                                                MARGINAL                    A TAX-EXEMPT YIELD OF:
                                              FEDERAL TAX      2%        3%        4%        5%        6%        7%      
  TAXABLE INCOME                                 RATE                  IS EQUIVALENT TO A TAXABLE YIELD OF:        
- ----------------------------------------------------------------------------------------------------------------------
                                                                                         
$23,350 - $56,550     $39,000 - $94,250       28.0%            2.78      4.17      5.56      6.94      8.33       9.72
- ----------------------------------------------------------------------------------------------------------------------
Over $56,550          Over $94,250            31.0             2.90      4.35      5.80      7.25      8.70      10.14
====================================================================================================================== 


                                                COMBINED
      SINGLE                JOINT              N.Y. CITY,
                                               N.Y. STATE                   A TAX-EXEMPT YIELD OF:
                                              AND FEDERAL       2%        3%        4%        5%        6%        7%      
  TAXABLE INCOME                               TAX  RATE               IS EQUIVALENT TO A TAXABLE YIELD OF:        
                                                                                         
- ----------------------------------------------------------------------------------------------------------------------
$23,350 - $56,550     $39,000 - $94,250       36.2%            3.14      4.71      6.27      7.84      9.41      10.98
- ----------------------------------------------------------------------------------------------------------------------
Over $56,550          Over $94,250            38.9             3.28      4.91      6.55      8.19      9.83      11.46
====================================================================================================================== 





              TAXABLE EQUIVALENT YIELD TABLE FOR PERSONS WHOSE ADJUSTED GROSS INCOME IS OVER $114,700*
- ----------------------------------------------------------------------------------------------------------------------
      SINGLE                JOINT                YOUR
                                                MARGINAL                    A TAX-EXEMPT YIELD OF:
                                              FEDERAL TAX      2%        3%        4%        5%        6%        7%      
  TAXABLE INCOME                                 RATE                  IS EQUIVALENT TO A TAXABLE YIELD OF:        
                                                                                         
- ----------------------------------------------------------------------------------------------------------------------
$56,550 - $117,950    $94,250 - $143,600      31.9%            2.94      4.41      5.88      7.35       8.81     10.28
- ----------------------------------------------------------------------------------------------------------------------
$117,950 - $256,500   $143,600 - $256,500     37.1             3.18      4.77      6.36      7.95       9.54     11.13
- ----------------------------------------------------------------------------------------------------------------------
Over $256,500         Over $256,500           40.8             3.38      5.07      6.76      8.44      10.13     11.82
====================================================================================================================== 


                                                COMBINED
      SINGLE                JOINT              N.Y. CITY,
                                               N.Y. STATE                   A TAX-EXEMPT YIELD OF:
                                              AND FEDERAL       2%        3%        4%        5%        6%        7%      
  TAXABLE INCOME                               TAX  RATE               IS EQUIVALENT TO A TAXABLE YIELD OF:        
                                                                                         
- ----------------------------------------------------------------------------------------------------------------------
$117,950 - $256,500   $143,600 - $256,500     44.3%            3.59      5.39      7.18      8.98      10.77     12.57
- ----------------------------------------------------------------------------------------------------------------------
Over $256,500         Over $256,500           47.6             3.82      5.73      7.63      9.54      11.45     13.36
====================================================================================================================== 


 
 * This table assumes at least $3.75 of itemized deductions for each $100 of
   adjusted gross income over $114,700. For a married couple with adjusted gross
   income between $172,050 and $294,550 (single between $114,700 and $237,200),
   add 0.7% to the tax rate for each personal and dependency exemption. The
   taxable equivalent yield is the tax-exempt yield divided by: 100% minus the
   adjusted tax rate. For example, if the table tax rate is 47.6% and you are
   married with no dependents, the adjusted tax rate is 49% (47.6% + 0.7% +
   0.7%). For a tax-exempt yield of 6%, the taxable equivalent yield is about
   11.76% (6% / (100% - 49%)).
** The tables do not reflect the impact of the New York State Tax Table Benefit
   Recapture that is intended to eliminate the benefit of the graduated rate
   structure and applies to taxable income between $100,000 and $150,000.
 
                                      B-12
   30
 
OFFICERS AND TRUSTEES
 
The officers and trustees of the Fund, their principal occupations and their
affiliations, if any, with KFS and KDI, are as follows (The number following
each person's title is the number of investment companies managed by KFS
("Kemper Managed Funds") for which he or she holds similar positions):
 
DAVID W. BELIN, Trustee (21), 2000 Financial Center, 7th and Walnut, Des Moines,
Iowa; Member, Belin Harris Lamson McCormick, P.C. (attorneys).
 
LEWIS A. BURNHAM, Trustee (21), 16410 Avila Boulevard, Tampa, Florida; Partner,
Business Resources Group; formerly, Executive Vice President, Anchor Glass
Container Corporation.
 
DONALD L. DUNAWAY, Trustee (21), One Park Place, Milwaukee, Wisconsin; Retired;
formerly, Executive Vice President, A. O. Smith Corporation (diversified
manufacturer).
 
ROBERT B. HOFFMAN, Trustee (21), 800 North Lindbergh Boulevard, St. Louis,
Missouri; Senior Vice President and Chief Financial Officer, Monsanto Company
(chemical products); formerly, Vice President, FMC Corporation (manufacturer of
machinery and chemicals); prior thereto, Director, Executive Vice President and
Chief Financial Officer, Staley Continental, Inc. (food products).
 
DONALD R. JONES, Trustee (21), 1303 East Algonquin Road, Schaumburg, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
 
DAVID B. MATHIS, Trustee (28), Kemper Center, Long Grove, Illinois; Chairman,
Chief Executive Officer and Director of Kemper Corporation; Director, KFS,
Kemper Financial Companies, Inc. ("KFC") several other Kemper Corporation
subsidiaries, IMC Global Inc. and Lumbermans Mutual Casualty Company.
 
SHIRLEY D. PETERSON, Trustee (18), 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General, U.S. Department of Justice.
 
WILLIAM P. SOMMERS, Trustee (21), 333 Ravenswood Avenue, Menlo Park, California;
President and Chief Executive Officer, SRI International (research and
development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton Inc. (management consulting
firm) (retired); Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
 
STEPHEN B. TIMBERS, President and Trustee*(31), 120 S. LaSalle Street, Chicago,
Illinois; President, Chief Operating Officer and Director, Kemper Corporation;
Chairman, Chief Executive Officer, Chief Investment Officer and Director, KFS;
Director, KFC, KDI and several other Kemper Corporation subsidiaries, Gillett
Holdings, Inc. and LTV Corporation.
 
J. PATRICK BEIMFORD, JR., Vice President*(24), 120 South LaSalle Street,
Chicago, Illinois; Executive Vice President/Director of Fixed Income
Investments, KFS.
 
PHILIP J. COLLORA, Vice President and Secretary*(31), 120 South LaSalle Street,
Chicago, Illinois; Attorney, Senior Vice President and Assistant Secretary, KFS.
 
CHARLES F. CUSTER, Vice President and Assistant Secretary*(31), 222 North
LaSalle Street, Chicago, Illinois; Partner, Vedder, Price, Kaufman & Kammholz
(attorneys), Legal Counsel to the Fund.
 
JEROME L. DUFFY, Treasurer*(31), 120 South LaSalle Street, Chicago, Illinois;
Senior Vice President, KFS.
 
JOHN E. PETERS, Vice President*(31), 120 South LaSalle Street, Chicago,
Illinois; Director and Senior Executive Vice President, KFS; Director and
President, KDI.
 
                                      B-13
   31
 
FRANK J. RACHWALSKI, JR., Vice President*(9), 120 South LaSalle Street, Chicago,
Illinois; Senior Vice President, KFS.
 
ELIZABETH C. WERTH, Assistant Secretary*(23), 120 South LaSalle Street, Chicago,
Illinois; Vice President and Director of State Registrations, KFS and KDI.
 
*Interested persons as defined in the Investment Company Act of 1940.
 
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund, except that Mr. Custer's law firm
receives fees from the Fund as counsel to the Fund. The table below shows
amounts paid or accrued to those trustees who are not designated "interested
persons" during the Fund's fiscal year ended April 30, 1995 and the total
compensation that Kemper Managed Funds paid to each trustee during the calendar
year 1994.
 


                                                                        PENSION OR                TOTAL
                                                     AGGREGATE      RETIREMENT BENEFITS        COMPENSATION
                                                    COMPENSATION    ACCRUED AS PART OF     KEMPER MANAGED FUNDS
    NAME OF TRUSTEE                                  FROM FUND         FUND EXPENSES       PAID TO TRUSTEES(3)
    ---------------                                 ------------    -------------------    --------------------
                                                                                  
David W. Belin(1)................................       $600                $ 0                  $112,200
Lewis A. Burnham.................................        500                  0                    90,100
Donald L. Dunaway(1).............................        600                  0                   115,400
Robert B. Hoffman................................        500                  0                    87,400
Donald R. Jones..................................        600                  0                    94,300
Shirley D. Peterson(2)...........................          0                  0                         0
William P. Sommers...............................        500                  0                    84,100

 
- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred
    compensation agreements with the Fund. Deferred amounts accrue interest
    monthly at a rate approximate to the yield of Kemper Money Market Fund-Money
    Market Portfolio.
 
(2) Appointed to the Board on June 15, 1995.
 
(3) Includes compensation for service on the Boards of 23 Kemper funds
    (including two Kemper funds no longer in existence). Also includes amounts
    for new portfolios estimated as if they had existed at the beginning of the
    year.
 
On July 14, 1995, the trustees and officers as a group owned less than 1% of the
then outstanding shares of the Fund. On that same date, Kemper Clearing Corp.,
Omnibus Account, 111 Kilbourn Avenue, Milwaukee, WI and J.B. Hanauer & Company,
Omnibus Account, Gatehall Corporate Center, 4 Gatehall Drive, Parsippany, N.J.
owned of record 42.67% and 47.16%, respectively, of the outstanding shares of
the Fund.
 
SPECIAL FEATURES
 
EXCHANGE PRIVILEGE. Subject to the limitations described below, Class A Shares
(or the equivalent) of the following Kemper Mutual Funds may be exchanged for
each other at their relative net asset values: Kemper Technology Fund, Kemper
Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund,
Kemper Income and Capital Preservation Fund, Kemper Municipal Bond Fund, Kemper
Diversified Income Fund, Kemper High Yield Fund, Kemper U.S. Government
Securities Fund, Kemper International Fund, Kemper State Tax-Free Income Series,
Kemper Adjustable Rate U.S. Government Fund, Kemper Blue Chip Fund, Kemper
Global Income Fund, Kemper Target Equity Fund (series are subject to a limited
offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash Reserves
Fund (available only upon exchange or conversion from Class A Shares of another
Kemper Mutual Fund), Kemper U.S. Mortgage Fund and Kemper Short-Intermediate
Government Fund ("Kemper Mutual Funds") and certain "Money Market Funds" (Kemper
Money Market Fund, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Tax-Exempt New York Money Market Fund and
 
                                      B-14
   32
 
Investors Cash Trust). Shares of Money Market Funds that were acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange. Shares purchased by check or through an
ACH transaction may not be exchanged until they have been owned for at least 15
days. In addition, shares of Kemper Funds, other than a Money Market Fund,
acquired by exchange from another Fund may not be exchanged thereafter until
they have been owned for 15 days. A series of Kemper Target Equity Fund will be
available on exchange only during the Offering Period for such series as
described in the prospectus for such series. Cash Equivalent Fund, Tax-Exempt
California Money Market Fund, Cash Account Trust, Tax-Exempt New York Money
Market Fund and Investors Cash Trust are available on exchange but only through
a financial services firm having a services agreement with KDI with respect to
such funds. Exchanges may only be made for funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Tax-Exempt New York
Money Market Fund is available for sale only in New York, Connecticut, New
Jersey and Pennsylvania.
 
The total value of shares being exchanged must at least equal the minimum
investment requirement of the fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange; however, financial services
firms may charge for their services in expediting exchange transactions.
Exchanges will be effected by redemption of shares of the fund held and purchase
of shares of the other fund. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis. Shareholders interested in exercising the
exchange privilege may obtain an exchange form and prospectuses of the other
funds from firms or KDI. Exchanges also may be authorized by telephone if the
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-231-8568 or
in writing subject to the limitations on liability described in the prospectus.
Any share certificates must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Except as otherwise permitted by applicable regulation, 60 days'
prior written notice of any termination or material change will be provided.
 
SYSTEMATIC WITHDRAWAL PROGRAM.  The owner of $5,000 or more of the Fund's shares
may provide for the payment from the owner's account of any requested dollar
amount to be paid to the owner or the owner's designated payee monthly,
quarterly, semi-annually or annually. The minimum periodic payment is $100.
Shares are redeemed so that the payee will receive payment approximately the
first of the month. Dividend distributions will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested, redemptions for the purpose of making such payments may reduce or
even exhaust the account. The right is reserved to amend the systematic
withdrawal program on 30 days' notice. The program may be terminated at any time
by the shareholder or the Fund. Firms provide varying arrangements for their
clients to redeem Fund shares on a periodic basis. Such firms may independently
establish minimums for such services.
 
ELECTRONIC FUNDS TRANSFER PROGRAMS.  For your convenience, the Fund has
established several investment and redemption programs using electronic funds
transfer via the Automated Clearing House (ACH). There is currently no charge by
the Fund for these programs. To use these features, your financial institution
must be affiliated with an Automated Clearing House (ACH). This ACH affiliation
permits the Shareholder Service Agent to electronically transfer money between
your bank account, or employer's payroll bank in the case of Direct Deposit, and
your Fund account. Your bank's crediting policies of these transferred funds may
vary. These features may be amended or terminated at any time by the Fund.
Shareholders should contact KDI at 1-800-231-8568 or the firm through which
their account was established for more information. These programs may not be
available through some firms that distribute shares of the Fund.
 
                                      B-15
   33
 
SHAREHOLDER RIGHTS
 
The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which shareholder approval is
required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination
of the Fund to the extent and as provided in the Declaration of Trust; (d) any
amendment of the Declaration of Trust (other than amendments changing the name
of the Fund or any Portfolio, establishing a Portfolio, supplying any omission,
curing any ambiguity or curing, correcting or supplementing any defective or
inconsistent provision thereof); and (e) such additional matters as may be
required by law, the Declaration of Trust, the By-laws of the Fund, or any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the trustees may consider necessary or desirable. The shareholders
also would vote upon changes in fundamental investment objectives, policies or
restrictions.
 
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy on the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
 
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of the Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
 
The Declaration of Trust provides that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum. Thus, a meeting of shareholders of the Fund could
take place even if less than a majority of the shareholders were represented on
its scheduled date. Shareholders would in such a case be permitted to take
action which does not require a larger vote than a majority of a quorum, such as
the election of trustees and ratification of the selection of auditors. Some
matters requiring a larger vote under the Declaration of Trust, such as
termination or reorganization of the Fund and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
 
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund (or any Portfolio or class) by notice to the shareholders
without shareholder approval.
 
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by KFS remote and not
material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
 
                                      B-16
   34
 
APPENDIX--RATINGS OF INVESTMENTS
 
The two highest ratings of Moody's Investors Service, Inc. ("Moody's") for
Municipal Securities are Aaa and Aa. Municipal Securities rated Aaa are judged
to be of the "best quality." The rating of Aa is assigned to Municipal
Securities which are of "high quality by all standards," but as to which margins
of protection or other elements make long-term risks appear somewhat larger than
Aaa rated Municipal Securities. The Aaa and Aa rated Municipal Securities
comprise what are generally known as "high grade."
 
The two highest ratings of Standard & Poor's Corporation ("S&P") for Municipal
Securities are AAA (Prime) and AA (High Grade). Municipal Securities rated AAA
are "obligations of the highest quality." The rating of AA is accorded issues
with investment characteristics "only slightly less marked than those of the
prime quality issues."
 
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Loans designated MIG-1 are of the
best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the market for
refinancing, or both. Loans designated MIG-2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
 
An S&P municipal and corporate commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. Issues assigned this
highest rating are regarded as having the greatest capacity for timely payment.
The designation A-1 indicates that the degree of safety regarding timely payment
is very strong. The designation A-2 indicates the capacity for timely payment is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1."
 
The "other debt securities" included in the definition of temporary investments
are corporate (as opposed to municipal) debt obligations rated AAA or AA by S&P
or Aaa or Aa by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." The Moody's corporate debt ratings of Aaa and Aa
do not differ materially from those set forth above for Municipal Securities.
 
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's. Among the factors considered by them in assigning ratings
are the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated Prime-1, 2 or 3.
 
After its purchase by the Fund, an issue of Municipal Securities or a temporary
investment may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires the elimination of
such obligation from the Fund's portfolio, but the Fund's investment adviser
will consider such an event in its determination of whether the Fund should
continue to hold such obligation in its portfolio. To the extent that the
ratings accorded by S&P or Moody's for Municipal Securities or temporary
investments may change as a result of changes in such organizations, or changes
in their rating systems, the Fund will attempt to use comparable ratings as
standards for its investments in Municipal Securities or temporary investments
in accordance with the investment policies contained herein.
 
                                      B-17