PROSPECTUS
NOVEMBER 30, 1996, as
revised May 30, 1997
Putnam Tax-Free High Yield Fund
Class A, B and M shares
INVESTMENT STRATEGY: TAX-ADVANTAGED
This prospectus explains concisely what you should know before
investing in Putnam Tax-Free High Yield Fund (the "fund"), a
series of Putnam Tax-Free Income Trust (the "Trust"). Please
read it carefully and keep it for future reference. You can find
more detailed information in the November 30, 1996 statement of
additional information (the "SAI"), as amended from time to time.
For a free copy of the SAI or other information, call Putnam
Investor Services at 1-800-225-1581. The SAI has been filed with
the Securities and Exchange Commission (the "Commission") and is
incorporated into this prospectus by reference. The Commission
maintains a Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference into this prospectus and the
SAI, and other information regarding registrants that file
electronically with the Commission.
The fund invests primarily in lower-rated bonds, commonly known
as "junk bonds." Investments of this type are subject to a
greater risk of loss of principal and nonpayment of interest.
Purchasers should carefully assess the risks associated with an
investment in the fund.
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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BOSTON * LONDON * TOKYO<PAGE>
ABOUT THE FUND
Expenses summary
.................................................................
This section describes the sales charges, management fees, and
annual operating expenses that apply to various classes of fund
shares. Use it to help you estimate the impact of transaction
costs on your investment over time.
Financial highlights
.................................................................
Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less than
10 years.
Objective
.................................................................
Read this section to make sure the fund's objective is consistent
with your own.
How the fund pursues its objective
.................................................................
This section explains in detail how the fund seeks its investment
objective.
Risk factors. All investments entail some risk. Read this
section to make sure you understand the risks that are
associated with an investment in the fund.
How performance is shown
.................................................................
This section describes and defines the measures used to assess
fund performance. All data are based on past investment results
and do not predict future performance.
How the fund is managed
.................................................................
Consult this section for information about the fund's management,
allocation of its expenses, and how purchases and sales of
securities are made.
Organization and history
.................................................................
In this section, you will learn when the fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.
<PAGE>
ABOUT YOUR INVESTMENT
Alternative sales arrangements
.................................................................
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.
How to buy shares
.................................................................
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges on each class
of shares.
Distribution plans
.................................................................
This section tells you what distribution fees are charged against
each class of shares.
How to sell shares
.................................................................
In this section you can learn how to sell fund shares, either
directly to the fund or through an investment dealer.
How to exchange shares
.................................................................
Find out in this section how you may exchange fund shares for
shares of other Putnam funds. The section also explains how
exchanges can be made without sales charges and the conditions
under which sales charges may be required.
How the fund values its shares
.................................................................
This section explains how the fund determines the value of its
shares.
How the fund makes distributions to shareholders; tax
information
.................................................................
This section describes the various options you have in choosing
how to receive fund dividends. It also discusses the tax status
of the payments and counsels you to seek specific advice about
your own situation.
<PAGE>
ABOUT PUTNAM INVESTMENTS, INC.
.................................................................
Read this section to learn more about the companies that provide
marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.
APPENDIX
.................................................................
Securities ratings
<PAGE>
About the fund
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following table summarizes your maximum transaction costs
from investing in the fund and expenses based on the most recent
fiscal year. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified
periods.
Class A Class B Class M
shares shares shares
Shareholder transaction
expenses
Maximum sales charge
imposed on purchases
(as a percentage of
offering price) 4.75% NONE* 3.25%*
Deferred sales charge 5.0% in the first
(as a percentage year, declining
of the lower of to 1.0% in the
original purchase sixth year, and
price or redemption eliminated
proceeds) NONE** thereafter NONE
Annual fund operating expenses
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees fees expenses expenses
- ---------- ----- -------------------
Class A 0.54% 0.20% 0.10% 0.84%
Class B 0.54% 0.85% 0.11% 1.50%
Class M 0.54% 0.50% 0.09% 1.13%
The table is provided to help you understand the expenses of
investing and your share of fund operating expenses. The
expenses shown in the table do not reflect the application of
credits that reduce fund expenses.
<PAGE>
Examples
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and, except as indicated, redemption at
the end of each period:
1 3 5 10
year years years years
Class A $56 $73 $92 $146
Class B $65 $77 $102 $161 ***
Class B (no redemption) $15 $47 $82 $161 ***
Class M $44 $67 $93 $165
The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.
* The higher 12b-1 fees borne by class B and class M
shares may cause long-term shareholders to pay more than
the economic equivalent of the maximum permitted front-
end sales charge on class A shares.
** A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were
purchased without an initial sales charge. See "How to
buy shares -- Class A shares."
*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight
years after purchase. See "Alternative sales
arrangements."
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for
class A, B and M shares. This information has been audited and
reported on by the Trust's independent accountants. The "Report
of independent accountants" and financial statements included in
the fund's annual report to shareholders for the 1996 fiscal year
are incorporated by reference into this prospectus. The fund's
annual report, which contains additional unaudited performance
information, is available without charge upon request.
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
December 29, 1994
(commencement of
Year ended operations) toYear ended
July 31 July 31 July 31
1996 1995 1996
Class M Class A
<S> <C> <C> <C>
Net asset value, beginning of period $14.13
$13.43 $14.14
Investment operations
Net investment income .84 .58 .90
Net realized and unrealized
gain (loss) on investments (.08) .70 (.10)
Total from investment operations .76 1.28 .80
Less distributions:
From net investment income (.85) (.58) (.89)
In excess of net investment income-- -- --
From net realized gain on investments --
- -- --
In excess of net realized
gain on investments -- -- --
Total distributions (.85) (.58) (.89)
Net asset value, end of period$14.04 $14.13 $14.05
Total investment return at net asset value (%)(a)
5.44 9.69(b) 5.76
Net assets, end of period (in thousands) $9,984
$2,331 $540,607
Ratio of expenses to average net assets (%)(c) 1.13
.71(b) .84
Ratio of net investment income
to average net assets (%) 5.87 3.98(b) 6.27
Portfolio turnover (%) 67.70 60.41 67.70
/TABLE
<PAGE>
<TABLE>
<CAPTION>
For the period
YearSeptember 20, 1993
ended (commencement of
July operations) to Year ended July 31
31 July 31
1995 1994 1996 1995 1994 1993
Class A Class B
<S> <C> <C> <C> <C>
$14.24 $15.34 14.14 $14.24 $15.01 14.64
.94 .83 .80 .85 .86 .95
(.10) (.98) (.09) (.10) (.65) .41
.84 (.15) .71 .75 .21 1.36
(.94) (.83) (.80) (.85)(.85)(.95)
-- (.02) -- -- (.03) --
-- (.05) -- -- (.05) (.04)
-- (.05) -- -- (.05) --
(.94) (.95) (.80) (.85) (.98) (.99)
$14.14 $14.24 $14.05 $14.14 $14.24 $15.01
6.24 (.99)(b) 5.08 5.54 1.36 9.68
$474,984$361,593$1,421,448$1,436,481$1,522,955 $1,501,535
.87 (.71)(b) 1.50 1.51 1.45 1.38
6.73 5.58(b) 5.62 6.10 5.76 6.39
60.41 44.41 67.70 60.41 44.41 52.29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended July 31
1992 1991 1990 1989 1988 1987
Class B
<C> <C> <C>
<C> <C> <C>
$13.79$13.87 $14.30 $13.72 $13.77 $13.91
.99 .99 1.00 .98 .96 .98
.94 (.07) (.43) .56 (.05) .04
1.93 .92 .57 1.54 .91 1.02
(.99)(1.00) (1.00) (.96) (.96) (.98)
-- -- -- -- -- --
(.09) -- -- -- -- (.18)
-- -- -- -- -- --
(1.08)(1.00) (1.00) (.96) (.96) (1.16)
$14.64$13.79 $13.87 $14.30 $13.72 $13.77
14.60 6.98 4.20 11.71 6.96 7.48
$1,015,866 $738,113$651,152 $635,899$586,721 $582,023
1.45 1.52 1.66 1.75 1.77 1.78
7.03 7.26 7.12 7.02 7.11 6.71
82.31 49.83 46.66 96.97 101.02 132.87
(a) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period
ended July 31, 1996 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts.
</TABLE>
<PAGE>
OBJECTIVE
Putnam Tax-Free High Yield Fund seeks high current income exempt
from federal income tax. The fund is not intended to be a
complete investment program, and there is no assurance it will
achieve its objective.
HOW THE FUND PURSUES ITS OBJECTIVE
Basic investment strategy
Putnam Tax-Free High Yield Fund seeks its objective by following
the fundamental investment policy of investing at least 80% of
its net assets in a diversified portfolio of tax-exempt
securities (which are described below), except when investing for
defensive purposes during times of adverse market conditions.
The fund may trade its portfolio investments seeking short-term
profits, which may result in taxable income or capital gains and
may involve special risks. See "Portfolio turnover" below.
The fund may also invest in taxable obligations, as described
below, to the extent permitted by its investment policies, or
hold its assets in money market instruments or in cash.
The fund invests primarily in high yielding, higher risk, lower-
rated tax-exempt securities constituting a portfolio which Putnam
Investment Management, Inc., the fund's investment manager
("Putnam Management"), believes does not involve undue risk to
income or principal. Differing yields on tax-exempt securities
of the same maturity are a function of several factors, including
the relative financial strength of the issuers. High yields are
generally available from securities in the lower categories of
nationally recognized securities rating agencies ^(such as Baa or
MIG-4 or lower by Moody's Investors Service, Inc. ("Moody's") and
BBB or SP-3 or lower by Standard & Poor's ("S&P")), or from
unrated securities determined by Putnam management to be of
comparable quality. The fund may invest in securities rated^ at
least Ca ^ or CC by ^ a nationally recognized securities rating
agency, such as S&P or Moody's, or in unrated securities that
Putnam Management determines are of comparable quality. The fund
is not subject to any other limitation based on securities
ratings. Securities rated Ca ^ or CC (and comparable ^ unrated
securities) are considered speculative in a high degree and may
be in default. The ^ foregoing investment limitations will be
measured at the time of purchase and, to the extent that a
security is assigned a different rating by one or more of the
various rating agencies, Putnam Management will use the highest
rating assigned by any agency. The agencies' descriptions of
their rating categories are ^ included in the ^ appendix to this
prospectus.
Alternative minimum tax
Interest income distributed by the fund from certain types of
tax-exempt securities may be subject to federal alternative
minimum tax for individuals and corporations.
In determining compliance with the 80% test described above, it
is a fundamental policy of the fund to exclude from tax-exempt
securities any securities the interest from which may be subject
to the federal alternative minimum tax for individuals. All tax-
exempt interest dividends will, however, be included in
determining the federal alternative minimum taxable income of
corporations.
Alternative investment strategies
At times Putnam Management may judge that conditions in the
markets for tax-exempt securities make pursuing the fund's basic
investment strategy inconsistent with the best interests of its
shareholders. At such times Putnam Management may temporarily
use alternative strategies primarily designed to reduce
fluctuations in the value of fund assets.
In implementing these ^ defensive strategies, the fund may invest
without limit in taxable obligations, including obligations of
the U.S. government, its agencies or instrumentalities, may place
up to 25% of its assets in repurchase agreements with commercial
banks and registered broker-dealers, or may invest in any other
securities that Putnam Management considers consistent with such
defensive strategies.
It is impossible to predict when, or for how long, these
alternative strategies will be used.
Tax-exempt securities
Tax-exempt securities include obligations of a state (including
the District of Columbia), a territory or a U.S. possession, or
any of their agencies, instrumentalities or other governmental
units, the interest on which, in the opinion of bond counsel, is
exempt from federal income tax.
These securities are issued to obtain funds for various public
purposes, such as the construction of public facilities, the
payment of general operating expenses or the refunding of
outstanding debts.
They may also be issued to finance various private activities,
including the lending of funds to public or private institutions
for the construction of housing, educational or medical
facilities, or to fund short-term cash requirements. They may
also include certain types of industrial development bonds,
private activity bonds or notes issued by public authorities to
finance privately owned or operated facilities.
Short-term tax-exempt securities may be issued as interim
financing in anticipation of tax collections, revenue receipts or
bond sales to finance various public purposes.
The two principal classifications of tax-exempt securities are
general obligation and special obligation (or special revenue
obligation) securities.
General obligation securities involve a pledge of the credit of
an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues. Their payment may depend
on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation
securities vary according to the law applicable to the particular
issuer.
Special obligation (or special revenue obligation) securities are
payable only from the revenues derived from a particular facility
or class of facilities, or a specific revenue source, and
generally are not payable from the unrestricted revenues of the
issuer. Industrial development bonds and private activity bonds
are in most cases special obligation securities, whose credit
quality is tied to the private user of the facilities.
The fund may also invest in securities representing interests in
tax-exempt securities, known as "inverse floating obligations" or
"residual interest bonds." These obligations pay interest rates
that vary inversely with changes in the interest rates of
specified short-term tax-exempt securities or an index of short-
term tax-exempt securities. The interest rates on inverse
floating obligations or residual interest bonds will typically
decline as short-term market interest rates increase and increase
as short-term market rates decline.
These securities have the effect of providing a degree of
investment leverage. They will generally respond to changes in
market interest rates more rapidly than fixed-rate long-term
securities (typically twice as fast). As a result, the market
values of inverse floating obligations and residual interest
bonds will generally be more volatile than the market values of
fixed-rate tax-exempt securities.
<PAGE>
Risk factors
The values of tax-exempt securities fluctuate in response to
changes in interest rates. A decrease in interest rates will
generally result in an increase in the value of fund assets.
Conversely, during periods of rising interest rates, the value of
fund assets will generally decline. The magnitude of these
fluctuations generally is greater for securities with longer
maturities. However, the yields on such securities are also
generally higher. In addition, the values of fixed-income
securities are affected by changes in general economic conditions
and business conditions affecting the specific industries of
their issuers.
Changes by recognized rating services in their ratings of a
fixed-income security and changes in the ability of an issuer to
make payments of interest and principal may also affect the value
of these investments. Changes in the value of portfolio
securities generally will not affect income derived from these
securities, but will affect the fund's net asset value.
Investors should carefully consider their ability to assume the
risks of owning shares of a mutual fund that invests primarily in
lower-rated securities before making an investment in the fund.
The lower ratings of certain securities held by the fund reflect
a greater possibility that adverse changes in the financial
condition of the issuer, or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely
payments of interest and principal would likely make the values
of securities held by the fund more volatile and could limit the
fund's ability to sell its securities at prices approximating the
values placed on such securities. In the absence of a liquid
trading market for its portfolio securities, the fund at times
may be unable to establish the fair value of such securities.
The rating assigned to a security by ^ a rating agency does not
reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
The table below shows the percentages of fund assets invested
during fiscal 1996 in securities assigned to the various rating
categories by S&P, or, if unrated by S&P, assigned to comparable
rating categories by ^ another rating agency, and in unrated
securities determined by Putnam Management to be of comparable
quality:
<PAGE>
Unrated securities
Rated securities, of comparable quality,
as percentage of as percentage of
Rating net assets net assets
"AAA" 32.26% 0.24%
"AA" 1.88 0.15
"A" 4.47 0.34
"BBB" 18.19 4.51
"BB" 7.01 11.60
"B" 2.10 15.94
"CCC" 0.86 0.45
------ ------
66.77% 33.23%
====== ======
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis.
However, the amount of information available about the financial
condition of an issuer of tax-exempt securities may not be as
extensive as that which is made available by corporations whose
securities are publicly traded. When the fund invests in tax-
exempt securities in the lower rating categories, the achievement
of its goals is more dependent on Putnam Management's ability
than would be the case if it were investing in tax-exempt
securities in the higher rating categories.
The fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase.
However, Putnam Management will consider such reduction in its
determination of whether the fund should continue to hold the
security in its portfolio.
At times, a substantial portion of fund assets may be invested in
securities as to which the fund, by itself or together with other
funds and accounts managed by Putnam Management and its
affiliates, holds all or a major portion. Under adverse market
or economic conditions or in the event of adverse changes in the
financial condition of the issuer, it may be more difficult to
sell these securities when Putnam Management believes it
advisable to do so or the fund may be able to sell the securities
only at prices lower than if they were more widely held. Under
these circumstances, it may also be more difficult to determine
the fair value of such securities for purposes of computing the
fund's net asset value.
In order to enforce its rights in the event of a default of these
securities, the fund may be required to participate in various
legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could
increase fund operating expenses and adversely affect its net
asset value. Any income derived from the ownership or operation
of such assets would not be tax-exempt. The ability of a holder
of a tax-exempt security to enforce the terms of that security in
a bankruptcy proceeding may be more limited than would be the
case with respect to securities of private issuers.
Certain securities held by the fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
The fund may invest in so-called "zero-coupon" bonds, which are
issued at a significant discount from face value and pay interest
only at maturity rather than at intervals during the life of the
security. The values of zero-coupon bonds are subject to greater
fluctuation in response to changes in market interest rates than
bonds that pay interest currently.
Zero-coupon bonds allow an issuer to avoid the need to generate
cash to meet current interest payments. Accordingly, such bonds
may involve greater credit risks than bonds paying interest
currently. The fund is required to accrue and distribute
interest income from zero-coupon bonds on a current basis, even
though it does not receive that income currently in cash. Thus
it may be necessary to sell other investments to obtain cash
needed to make income distributions.
The secondary market for tax-exempt securities is generally less
liquid than that for taxable fixed-income securities,
particularly in the lower rating categories. Thus it may be more
difficult to value or buy and sell certain of these securities.
Certain investment grade securities share some of the risk
factors discussed above with respect to lower-rated securities.
For additional information concerning the risks associated with
investing in securities in the lower rating categories, see the
SAI.
Putnam Management buys and sells securities for the fund's
portfolio with a view to seeking as high a level of current
income as Putnam Management believes does not pose undue risk to
principal.
As a result, the fund will not necessarily invest in the highest
yielding tax-exempt securities permitted by its investment
policies if Putnam Management determines that market risks or
credit risks associated with such investments would subject the
fund's portfolio to excessive risk. The potential for
realization of capital gains resulting from possible changes in
interest rates will not be a major consideration. Putnam
Management will be free to take full advantage of the entire
range of maturities offered by tax-exempt securities and may
adjust the average maturity of the fund's portfolio from time to
time, depending on its assessment of the relative yields
available on securities of different maturities and its
expectations of future changes in interest rates. However, it is
anticipated that under normal market conditions the fund will
invest primarily in long-term tax-exempt securities having
maturities greater than ten years and that it will generally hold
short-term tax-exempt securities only for liquidity purposes.
Concentration policies
The fund will not invest more than 25% of its total assets in any
one industry. Governmental issuers of tax-exempt securities are
not considered part of any "industry." However, for this purpose
tax-exempt securities backed only by the assets and revenues of
nongovernmental users may be deemed to be issued by such
nongovernmental users. Thus, the 25% limitation would apply to
these obligations.
It is possible that the fund may invest more than 25% of its
assets in a broader segment of the market for tax-exempt
securities, such as revenue obligations of hospitals and other
health care facilities, housing revenue obligations, or airport
revenue obligations. This would be the case only if Putnam
Management determined that the yields available from obligations
in a particular segment of the market justified the additional
risks associated with such concentration.
Although these obligations could be supported by the credit of
governmental issuers or by the credit of nongovernmental issuers
engaged in a number of industries, economic, business, political
and other developments generally affecting the revenues of such
issuers may have a general adverse effect on all tax-exempt
securities in a particular market segment. (Examples of such
developments include proposed legislation or pending court
decisions affecting the financing of such projects and market
factors affecting the demand for their services or products.)
The fund reserves the right to invest more than 25% of its assets
in industrial development bonds and private activity ^ securities
or in issuers located in the same state.
Investments in premium securities
During a period of declining interest rates, many of the fund's
portfolio investments will likely bear coupon rates that are
higher than current market rates, regardless of whether these
securities were originally purchased at a premium. These
securities would generally carry market values greater than the
principal amounts payable on maturity, which would be reflected
in the net asset value of fund shares.
The values of these "premium" securities tend to approach the
principal amount as the securities approach maturity (or call
price in the case of securities approaching their first call
date). As a result, an investor who purchases fund shares during
these periods would initially receive higher monthly
distributions (derived from the higher coupon rates payable on
fund investments) than might be available from alternative
investments bearing current market interest rates. But the
investor may face an increased risk of capital loss as these
higher coupon securities approach maturity (or first call date).
In evaluating the potential performance of an investment,
investors may find it useful to compare current dividend rate
with the fund's "yield," which is computed on a yield-to-maturity
basis in accordance with SEC regulations and which reflects
amortization of market premiums. See "How performance is shown."
Portfolio turnover
The length of time the fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the fund is known as "portfolio turnover."
As a result of the fund's investment policies, under certain
market conditions its portfolio turnover rate may be higher than
that of other mutual funds.
Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction
costs on the sale of securities and reinvestment in other
securities. These transactions may result in realization of
taxable capital gains. Portfolio turnover rates are shown in the
section "Financial highlights."
Financial futures and options
The fund may purchase and sell financial futures contracts and
options.
The fund may purchase and sell futures contracts on the Municipal
Bond Index^. This index is intended to represent a numerical
measure of market performance for long-term tax exempt bonds. An
"index future" is a contract to buy or sell units of a particular
securities index at an agreed price on a specified future date.
Depending on the change in value of the index between the time
the fund enters into and terminates an index futures contract,
the fund realizes a gain or loss.
The fund may also purchase and sell put and call options on index
futures or on indexes directly, in addition to or as an
alternative to purchasing and selling index futures. The fund
may also purchase and sell futures contracts and related options
on U.S. Treasury securities, including U.S. Treasury bills, notes
and bonds ("U.S. government securities"), and options directly on
U.S. government securities.
In addition, the fund may purchase put and call options on, or
warrants to purchase, tax-exempt securities, either directly or
through custodial arrangements in which the fund and other
investors own an interest in one or more options on tax-exempt
securities.
The fund will engage in these transactions for hedging purposes
and, to the extent permitted by applicable law, for nonhedging
purposes, such as to manage the effective duration of the fund's
portfolio or as a substitute for direct investment.
The use of futures and options involves certain special risks and
may result in realization of taxable income or capital gains.
Futures and options transactions involve costs and may result in
losses.
Certain risks arise from the possibility of imperfect
correlations among movements in the prices of financial futures
and options purchased or sold by the fund, of the underlying bond
index or U.S. government securities and, in the case of hedging
transactions, of the tax-exempt securities that are the subject
of the hedge. The successful use of futures and options further
depends on Putnam Management's ability to forecast interest rates
and market movements correctly.
Other risks arise from the potential inability to close out
futures or options positions. There can be no assurance that a
liquid secondary market will exist for any futures contract or
option at a particular time. The fund's ability to terminate
option positions ^ established in the over-the-counter market may
be more limited than exchange-traded options and may also involve
the risks that securities dealers participating in such
transactions would fail to meet their obligations to the fund.
Certain provisions of the Internal Revenue Code and certain
regulatory requirements may limit the use of futures and options
transactions.
<PAGE>
A more detailed explanation of financial futures and options
transactions, and the risks associated with them, is included in
the SAI.
Other investment practices
The fund may also engage in the following investment practices,
each of which may result in taxable income or capital gains and
involves certain special risks. The SAI contains more detailed
information about these practices, including limitations designed
to reduce these risks.
Repurchase agreements and forward commitments. The fund may
enter into repurchase agreements on up to 25% of its assets.
These transactions must be fully collateralized at all times.
The fund may also purchase securities for future delivery, which
may increase its overall investment exposure and involves a risk
of loss if the value of the securities declines prior to the
settlement date. These transactions involve some risk if the
other party should default on its obligation and the fund is
delayed or prevented from recovering the collateral or completing
the transaction.
Derivatives
Certain of the instruments in which the fund may invest, such as
futures contracts, options and inverse floating obligations, are
considered to be "derivatives." Derivatives are financial
instruments whose value depends upon, or is derived from, the
value of an underlying asset, such as a security or an index.
Further information about these instruments and the risks
involved in their use is included elsewhere in this prospectus
and in the SAI.
Limiting investment risk
Specific investment restrictions help to limit investment risks
for the fund's shareholders. These restrictions prohibit the
fund ^ with respect to 75% of its total assets from acquiring
more than 10% of the voting securities of any one issuer.* They
also prohibit the fund from investing more than:
(a) (with respect to 75% of its total assets) 5% of its total
assets in securities of any one issuer ^ other than the U.S.
government ^;* or
^(b) 15% of its net assets in any combination of securities that
are not readily marketable, in securities restricted as to resale
(excluding securities determined by the Trust's Trustees (or the
person designated by them to make such determinations) to be
readily marketable), and in repurchase agreements maturing in
more than seven days.
^
Restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies. See the SAI for the full text
of these policies and other fundamental investment policies.
Except for investment policies designated as fundamental in this
prospectus or the SAI, the investment policies described in this
prospectus and in the SAI are not fundamental policies. The
Trustees may change any non-fundamental investment policy without
shareholder approval. As a matter of policy, the Trustees would
not materially change the fund's investment objective without
shareholder approval.
^
HOW PERFORMANCE IS SHOWN
Fund advertisements may, from time to time, include performance
information. "Yield" for each class of shares is calculated by
dividing the annualized net investment income per share during a
recent 30-day period by the maximum public offering price per
share of the class on the last day of that period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for ^ tax purposes. SEC
regulations require that net investment income be calculated on a
"yield-to-maturity" basis, which has the effect of amortizing any
premiums or discounts in the current market value of fixed-income
securities. The current dividend rate is based on net investment
income as determined for tax purposes, which may not reflect
amortization in the same manner. See "How the fund pursues its
objective -- Investments in premium securities."
Yield is based on the price of the shares, including the maximum
initial sales charge in the case of class A and class M shares,
but does not reflect any contingent deferred sales charge in the
case of class B shares. "Tax-equivalent" yield for each class of
shares shows the effect on performance of the tax-exempt status
of distributions received from the fund. It reflects the
approximate yield that a taxable investment must earn for
shareholders at stated income levels to produce an after-tax
yield equivalent to a class's tax-exempt yield.
"Total return" for the one-, five- and ten-year periods (or for
the life of a class, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the fund invested at the maximum
public offering price (in the case of class A and class M shares)
or reflecting the deduction of any applicable contingent deferred
sales charge (in the case of class B shares). Total return may
also be presented for other periods or based on investment at
reduced sales charge levels. Any quotation of investment
performance not reflecting the maximum initial sales charge or
contingent deferred sales charge would be reduced if the sales
charge were used.
All data are based on past investment results and do not predict
future performance. Investment performance, which will vary, is
based on many factors, including market conditions, portfolio
composition, fund operating expenses and which class of shares
the investor purchases. Investment performance also often
reflects the risks associated with the fund's investment
objective and policies. These factors should be considered when
comparing the fund's investment results with those of other
mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. Fund performance may be
compared to that of various indexes. See the SAI.
HOW THE FUND IS MANAGED
The Trustees are responsible for generally overseeing the conduct
of fund business. Subject to such policies as the Trustees may
determine, Putnam Management furnishes a continuing investment
program for the fund and makes investment decisions on its
behalf. Subject to the control of the Trustees, Putnam
Management also manages the fund's other affairs and business.
The fund pays Putnam Management a monthly fee for these services
based on average net assets. See "Expenses summary" and the SAI.
The following ^ officer of Putnam Management ^ has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year stated below:
Business experience
Year (at least 5 years)
---- -----------------
Triet M. Nguyen 1988 Employed as an investment
Senior Vice President professional by Putnam
Management since 1985.
^
The Trust pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its distribution plans (which are in turn allocated to the
relevant class of shares). Expenses of the Trust directly
charged or attributable to the fund will be paid from the assets
of the fund. General expenses of the Trust will be allocated
among and charged to the assets of the fund and any other
portfolio of the Trust on a basis that the Trustees deem fair and
equitable, which may be based on the relative assets of the fund
and any other portfolio of the Trust or the nature of the
services performed and relative applicability to the fund. The
Trust also reimburses Putnam Management for the compensation and
related expenses of certain fund officers and their staff who
provide administrative services. The total reimbursement is
determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
fund securities. In selecting broker-dealers, Putnam Management
may consider research and brokerage services furnished to it and
its affiliates. Subject to seeking the most favorable price and
execution available, Putnam Management may consider sales of fund
shares (and, if permitted by law, of the other Putnam funds) as a
factor in the selection of broker-dealers.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business Trust organized on June 28,
1985. A copy of the Agreement and Declaration of Trust, which is
governed by Massachusetts law, is on file with the Secretary of
State of The Commonwealth of Massachusetts.
The Trust is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Trust may, without
shareholder approval, be divided into two or more series of such
shares and are currently divided into two series of shares: the
fund and Putnam Tax-Free Insured Fund.
Any such series of shares may be further divided without
shareholder approval into two or more classes of shares having
such preferences and special or relative rights and privileges as
the Trustees determine. Only class A, B and M shares are offered
by this prospectus. The fund may also offer other classes of
shares with different sales charges and expenses. Because of
these different sales charges and expenses, the investment
performance of the classes will vary. For more information,
including your eligibility to purchase any other class of shares,
contact your investment dealer or Putnam Mutual Funds (at 1-800-
225-1581).
Each share has one vote, with fractional shares voting
proportionally. Shares vote by individual series on all matters
except (i) when required by the Investment Company Act of 1940,
shares of all series shall be voted in the aggregate and (ii)
when the Trustees have determined that the matter affects only
the interests of one or more series, only shareholders of such
series shall be entitled to vote. Shares of all classes will
vote together as a single class except when otherwise required by
law or as determined by the Trustees. Shares of the fund are
freely transferable, are entitled to dividends from the assets of
the fund as declared by the Trustees, and, if the Trust were
liquidated, would receive the net assets of the fund. The Trust
may suspend the sale of shares of the fund at any time and may
refuse any order to purchase shares. Although the Trust is not
required to hold annual meetings of its shareholders,
shareholders holding at least 10% of the outstanding shares
entitled to vote have the right to call a meeting to elect or
remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
If you own fewer shares than the minimum set by the Trustees
(presently 20 shares), the fund may choose to redeem your shares.
You will receive at least 30 days' written notice before the fund
redeems your shares, and you may purchase additional shares at
any time to avoid a redemption. The fund may also redeem shares
if you own shares above a maximum amount set by the Trustees.
There is presently no maximum, but the Trustees may establish one
at any time, which could apply to both present and future
shareholders.
The Trust's Trustees: George Putnam,* Chairman. President of
the Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; William F. Pounds, Vice
Chairman. Professor of Management, Alfred P. Sloan School of
Management, Massachusetts Institute of Technology; Jameson Adkins
Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice
Chairman, North American Management Corp.; John A. Hill,
Principal and Managing Director, First Reserve Corporation;
Ronald J. Jackson, Former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc., Director of Safety 1st, Inc.,
Trustee of Salem Hospital and the Peabody Essex Museum;
Elizabeth T. Kennan, President Emeritus and Professor, Mount
Holyoke College; Lawrence J. Lasser,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; Robert E. Patterson, Executive Vice
President, Cabot Partners Limited Partnership; Donald S.
Perkins,* Director of various corporations, including Cummins
Engine Company, Lucent Technologies, Inc., Springs Industries,
Inc. and Time Warner Inc.; George Putnam, III,* President, New
Generation Research, Inc.^; A.J.C. Smith,* Chairman, Chief
Executive Officer and Director, Marsh & McLennan Companies, Inc.;
and W. Nicholas Thorndike, Director of various corporations and
charitable organizations, including Data General Corporation,
Bradley Real Estate, Inc. and Providence Journal Co. Also,
Trustee of Massachusetts General Hospital and Eastern Utilities
Associates. The Trustees are also Trustees of the other Putnam
funds. Those marked with an asterisk (*) are or may be deemed to
be "interested persons" of the Trust, Putnam Management or Putnam
Mutual Funds.
<PAGE>
About Your Investment
ALTERNATIVE SALES ARRANGEMENTS
Class A shares. An investor who purchases class A shares pays a
sales charge at the time of purchase. As a result, class A
shares are not subject to any charges when they are redeemed,
except for certain sales at net asset value that are subject to a
contingent deferred sales charge ("CDSC"). Certain purchases of
class A shares qualify for reduced sales charges. Class A shares
bear a lower 12b-1 fee than class B and class M shares. See "How
to buy shares -- Class A shares" and "Distribution plans."
Class B shares. Class B shares are sold without an initial sales
charge, but are subject to a CDSC if redeemed within a specified
period after purchase. Class B shares also bear a higher 12b-1
fee than class A and class M shares. Class B shares
automatically convert into class A shares, based on relative net
asset value, approximately eight years after purchase. For more
information about the conversion of class B shares, see the SAI.
This discussion includes information about how shares acquired
through reinvestment of distributions are treated for conversion
purposes. The discussion also notes certain circumstances under
which a conversion may not occur. Class B shares provide an
investor the benefit of putting all of the investor's dollars to
work from the time the investment is made. Until conversion,
class B shares will have a higher expense ratio and pay lower
dividends than class A and class M shares because of the higher
12b-1 fee. See "How to buy shares -- Class B shares" and
"Distribution plans."
Class M shares. An investor who purchases class M shares pays a
sales charge at the time of purchase that is lower than the sales
charge applicable to class A shares. Certain purchases of class
M shares qualify for reduced sales charges. Class M shares bear
a 12b-1 fee that is lower than class B shares but higher than
class A shares. Class M shares are not subject to any CDSC and
do not convert into any other class of shares. See "How to buy
shares -- Class M shares" and "Distribution plans."
Which arrangement is best for you? The decision as to which
class of shares provides a more suitable investment for an
investor depends on a number of factors, including the amount and
intended length of the investment. Investors making investments
that qualify for reduced sales charges might consider class A
shares or class M shares. Investors who prefer not to pay an
initial sales charge might consider class B shares. Orders for
class B shares for $250,000 or more will be treated as orders for
class A shares or declined. For more information about these
sales arrangements, consult your investment dealer or Putnam <PAGE>
Investor Services. Shares may only be exchanged for shares of
the same class of another Putnam fund. See "How to exchange
shares."
HOW TO BUY SHARES
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment dealers,
through Putnam Mutual Funds (at 1-800-225-1581), or through a
systematic investment plan. If you do not have a dealer, Putnam
Mutual Funds can refer you to one.
Buying shares through Putnam Mutual Funds. Complete an order
form and write a check for the amount you wish to invest, payable
to the fund. Return the completed form and check to Putnam
Mutual Funds, which will act as your agent in purchasing shares
through your designated investment dealer.
Buying shares through systematic investing. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
Class A shares
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
<PAGE>
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 25,000 4.99% 4.75% 4.50%
25,000 but under 100,000 4.71 4.50 4.25
100,000 but under 250,000 3.90 3.75 3.50
250,000 but under 500,000 3.09 3.00 2.75
500,000 but under 1,000,000 2.04 2.00 1.85
- -----------------------------------------------------------------
^ No initial sales charge ^ applies to purchases of class A
shares of $1 million or more. However, a CDSC of 1.00% or 0.50%,
respectively, ^ is imposed on redemptions of these shares within
the first or second year after purchase, unless the ^ dealer of
record waived its commission with ^ Putnam Mutual Funds'
approval. ^
Putnam Mutual Funds pays investment dealers of record commissions
on sales of class A shares of $1 million or more based on an
investor's cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset
value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase
following the end of the prior period. Such commissions are paid
at the rate of 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
Class B shares
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if you redeem shares within a specified
period after purchase, as shown in the table below. ^
Year 1 2 3 4 5 6 7+
- -------------------------------------------------------------
Charge 5% 4% 3% 3% 2% 1% 0%
^ Putnam Mutual Funds pays a sales commission equal to 4.00% of
the amount invested (including a prepaid service fee of 0.25% of
the amount invested) to dealers who sell class B shares. These
commissions are not paid on exchanges from other Putnam funds to
investors exempt from the CDSC. ^
<PAGE>
Class M shares
The public offering price of class M shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, at its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 50,000 3.36% 3.25% 3.00%
50,000 but under 100,000 2.30 2.25 2.00
100,000 but under 250,000 1.52 1.50 1.25
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above NONE NONE NONE
Sales charges will not apply to class M shares purchased with
redemption proceeds received within the prior 90 days from non-
Putnam mutual funds on which the investor paid a front-end or a
contingent deferred sales charge. Members of qualified groups
may also purchase class M shares without a sales charge.
General
You may be eligible to buy fund shares at reduced sales charges
or to sell shares without a CDSC.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan, qualified ^
benefit plans and other plans. Descriptions are also included in
the order form and in the SAI.
Class A, class B and class M shares are available at net asset
value without an initial sales charge or a CDSC to current and
retired Trustees (and their families), current and retired
employees (and their families) of Putnam Management and
affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with
Putnam Mutual Funds, employees (and their families) of financial
institutions having sales agreements with Putnam Mutual Funds (or
otherwise having an arrangement with a broker-dealer or financial
institution with respect to sales of fund shares), financial
institution trust departments investing an aggregate of $1
million or more in Putnam funds, clients of certain
administrators of tax-qualified plans, employee benefit plans of
companies with more than 750 employees, tax-qualified plans when
proceeds from repayments of loans to participants are invested
(or reinvested) in Putnam funds, "wrap accounts" for the benefit
of clients of broker-dealers, financial institutions or financial
planners adhering to certain standards established by Putnam
Mutual Funds and investors meeting certain requirements who sold
shares of certain Putnam closed-end funds pursuant to a tender
offer by the closed-end fund.
In addition, shares are available at net asset value without an
initial sales charge or a CDSC in connection with the acquisition
by the fund of assets of an investment company or personal
holding company. The CDSC will be waived on redemptions of
shares arising out of the death or post-purchase disability of a
shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the shares subject to a
systematic withdrawal plan may also be redeemed each year without
a CDSC. The SAI contains additional information about purchasing
shares at reduced sales charges.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
fund shares at net asset value.
If you are considering redeeming or ^ transferring shares to
another person shortly after purchase, you should pay for those
shares with a certified check to avoid any delay in redemption^
or transfer. Otherwise, payment may be delayed until the
purchase price of those shares has been collected or, if you
redeem by telephone, until 15 calendar days after the purchase
date. To eliminate the need for safekeeping, certificates will
not be issued for your shares unless you request them.
In determining whether a CDSC is payable on any redemption,
shares not subject to any charge will be redeemed first, followed
by shares held longest during the CDSC period. Any CDSC will be
based on the lower of the shares' cost and net asset value. For
this purpose, the amount of any increase in a share's value above
its initial purchase price is not regarded as a share exempt from
the CDSC. Thus, when you redeem a share that has appreciated in
value during the CDSC period, a CDSC is assessed on its initial
purchase price. Any shares acquired by reinvestment of
distributions will be redeemed without a CDSC. For information on
how sales charges are calculated if you exchange your shares, see
"How to exchange shares." Putnam Mutual Funds receives the
entire amount of any CDSC you pay. See the SAI for more
information about the CDSC. The CDSC applicable to shares of the
fund issued prior to August 23, 1993 is calculated in a different
manner than the CDSC described above. For further information
consult your dealer or Putnam Investor Services.
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLANS
^ The fund has adopted distribution ^ plans to compensate Putnam
Mutual Funds for services provided and expenses incurred by it as
principal underwriter of fund shares, including the payments to
dealers mentioned below. The plans provide for payments by the
fund to Putnam Mutual Funds at ^ annual rates (expressed as a
percentage of average net assets) of up to 0.35% ^ on class A
shares and 1.00% on class B and class M shares. The Trustees
currently limit payments ^ on class A, class B and class M shares
to 0.20%, 0.85% and 0.50% of average net assets, respectively.
Putnam Mutual Funds ^ compensates qualifying dealers (including,
for this purpose, certain financial institutions) ^ for sales of
^ shares and the maintenance of shareholder accounts.
^ Putnam Mutual Funds makes quarterly payments ^ to dealers at
the annual rate of up to 0.20% of the average net asset value of
class A shares. No payments are made during the first ^ year
after purchase on shares purchased at net asset value by
shareholders investing $1 million or more^, unless the
shareholder has made arrangements with Putnam Mutual Funds and
the dealer of record has waived the sales commission.
Putnam Mutual Funds makes quarterly payments to dealers at the
annual rate of 0.20% and 0.25% of ^ the average net asset value
of class B shares outstanding as of March 31, 1990 and acquired
after that date, respectively, except for the first year, for
which service fees are prepaid at the time of sale as described
above. ^ Putnam Mutual Funds makes quarterly payments to dealers
at the annual rate of 0.40% of ^ the average net asset value of
class ^ M shares. ^
Putnam Mutual Funds may suspend or modify ^ its payments ^ to
dealers. ^ The payments are also subject to the continuation of
the relevant distribution plan, the terms of service agreements
between dealers and Putnam Mutual Funds, and any applicable
limits imposed by the National Association of Securities Dealers,
Inc.
^
You can sell your shares to the fund any day the New York Stock
Exchange is open, either directly to the fund or through your
investment dealer. The fund will only redeem shares for which it
has received payment.
Selling shares directly to your fund. Send a signed letter of
instruction or stock power form to Putnam Investor Services,
along with any certificates that represent shares you want to
sell. The price you will receive is the next net asset value
calculated after the fund receives your request in proper form
less any applicable CDSC. In order to receive that day's net
asset value, Putnam Investor Services must receive your request
before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more,
the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Putnam
Investor Services and many commercial banks.
If you want your redemption proceeds sent to an address other
than your address as it appears on Putnam's records, a signature
guarantee is required. Putnam Investor Services usually requires
additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
Contact Putnam Investor Services for details.
Your fund generally sends you payment for your shares the
business day after your request is received. Under unusual
circumstances, the fund may suspend redemptions, or postpone
payment for more than seven days, as permitted by federal
securities law.
You may use Putnam's Telephone Redemption Privilege to redeem
shares valued up to $100,000 ^ unless you have notified Putnam
Investor Services of an address change within the preceding 15
days. Unless an investor indicates otherwise on the account
application, Putnam Investor Services will be authorized to act
upon redemption and transfer instructions received by telephone
from a shareholder, or any person claiming to act as his or her
representative, who can provide Putnam Investor Services with his
or her account registration and address as it appears on Putnam
Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. For information,
consult Putnam Investor Services.
During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Putnam Investor
Services by telephone. In this event, you may wish to submit a
written redemption request, as described above, or contact your
investment dealer, as described below. The Telephone Redemption
Privilege is not available if you were issued certificates for
shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer must
receive your request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for
its services.
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value beginning 15 days
after purchase. Not all Putnam funds offer all classes of
shares. If you exchange shares subject to a CDSC, the
transaction will not be subject to the CDSC. However, when you
redeem the shares acquired through the exchange, the redemption
may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the
schedule of any fund into or from which you have exchanged your
shares that would result in your paying the highest CDSC
applicable to your class of shares. For purposes of computing
the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be
affected by any exchange.
To exchange your shares, simply complete an Exchange
Authorization Form and send it to Putnam Investor Services. The
form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares
and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available for amounts up to
$500,000. Putnam Investor Services' procedures for telephonic
transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued
certificates for shares that remain outstanding. Ask your
investment dealer or Putnam Investor Services for prospectuses of
other Putnam funds. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where Putnam Management or the Trustees
believe doing so would be in the best interests of your fund, the
fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Consult Putnam Investor Services before requesting an
exchange. See the SAI to find out more about the exchange
privilege.
HOW THE FUND VALUES ITS SHARES
The fund calculates the net asset value of a share of each class
by dividing the total value of its assets, less liabilities, by
the number of its shares outstanding. Shares are valued as of
the close of regular trading on the New York Stock Exchange each
day the Exchange is open.
Tax-exempt securities are valued on the basis of valuations
provided by a pricing service approved by the Trustees, which
uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in
determining value. The fund believes that reliable market
quotations generally are not readily available for purposes of
valuing its portfolio securities. As a result, it is likely that
most of the valuations provided by a pricing service will be
based upon fair value determined on the basis of the factors
listed above.
Non-tax-exempt securities for which market quotations are readily
available are valued at market value. Short-term investments
that will mature in 60 days or less are valued at amortized cost,
which approximates market value. All other securities and assets
are valued at their fair value following procedures approved by
the Trustees.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
The fund declares all of its net interest income as a
distribution on each day it is open for business. Net interest
income consists of interest accrued on portfolio investments,
less accrued expenses, computed in each case since the most
recent determination of net asset value. Normally, the fund pays
distributions of net interest income monthly. The fund will
distribute at least annually all net realized capital gains, if
any, after applying any available capital loss carryovers. A
capital loss carryover is currently available. Distributions
paid on class A shares will generally be greater than those paid
on class B and class M shares because expenses attributable to
class B and class M shares will generally be higher.
You begin earning distributions on the business day after Putnam
Mutual Funds receives payment for your shares. It is your
responsibility to see that your dealer forwards payment promptly.
You can choose from three distribution options:
- - Reinvest all distributions in additional shares without a
sales charge;
- - Receive distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares without a sales charge; or
- - Receive all distributions in cash.
You can change your distribution option by notifying Putnam
Investor Services in writing. If you do not select an option
when you open your account, all distributions will be reinvested.
All distributions not paid in cash will be reinvested in shares
of the class on which the distributions are paid. You will
receive a statement confirming reinvestment of distributions in
additional fund shares (or in shares of other Putnam funds for
Dividends Plus accounts) promptly following the quarter in which
the reinvestment occurs.
If a check representing a fund distribution is not cashed within
a specified period, Putnam Investor Services will notify you that
you have the option of requesting another check or reinvesting
the distribution in the fund or in another Putnam fund. If
Putnam Investor Services does not receive your election, the
distribution will be reinvested in the fund. Similarly, if
correspondence sent by the fund or Putnam Investor Services is
returned as "undeliverable," fund distributions will
automatically be reinvested in the fund or in another Putnam
fund.
The fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on
income and gains it distributes to shareholders. The fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis.
Fund distributions designated as "exempt-interest dividends" are
not generally subject to federal income tax. However, if you
receive social security or railroad retirement benefits, you
should consult your tax adviser to determine what effect, if any,
an investment in the fund may have on the taxation of your
benefits. In addition, an investment in the fund may result in
liability for federal alternative minimum tax and for state and
local taxes, for both individual and corporate shareholders.
The fund may at times purchase tax-exempt securities at a
discount from the price at which they were originally issued,
especially during periods of rising interest rates. For federal
income tax purposes, some or all of this market discount will be
included in the fund's ordinary income and will be taxable to you
as such when it is distributed to you.
Fund distributions other than exempt-interest dividends will be
taxable to you as ordinary income, except that any distributions
of net long-term capital gains will be taxable as such,
regardless of how long you have held the shares. Distributions
will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions.
Early in each year Putnam Investor Services will notify you of
the amount and tax status of distributions paid to you by the
fund for the preceding year.
The foregoing is a summary of certain federal income tax
consequences of investing in the fund. You should consult your
tax adviser to determine the precise effect of an investment in
the fund on your particular tax situation (including possible
liability for federal alternative minimum tax and state and local
taxes).
<PAGE>
About Putnam Investments, Inc.
Putnam Management has been managing mutual funds since 1937.
Putnam Mutual Funds is the principal underwriter of the Trust.
Putnam Fiduciary Trust Company is the custodian of the Trust.
Putnam Investor Services, a division of Putnam Fiduciary Trust
Company, is the investor servicing and transfer agent for the
Trust.
Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary
Trust Company are subsidiaries of Putnam Investments, Inc., which
is wholly owned by Marsh & McLennan Companies, Inc., a publicly-
owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
<PAGE>
Appendix
SECURITIES RATINGS
The following rating services describe rated securities as
follows:
Moody's Investors Services, Inc.
Bonds
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
(The fund will invest principally in securities in the following
rating categories:)
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Notes
MIG 1/VMIG 1 -- This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins
of protection are ample although not so large as in the preceding
group.
Commercial paper
Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- -- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- -- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics
cited above to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
Standard & Poor's
Bonds
AAA -- Debt rated `AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Debt rated `AA' has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only
in small degree.
A -- Debt rated `A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
(The fund will invest principally in securities in the following
rating categories:)
BBB -- Debt rated `BBB' is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
BB -- Debt rated `BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied `BBB-' rating.
B -- Debt rated `B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The `B' rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied `BB' or `BB-' rating.
CCC -- Debt rated `CCC' has a currently identifiable
vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `B' or `B-'
rating.
CC -- The rating `CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied `CCC'-
rating.
C -- The rating `C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied `CCC-' debt
rating. The `C' rating may be used to cover a situation where
bankruptcy petition has been filed, but debt service payments are
continued.
D -- Bonds rated `D' are in payment default. The `D' rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The `D' rating also will
be used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
Notes
SP-1 -- Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over
the term of the notes.
Commercial paper
A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated `A-1'.
^ Duff & Phelps Corporation
Long-Term Debt
AAA -- Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A+, A, A- -- Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within this category.
B+, B, B- -- Below investment grade and possessing risk that
obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a
higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can
be substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
Fitch Investors Service, Inc.:
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated AAA.
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB -- Bonds considered to be speculative. The obligor's ability
to pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B -- Bonds are considered highly speculative. Bonds in this class
are lightly protected as to the obligor's ability to pay interest
over the life of the issue and repay principal when due.
CCC -- Bonds have certain characteristics which, with passing of
time, could lead to the possibility of default on either
principal or interest payments.
CC -- Bonds are minimally protected. Default in payment of
interest and/or principal sees probable.
<PAGE>
Make the most of your Putnam privileges
The following services are available to you as a Putnam mutual
fund shareholder.
SYSTEMATIC INVESTMENT PLAN Invest as much as you wish ($25 or
more) on any business day of the month except for the 29th, 30th,
or 31st. The amount you choose will be automatically transferred
each month from your checking or savings account.
SYSTEMATIC WITHDRAWAL Make regular withdrawals of $50 or more
monthly, quarterly, or semiannually from your Putnam mutual fund
account valued at $10,000 or more. Your automatic withdrawal may
be made on any business day of the month except for the 29th,
30th, or 31st.
SYSTEMATIC EXCHANGE Transfer assets automatically from one
Putnam account to another on a regular, prearranged basis. There
is no additional charge for this service.
FREE EXCHANGE PRIVILEGE Exchange money between Putnam funds in
the same class of shares without charge. The exchange privilege
allows you to adjust your investments as your objectives change.
A signature guarantee is required for exchanges of more than
$500,000 and shares of all Putnam funds may not be available to
all investors.
Investors may not maintain, within the same fund, simultaneous
plans for systematic investment or exchange (into the fund) and
systematic withdrawal or exchange (out of the fund). These
privileges are subject to change or termination.
For more information about any of these services and privileges,
call your investment advisor or a Putnam customer service
representative toll free at 1-800-225-1581.
<PAGE>
Putnam Family of Funds*
PUTNAM GROWTH FUNDS
Putnam Asia Pacific Growth Fund
Putnam Capital Appreciation Fund
Putnam Diversified Equity Trust
Putnam Emerging Markets Fund
Putnam Europe Growth Fund
Putnam Global Growth Fund
Putnam Global Natural Resources Fund
Putnam Health Sciences Trust
Putnam International Growth Fund
Putnam International New Opportunities Fund
Putnam International Voyager Fund
Putnam Investors Fund
Putnam New Opportunities Fund
Putnam OTC & Emerging Growth Fund+
Putnam Vista Fund
Putnam Voyager Fund
Putnam Voyager Fund II
PUTNAM GROWTH AND INCOME FUNDS
Putnam Balanced Retirement Fund
Putnam Convertible Income-Growth Trust
Putnam Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Putnam Growth and Income Fund II
Putnam International Growth and Income Fund
Putnam New Value Fund
Putnam Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Putnam American Government Income Fund
Putnam Diversified Income Trust
Putnam Diversified Income Trust II
Putnam Federal Income Trust
Putnam Global Governmental Income Trust
Putnam High Yield Advantage Fund
Putnam High Yield Total Return Fund
Putnam High Yield Trust++
Putnam Income Fund
Putnam Intermediate U.S. Government Income Fund
Putnam Preferred Income Fund
Putnam U.S. Government Income Trust
<PAGE>
PUTNAM TAX-FREE INCOME FUNDS
Putnam Municipal Income Fund
Putnam Tax Exempt Income Fund
Putnam Tax-Free High Yield Fund
Putnam Tax-Free Insured Fund
Putnam State tax-free income funds+++
Arizona, California, Florida,
Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio, and
Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that
spread your money across a variety of stocks, bonds, and money
market investments seeking to help maximize your return and
reduce your risk.
The three portfolios:
Balanced Portfolio
Conservative Portfolio
Growth Portfolio
PUTNAM MONEY MARKET FUNDS**
Putnam Money Market Fund
Putnam California Tax Exempt Money Market Fund
Putnam New York Tax Exempt Money Market Fund
Putnam Tax Exempt Money Market Fund
*As of 1/1/97.
+Formerly Putnam OTC Emerging Growth Fund.
++Closed to new investors.
+++Not available in all states.
**Investments in money market funds are neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a steady net asset value of $1.00 per share, although
there is no assurance this net asset value will be maintained in
the future.
Please call your financial advisor or Putnam to obtain a
prospectus for any Putnam fund. It contains more complete
information, including charges and expenses. Read it carefully
before you invest or send money.
<PAGE>
PUTNAM TAX-FREE HIGH YIELD FUND
One Post Office Square
Boston, MA 02109
FUND INFORMATION:
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
