PROSPECTUS
NOVEMBER 30,
1996 , as
revised MAY 30,
1997
Putnam Tax-Free Insured 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 Insured 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.
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.
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.
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 0.59% 0.20% 0.11% 0.90%
Class B 0.59% 0.60% 0.14% 1.33%
Class M 0.59% 0.50% 0.10% 1.19%
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. The 12b-1 fees for class B
shares reflect amounts currently payable under the class B
distribution plan. Actual 12b-1 fees and total fund operating
expenses for the class B shares were 0.85% and 1.58%,
respectively.
<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 $75 $95 $153
Class B $64 $72 $93 $148 ***
Class B (no redemption) $14 $42 $73 $148 ***
Class M $44 $69 $96 $172
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
June 1, 1995
(commencement
Year ended of
operations)Year ended
July 31 to July 31 July 31
1996 1995 1996
Class M Class A
<S> <C> <C> <C>
Net asset value, beginning of period $14.86
$15.11$14.86
Investment operations
Net investment income .76 .12 .81
Net realized and unrealized
gain (loss) on investments .08 (.25) .08
Total from investment operations .84 (.13) .89
Less distributions:
From net investment income (.76) (.12) (.81)
From net realized gain on investments -- --
- --
In excess of net realized gain on
investments -- -- --
Total distributions (.76) (.12) (.81)
Net asset value, end of period $14.94 $14.86 $14.94
Total investment return at net
asset value (%) (a) 5.74 (0.87)(c) 6.06
Net assets, end of period (in thousands) $325
$17$196,948
Ratio of expenses to average net assets (%) (b)
1.19.14(c) .90
Ratio of net investment income to average
net assets (%) 4.99 .73(c) 5.37
Portfolio turnover (%) 54.58 37.62 54.58
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
For the period
September 20, 1993
(commencement of
operations) to Year ended July 31
July 31
1995 1994 1996 1995 1994 1993
Class A Class B
<C> <C> <C> <C> <C>
$14.67 $15.88 $14.87 $14.68 $15.50
$15.42
.83 .73 .71 .73 .74 .75
.19 (1.12) .09 .20 (.73) .28
1.02 (.39) .80 .93 .01
1.03
(.82) (.72) (.71) (.73) (.73)
(.75)
-- -- -- -- -- (.20)
(.01) (.10) -- (.01) (.10)
--
(.83) (.82) (.71) (.74) (.83)
(.95)
$14.86 $14.67 $14.96 $14.87 $14.68
$15.50
7.21 (2.49)(c) 5.44 6.53 ---
7.00
$184,241 $143,079 $354,431 $377,443 $432,895
$572,659
.89 .80(c) 1.58 1.54 1.53 1.74
5.68 4.73(c) 4.72 5.05 4.81
4.88
37.62 47.72 54.58 37.62 47.72
42.01
/TABLE
<PAGE>
<TABLE>
<CAPTION>
Year ended July 31
<C> <C> <C> <C> <C>
19921991 1990 1989 1988 1987
Class B
$14.38 $14.25 $14.79 $13.85$13.77 $13.91
.76 .79 .83 .85 .85 .84
1.14.14 (.06) .93 .11 (.10)
1.90.93 .77 1.78 .96 .74
(.77) (.80) (.83) (.84) (.85) (.84)
(.09) -- (.48) -- (.03) (.04)
-- -- -- -- -- --
(.86)(.80) (1.31) (.84) (.88) (.88)
$15.42 $14.38 $14.25 $14.79$13.85 $13.77
13.63 6.79 5.49 13.31 7.24 5.31
$466,135 $359,465 $309,050 $293,127 $268,004
$264,916
1.791.68 1.63 1.61 1.58 1.61
5.165.60 5.81 6.01 6.20 5.83
66.18 54.69 86.29 201.21197.29 85.49
(a) Total investment return assumes dividend reinvestment and
does not reflect the effect of
sales charges.
(b) The ratio of expenses to average net assets for the period
ended July 31, 1996 includes
amounts paid through expenses offset arrangements. Prior period
ratios exclude these
amounts.
(c) Not annualized.
</TABLE>
<PAGE>
OBJECTIVE
Putnam Tax-Free Insured 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 Insured 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 invests in tax-exempt securities which are insured,
rated AAA or Aaa (SP-1,
Prime-1, A-1+ or MIG-1 in the case of notes or commercial paper),
or backed by the U.S.
government. Insurance guarantees payment of principal and
interest, but not market value.
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 a portion of its assets in
money market instruments or in
cash. Putnam Investment Management, Inc., the fund's investment
manager ("Putnam
Management"), expects the fund will generally invest in
tax-exempt securities of longer
maturities (10 years or more), but the fund may invest in
tax-exempt securities having a
broad range of maturities.
Investments by the fund in tax-exempt securities will be limited
to securities rated at
least Baa or BBB by a nationally recognized securities
rating agency,
such as Standard & Poor's ("S&P") or Moody's Investors
Service, Inc. ("Moody's")
, or unrated securities that Putnam Management
determines are of
comparable quality. The rating services' descriptions of the
four highest grades
of debt securities are included in the SAI. Securities rated Baa
or BBB (and comparable
unrated securities) lack outstanding investment characteristics,
have speculative characteristics
and may be more likely to exhibit a weakened capacity to pay
interest and repay principal
under adverse economic conditions. 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.
In addition, at the time of purchase and so long as a tax-exempt
security is held by the fund,
each such security must be covered by insurance guaranteeing the
timely payment of
principal and interest, unless a security is, at the time of
purchase, (i) rated AAA or Aaa, in
the case of a bond, or SP-1, MIG-1, Prime-1, or A-1+, in the case
of a note or commercial
paper, or (ii) backed by the full faith and credit of the U.S.
government. Under normal
market conditions it is expected that at least 70% of the fund's
tax-exempt securities will be
protected by insurance. Such insurance may be provided under (i)
a "new issue" insurance
policy obtained by the issuer or underwriter of a security, (ii)
a "secondary market" policy
purchased by the fund with respect to a security, or (iii) a
portfolio insurance policy
maintained by the fund. In each case, such insurance policies
guarantee only the timely
payment of principal and interest on the insured tax-exempt
securities. Market value, which
may fluctuate due to changes in interest rates or factors
affecting the credit of the issuer or
the insurer, is not insured. These forms of insurance, which are
more fully described below
under "Insurance," are available from a number of insurance
companies. The fund will only
acquire insurance from, and purchase tax-exempt securities
insured by, companies whose
claims paying ability is rated AAA or Aaa at the time of
purchase. Changes in the financial
condition of an insurer could result in a subsequent reduction or
withdrawal of such rating.
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.
Certain investment grade securities share some of the risk
factors discussed above with
respect to lower-rated securities.
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.
<PAGE>
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.
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, an
insurer's claims paying ability and changes in the ability of an
issuer to make payments of
interest and principal may also affect the value of these
investments. The portfolio insurance
covering tax-exempt securities purchased by the fund does not
insure against changes in
market value. 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.
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 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.
For additional information concerning the risks associated with
investing in securities in the
lower rating categories, see the SAI.
Insurance
The three types of insurance are "new issue" insurance, portfolio
insurance and "secondary
market" insurance. The fund may obtain a portfolio insurance
policy which would guarantee
payment of principal and interest on eligible tax-exempt
securities owned by the fund which
are not otherwise insured by "new issue" insurance or "secondary
market" insurance and
which would require insurance coverage under the fund's
investment policies. Under a
portfolio insurance policy, the insurer may from time to time
establish criteria for
determining tax-exempt securities eligible for insurance. The
fund will not purchase a tax-
exempt security which is not eligible for coverage under a
portfolio policy unless the security
is otherwise insured or is exempt from the fund's insurance
requirements.
Unlike tax-exempt securities covered by "new issue" insurance,
which continues in force for
the life of the security, a tax-exempt security will be entitled
to the benefit of insurance
under a portfolio policy only so long as the fund owns the
security. If the fund sells the
security, the insurance protection ends. As a result, the fund
will generally not attribute any
value to portfolio insurance in valuing its investments.
However, if any tax-exempt security
is in default or presents a material risk of default, the fund
intends to continue to hold the
security in its portfolio and to place a value on the insurance
protection. Thus, Putnam
Management's ability to manage the portfolio of the fund or to
obtain portfolio insurance
from other insurers may be limited to the extent that it holds
defaulted securities. Portfolio
insurance cannot be cancelled by the insurer with respect to any
tax-exempt security already
held by the fund except for non-payment of premiums. However,
there is no assurance that
portfolio insurance will be available at reasonable premium
rates.
The fund may at times purchase "secondary market" insurance on
tax-exempt securities
which it holds or acquires. Like "new issue" insurance, this
insurance continues in force for
the life of the security for the benefit of any holder of the
security. The purchase of
secondary market insurance would be reflected in the market value
of the security and, if
available, may enable the fund to dispose of a defaulted security
at a price similar to that of
comparable, undefaulted securities.
Insurance premiums paid by the fund for portfolio insurance would
be treated as an expense
of the fund, reducing the fund's net investment income. While
the amount of premiums
depends on the composition of the fund's portfolio, Putnam
Management estimates that, at
current rates, the fund's annual premium expense for portfolio
insurance, if purchased,
would range from 0.1% to 0.5% of that portion of the fund's
assets covered by such
insurance. Premiums paid for secondary market insurance,
however, would be treated as
capital costs, increasing the fund's cost basis in its
investments and reducing its effective
yield. During fiscal 1996, the fund did not pay any insurance
premiums.
Concentration policies
The fund will not invest more than 25% of its total assets in any
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 such 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
and private activity bonds 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."
<PAGE>
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, which are
traded on the Chicago Board of Trade. 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 rate 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 for
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.
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 assets) 5% of its total
assets in securities of any
one issuer other than the U.S. government
(insurance policies of which the fund is a beneficiary are
not considered
securities for purposes of this restriction);* 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)
---- -------------------
Richard P. Wyke 1988 Employed by Putnam Management
Senior Vice President since 1987.
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
High Yield 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.
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
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 $47
million and 0.25% thereafter.
Class B shares
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if
you redeem shares within a specified period after purchase, as
shown in the table below.
Year 1 2 3 4 5 6 7+
- -------------------------------------------------------------
Charge 5% 4% 3% 3% 2% 1% 0%
Putnam Mutual Funds pays a sales commission equal to 4.00% of
the amount invested
(including a prepaid service fee of 0.25% of the amount invested)
to dealers who sell class B
shares. These commissions are not paid on exchanges from other
Putnam funds or on sales
to investors exempt from the CDSC
Class M shares
The public offering price of class M shares is the net asset
value plus a sales charge that
varies depending on the size of your purchase. The fund receives
the net asset value. The
sales charge is allocated between your investment dealer and
Putnam Mutual Funds as shown
in the following table, except when Putnam Mutual Funds, at its
discretion, allocates the
entire amount to your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) 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 shares 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. 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$,
0.60% and 0.50% of average net assets , respectively.
Putnam Mutual Funds has agreed to waive the class B
12b-1 fee in its
entirety through December 31, 1997. Payments to dealers
are not affected by
this waiver. The table of fees and expenses set forth under the
heading "About the fund
Expenses summary" has not been restated to reflect this waiver.
With Trustee approval, the
waiver may be terminated earlier, in which event class B
shareholders would be notified and
the prospectus revised.
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 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 rates 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.
HOW TO SELL SHARES
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.
<PAGE>
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.
<PAGE>
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).
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.
<PAGE>
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>
Make the most of your Putnam privileges
As a Putnam mutual fund shareholder, you have access to a number
of services that can help
you build a more effective and flexible financial program. Here
are some of the ways you
can use these privileges to make the most of your Putnam mutual
fund investment.
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.
DIVIDENDS PLUS
Diversify your portfolio by investing dividends and other
distributions from one Putnam fund
automatically into another at net asset value.
STATEMENT OF INTENTION
To reduce a front-end sales charge, you may agree to invest a
minimum dollar amount over
13 months. Depending on your fund, the minimum is $25,000,
$50,000, or $100,000.
Whenever you make an investment under this arrangement, you or
your investment advisor
should notify Putnam that a Statement of Intention is in effect.
<PAGE>
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 TAX-FREE INSURED 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
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)
5.449.69(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.
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
