Prospectus
NOVEMBER 30, 1999
Putnam Tax-Free Insured Fund
Class A, B, C and M shares
Investment Category: Tax-Advantaged
This prospectus explains what you should know about this mutual
fund before you invest. Please read it carefully.
Putnam Investment Management, Inc. (Putnam Management), which has
managed mutual funds since 1937, manages the fund. These
securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the
accuracy or adequacy of this prospectus. Any statement to the
contrary is a crime.
CONTENTS
^ 2 Fund summary
^ 2 Goal
^ 2 Main investment strategies
^ 2 Main risks
^ 2 Performance information
^ 4 Fees and expenses
^ 5 What are the fund's main investment strategies and related
risks?
^ 9 Who manages the fund?
^ 10 How does the fund price its shares?
^ 11 How do I buy fund shares?
^ 14 How do I sell fund shares?
^ 16 How do I exchange fund shares?
^ 17 Fund distributions and taxes
^ 18 Financial highlights
LOGO
BOSTON ( LONDON(TOKYO
Fund summary
GOAL
The fund seeks high current income exempt from federal income tax.
MAIN INVESTMENT STRATEGIES - TAX EXEMPT BONDS
We invest mainly in bonds that
* pay interest that is exempt from federal income tax but may be
subject to the federal alternative minimum tax (AMT),^
* are rated AAA ^(or the equivalent), insured (to pay principal
and interest) and/or guaranteed by the U.S. government and^
* have intermediate- to long-term maturities (three years or
longer).
MAIN RISKS
The main risks that could adversely affect the value of this
fund's shares and the total return on your investment include:
* The risk that movements in the securities markets will adversely
affect the value of the fund's investments. This risk includes
interest rate risk, which means that the prices of the fund's
investments are likely to fall if interest rates rise. Interest
rate risk is generally highest for investments with long
maturities.
* The risk that the issuers or insurers of the fund's investments
will not make or will be perceived to be unlikely to make timely
payments of interest and principal.
* The risk that interest the fund receives might become taxable or
be determined to be taxable.
You can lose money by investing in the fund. The fund may not
achieve its goals and is not intended as a complete investment
program. An investment in the fund is not a deposit ^ in a bank
and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
PERFORMANCE INFORMATION
The following information provides some indication of the fund's
risks. The chart shows year-to-year changes in the performance of
one of the fund's classes of shares, class B shares. The table
following the chart compares the fund's performance to that of a
broad measure of market performance. Of course, the fund's past
performance is not an indication of future performance.
CALENDAR YEAR TOTAL RETURNS FOR CLASS B SHARES
1998
5.17
1997
8.24
1996
2.69
1995
16.96
1994
- -6.38
1993
11.20
1992
7.16
1991
11.08
1990
5.25
1989
9.80
Performance figures in the bar chart do not reflect the impact of
sales charges. If they did, performance would be less than that
shown. Year-to-date performance through 9/30/99 was ^-3.28%.
During the periods shown in the bar chart, the highest return for
a quarter was 7.09% (quarter ending 3/31/95) and the lowest return
for a quarter was -5.66% (quarter ending 3/31/94).
Average Annual Total Returns (for periods ending 12/31/98)
Past
1 year
Past
5 years
Past
10 years
Class A
- -0.07%
4.38%
6.62%
Class B
0.21%
4.74%
6.95%
Class C
3.14%
4.60%
6.63%
Class M
1.19%
4.25%
6.54%
Lehman Brothers Municipal Bond Index
6.48%
6.23%
8.22%
Unlike the bar chart, this performance information reflects the
impact of sales charges. Class A and class M share performance
reflects the current maximum initial sales charges; class B and
class C share performance reflects the maximum applicable deferred
sales charge if shares had been redeemed on 12/31/98 and ^, for
class B ^ assumes conversion to class A shares after eight years.
For periods before the inception of class A shares (9/20/93^),
class C shares (7/26/99) and class M shares (6/1/95^) performance
shown for these classes in the table is based on the performance
of the fund's class B shares, adjusted to reflect the appropriate
sales charge and, in the case of class C shares, the higher 12b-1
fees paid by such shares. The fund's performance is compared to
the Lehman Brothers Municipal Bond Index, an unmanaged index of
long-term fixed-rate investment-grade tax-exempt bonds
representative of the municipal bond market.
FEES AND EXPENSES
This table summarizes the fees and expenses you may pay if you
invest in the fund. Except as noted, expenses are based on the
fund's last fiscal year.
Shareholder Fees (fees paid directly from your investment)
Class A
Class B
Class C
Class M
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage
of the offering price
4.75%
NONE^
NONE^
3.25%^
Maximum Deferred Sales Charge (Load) (as a percentage of the
original purchase price or redemption proceeds, whichever is
lower)
NONE*^
5.00%
1.00%
NONE
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
Management
Fees
Distribution
(12b-1) Fees
Other
Expenses
Total Annual
Fund
Operating
Expenses
Class A
0.58%
0.20%
0.16%
0.94%
Class B
0.58%
0.60%+
0.16%
1.34%
Class C
0.58%
1.00%
0.16%
1.74%
Class M
0.58%
0.50%
0.16%
1.24%
+ The 12b-1 fees for class B shares reflect the maximum amount
expected to be paid under the class B distribution plan.
^* A deferred sales charge of up to 1% may be imposed on certain
redemptions of class A shares bought without an initial sales
charge.
EXAMPLE
^ The example translates ^ expenses ^ shown in the preceding table
into dollar amounts. By doing this, you can more easily compare
the cost of investing in the fund to the cost of investing in
other mutual funds. The example makes certain assumptions. It
assumes that you invest $10,000 in the fund for the time periods
shown and then, except as shown for class B and class C shares,
redeem all your shares at the end of those periods. It also
assumes a 5% return on your investment each year and that the
fund's operating expenses remain the same. The example is
hypothetical; your actual costs and returns may be higher or
lower.
1 year
3 years
5 years
10 years
Class A
$566
$760
$970
$1,575
Class B
$636
$725
$934
$1,503*
Class B (no redemption)
$136
$425
$734
$1,503*
Class C
$277
$548
$944
$2,052
Class C (no redemption)
$177
$548
$944
$2,052
Class M
$447
$706
$984
$1,776
* Reflects the conversion of class B shares to class A shares,
which pay lower 12b-1 fees. Conversion occurs no more than eight
years after purchase.
What are ^ the fund's main investment strategies and related
risks?
Any investment carries with it some level of risk that generally
reflects its potential for reward. We normally pursue the fund's
goal by investing at least 80% of the fund's net assets in tax-
exempt securities. This investment policy cannot be changed
without the approval of the fund's shareholders. We will consider,
among other things, credit, interest rate and prepayment risks as
well as general market conditions when deciding whether to buy or
sell investments for the fund. A description of the risks
associated with the fund's main investment strategies follows.
* Tax-exempt investments. These investments are issued by public
authorities or private enterprises to raise money for public
purposes, such as loans for the construction of housing, schools
or hospitals, or to provide temporary financing in anticipation of
the receipt of taxes and other revenue. They also include ^
private activity bonds^ such as industrial development bonds and
other notes of public authorities to finance privately owned or
operated facilities. Changes in law or adverse determinations by
the Internal Revenue Service or state tax authority may make the
income from some of these obligations taxable.
Private activity bonds may be subject to the federal ^ AMT for
individuals. ^ Because these investments are not tax-exempt, we
cannot ^ include them for the purpose of complying with the 80%
investment policy described above. Corporations will be required
to include all tax-exempt interest dividends in determining their
federal AMT. For more information, including possible state and
other taxes, contact your tax advisor.
General obligations. These are backed by the issuer's authority to
levy taxes and are considered an obligation of the issuer. They
are payable from the issuer's general unrestricted revenues,
although payment may depend upon government appropriation or aid
from other governments. These investments may be vulnerable to
legal limits on a government's power to raise revenue or increase
taxes, as well as economic or other developments that can reduce
revenues.
Special revenue obligations. These are payable from revenues
earned by a particular project or other revenue source. These
include ^ private activity bonds such as industrial development
bonds and other notes of public authorities to finance privately
owned or operated facilities. Investors can look only to the
revenue generated by the project or the private company operating
the project rather than the credit of the state or local
government authority issuing the bonds. Special revenue
obligations are typically subject to greater credit risk than
general obligations because of the relatively limited source of
revenue.
* Interest rate risk. The values of bonds and other debt usually
rise and fall in response to changes in interest rates. Declining
interest rates generally raise the value of existing debt
instruments, and rising interest rates generally lower the ^
values of existing debt instruments. Changes in a debt
instrument's ^ values usually will not affect the amount of income
the fund receives from it, but will affect the value of the fund's
shares. Interest rate risk is generally greater for investments
with longer maturities.
Some investments give the issuer the option to call, or redeem,
these investments before their maturity date. If an issuer "calls"
its ^ investments during a time of declining interest rates, we
might have to reinvest the proceeds in an investment offering a
lower yield, and therefore might not benefit from any increase in
value as a result of declining interest rates.
^ "Premium investments"^ offer interest rates higher than
prevailing market rates. ^ However, they involve a greater risk of
loss, because their values tend to decline ^ over time. You ^ may
find it useful to compare the fund's yield, which ^ factors out
the effect of premium securities, with its current dividend rate,
which does not ^ factor out that effect.
* Credit risk. Investors normally expect to be compensated in
proportion to the risk they are assuming. Thus, debt of issuers
with poor credit prospects usually offers higher yields than debt
of issuers with more secure credit. Higher-rated investments
generally offer lower credit risk, but not necessarily lower
interest rate risk. The values of higher-rated investments still
fluctuate in response to changes in interest rates.
Under normal market conditions, we buy investments that are
insured, rated AAA ^ or its equivalent (or Prime-1 or the
equivalent for notes or commercial paper) at the time of purchase
by a nationally recognized securities rating agency, or are
unrated investments that we ^ believe are of comparable quality^,
or backed by the U.S. government. Insurance guarantees payment of
principal and interest, but does not guarantee market value of an
insured investment. In addition, for investments that are insured
or backed by the U.S. government, we will only buy investments
that are investment grade, which means they are rated at least BBB
(or its equivalent) at the time of purchase by a nationally
recognized securities rating agency, or are unrated investments
that we think are of comparable quality. We will not necessarily
sell an investment if its rating is reduced after we buy it.
* Concentration of investments. ^ We make significant investments
in a broad segment of the tax-exempt debt market, such as revenue
bonds for ^ health care facilities, housing or airports^. We may
also make significant investments in the debt of issuers located
in the same state. ^ These investments may cause the value of the
fund's shares to change more than the values of shares of funds ^
that invest in a greater variety of investments. Certain events
may adversely affect all ^ investments within a particular market
segment. Examples ^ include legislation or court decisions ^ or
concerns about ^ pending legislation or court ^ decisions, or
lower demand for the services or products provided by a particular
market segment. Investing in issuers located in the same state
may make the fund more vulnerable to that state's economy and to
issues affecting its tax exempt issuers, such as their ability to
collect revenues to meet payment obligations.
At times, the mutual fund and other accounts ^ that we and our
affiliates^ manage may own all or most of the debt of a particular
public issuer. This concentration of ownership may make it more
difficult to sell, or to determine the fair value of, these
investments.
* Insurance. We expect that at least 70% of the fund's tax-exempt
investments will normally be protected by insurance. This
insurance may be provided under a (1) "new issue" insurance policy
obtained by the issuer or underwriter of an investment (which
provides coverage for the life of the investment), (2) a
"secondary market" policy bought by the fund with respect to an
investment (which provides coverage for the life of the
investment) or (3) a portfolio insurance policy maintained by the
fund (which provides coverage only for as long as the fund holds
the investment). In each case, insurance does not protect the
fund from market fluctuations in the value of an insured security,
but only guarantees timely payment of principal and interest for
such investments. When the fund buys portfolio insurance, it may
be unable to sell investments that are in default or likely to
default, which may limit our ability to manage the fund's
investments. We will only buy insurance from and investments
insured by companies whose claims-paying ability has received (at
the time we buy the investments affected) the highest rating from
at least one of the agencies providing those ratings. The cost of
insurance will be borne by the fund. During fiscal 1999, the fund
did not pay any insurance premiums. ^
> Derivatives. We may engage in a variety of transactions
involving derivatives, such as futures, options, warrants and swap
contracts. Derivatives are financial instruments whose value
depends upon, or is derived from, the value of something else,
such as one or more underlying investments, pools of investments,
indexes or currencies. We may use derivatives both for hedging
and non-hedging purposes. For example, the fund may use
derivatives to increase or decrease its exposure to long- or short-
term interest rates. However, we may also choose not to ^ use
derivatives, based on our evaluation of market conditions or the
availability of suitable derivatives.
Derivatives involve special risks and may result in losses.
The fund depends on our ability to handle these sophisticated
instruments. The prices of derivatives may move in unexpected
ways, especially in abnormal market conditions. Some derivatives
are "leveraged" and therefore may magnify or otherwise increase
investment losses. Our use of derivatives may also cause the fund
to receive taxable income which could increase the taxes payable
by shareholders.
Other risks arise from our potential inability to terminate or
sell derivatives positions. A liquid secondary market may not
always exist for the fund's derivatives positions at any time. In
fact, many over-the-counter instruments (investments not traded on
an exchange) will not be liquid. Over-the-counter instruments
also involve the risk that the other party to the derivative
transaction will not meet its obligations. For further
information about the risks of derivatives, see the statement of
additional information (SAI).
* Alternative strategies. At times we may judge that market
conditions make pursuing ^ the fund's usual investment strategies
inconsistent with the best interests of ^ the shareholders. We
then may temporarily use alternative strategies that are mainly
designed to limit ^ losses, including investing in taxable
obligations. However, we may choose not to use these strategies
for a variety of reasons, even in very volatile market conditions.
These strategies may cause us to miss out on investment
opportunities, and may prevent us from achieving the fund's goal.
* Other investments. In addition to the main investment
strategies described above, we may also make other types of
investments, such as investments in ^ repurchase agreements^ and
forward commitments^ which may produce taxable income and may be
subject to other risks, as described in the statement of
additional information (SAI).
* Changes in policies. The Trustees may change the fund's goal,
investment strategies and other policies without shareholder
approval, except as otherwise indicated.
Who manages the fund?
The fund's Trustees oversee the general conduct of the fund's
business. The Trustees have retained Putnam Management to be the
fund's investment manager, responsible for making investment
decisions for the fund and managing the fund's other affairs and
business. The fund pays Putnam Management a quarterly management
fee for these services based on the fund's average net assets. The
fund paid Putnam Management a management fee of 0.58% of average
net assets for the fund's last fiscal year. Putnam Management's
address is One Post Office Square, Boston, MA 02109.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year shown below. His experience as a
portfolio manager or investment analyst over at least the last
five years is also shown.
Manager Since Experience
Richard P. Wyke 1988 ^ 1987 - Present Putnam
Management ^.
Senior Vice President
Year 2000 issues. The fund could be adversely affected if the
computer systems ^ that we and the fund's other service providers
use do not properly process and calculate date-related information
relating to the end of this century and the beginning of the next.
While year 2000-related computer problems could have a negative
effect on the fund, both in its operations and in its investments,
^ we are working to avoid such problems and to obtain assurances
from service providers that they are taking similar steps. No
assurances, though, can be provided that the fund will not be
adversely impacted by these matters.
How does the fund price its shares?
The price of the fund's shares is based on its net asset value
(NAV). The NAV per share of each class equals the total value of
its assets, less its liabilities, divided by the number of its
outstanding shares. Shares are only valued as of the close of
regular trading on the New York Stock Exchange each day the
exchange is open.
The fund values its investments for which market quotations are
readily available at market value. It values short-term
investments that will mature within 60 days at amortized cost,
which approximates market value. It values all other investments
and assets at their fair value.
How do I buy fund shares?
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50 ($25
through systematic investing). The fund sells its shares at the
offering price, which is the NAV plus any applicable sales charge.
Your financial advisor or Putnam Investor Services generally must
receive your completed buy order before the close of regular
trading on the New York Stock Exchange for your shares to be
bought at that day's offering price.
You can buy shares
* Through a financial advisor. Your advisor will be responsible
for furnishing all necessary documents to Putnam Investor
Services, and may charge you for his or her services.
* 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
through your advisor or Putnam Investor Services at 1-800-225-
1581.
You may also complete an order form and write a check for the
amount you wish to invest, payable to the fund. Return the check
and completed form to Putnam Mutual Funds.
The fund may periodically close to new purchases of shares or
refuse any order to buy shares if the fund determines that doing
so would be in the best interests of the fund and its
shareholders.
WHICH CLASS OF SHARES IS BEST FOR ME?
This prospectus offers you a choice of four classes of fund
shares: A, B, C and M. This allows you to choose among different
types of sales charges and different levels of ongoing operating
expenses, as illustrated in the "Fees and expenses" section. The
class of shares that is best for you depends on a number of
factors, including the amount you plan to invest and how long you
plan to hold the shares. Here is a summary of the differences
among the classes of shares:
Class A shares
* Initial sales charge of up to 4.75%
* Lower sales charge for investments of $25,000 or more
* No deferred sales charge (except on certain redemptions of
shares bought without an initial sales charge)
* Lower annual expenses, and higher dividends, than class B, C or
M shares because of lower 12b-1 fee
Class B shares
* No initial sales charge; your entire investment goes to work for
you
* Deferred sales charge of up to ^ 5.00% if you sell shares within
6 years after you bought them
* Higher annual expenses, and lower dividends, than class A or M
shares because of higher 12b-1 fee
* Convert automatically to class A shares after 8 years, reducing
the future 12b-1 fee (may convert sooner in some cases)
* Orders for class B shares for ^ $250,000 or more are treated as
orders for class A shares or refused
Class C shares
* No initial sales charge; your entire investment goes to work for
you
* Deferred sales charge of up to 1.00% if you sell shares within
one year after you bought them
* Higher annual expenses, and lower dividends, than class A or M
shares because of higher 12b-1 fee
* No conversion to class A shares, so future 12b-1 fee does not
decrease
* Orders of $1,000,000 or more and orders ^ that because of a
right of accumulation or statement of intent would qualify for the
purchase of class A shares without an initial sales charge will be
treated as orders for class A shares or declined.
Class M shares
* Initial sales charge of up to 3.25%
* Lower sales charges for ^ investments of $50,000 or more
* No deferred sales charge
* Lower annual expenses, and higher dividends, than class B or
class C shares because of lower 12b-1 fee
* Higher annual expenses, and lower dividends, than class A shares
because of higher 12b-1 fee
* No conversion to class A shares, so future 12b-1 fee does not
decrease
Initial sales charges for class A and M shares
Class A sales charge Class M sales charge
as a percentage of: as a percentage of:
------------------------------ --------------------------
- --
Amount of purchase Net amount Offering Net amount
Offering
at offering price ($) invested price* invested price*
- ------------------------------------------------------------------
- --------------------------------------------------------
Under 25,000 4.99% 4.75% 3.36% 3.25%
25,000 but under 50,000 4.71 4.50 3.36 3.25
50,000 but under 100,000 4.71 4.50 2.30 2.25
100,000 but under 250,000 3.90 3.75 1.52 1.50
250,000 but under 500,000 3.09 3.00 1.01 1.00
500,000 but under 1,000,000 2.04 2.00 NONE NONE
1,000,000 and above NONE NONE NONE NONE
- ------------------------------------------------------------------
- ---------------------------------------------------
* Offering price includes sales charge.
Deferred sales charges for class B, class C and certain class A
shares
If you sell (redeem) class B shares within six years after you
bought them, you will generally pay a deferred sales charge
according to the following schedule.
Year after ^ purchase 1 2 3 4 5 6 7+
Charge 5% 4% 3% 3% 2% 1% 0%
A deferred sales charge of up to 1% will apply to class C shares
if redeemed within one year of purchase. A deferred sales charge
of up to 1% may apply to class A shares purchased without an
initial sales charge, if redeemed within two years ^ of purchase.
Deferred sales charges will be based on the lower of the shares'
cost and current NAV. Shares not subject to any charge will be
redeemed first, followed by shares held longest. You may sell
shares acquired by reinvestment of distributions without a charge
at any time.
* You may be eligible for reductions and waivers of sales charges.
Sales charges may be reduced or waived under certain circumstances
and for certain groups. Information about reductions and waivers
of sales charges is included in the SAI. You may consult your
financial advisor or Putnam Mutual Funds for assistance.
* Distribution (12b-1) plans. The fund has adopted distribution
plans to pay for the marketing of fund shares and for services
provided to shareholders. The plans provide for payments at annual
rates (based on average net assets) of up to 0.35% on class A
shares and 1.00% on class B, class C 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. Because these fees are paid out of the fund's assets
on an ongoing basis, they will increase the cost of your
investment. The higher fees for class B, class C and class M
shares may cost you more than paying the initial sales charge for
class A shares. Because class C and class M shares, unlike class B
shares, do not convert to class A shares, class C and class M
shares may cost you more over time than class B shares.
How do I sell fund shares?
You can sell your shares back to the fund any day the New York
Stock Exchange is open, either through your financial advisor or
directly to the fund. Payment for redemption may be delayed until
the fund collects the purchase price of shares, which may take up
to 15 calendar days after the purchase date.
* Selling shares through your financial advisor. Your advisor must
receive your request in proper form before the close of regular
trading on the New York Stock Exchange for you to receive that
day's NAV, less any applicable deferred sales charge. Your advisor
will be responsible for furnishing all necessary documents to
Putnam Investor Services on a timely basis and may charge you for
his or her services.
* Selling shares directly to the fund. Putnam Investor Services
must receive your request in proper form before the close of
regular trading on the New York Stock Exchange in order to receive
that day's NAV, less any applicable sales charge.
By mail. Send a ^ letter of instruction signed by all registered
owners or their legal representatives to Putnam Investor Services.
If you have certificates for the shares you want to sell, you must
include them along with completed stock power forms.
By telephone. You may use Putnam's ^ telephone redemption
privilege to redeem shares valued at less than $100,000 unless you
have notified Putnam Investor Services of an address change within
the preceding 15 days, in which case other requirements may apply.
Unless you indicate otherwise on the account application, Putnam
Investor Services will be authorized to accept redemption ^
instructions received by telephone.
The ^ telephone redemption privilege is not available if there are
certificates for your shares. The ^ telephone redemption privilege
may be modified or terminated without notice.
* Additional ^ requirements. In certain situations, for example,
if you ^ sell shares with a value of $100,000 or more, ^ the
signatures of all registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer or certain other
financial institutions. In addition, ^ Putnam Investor Services
usually requires additional documents for the sale of shares by a
corporation, partnership, agent or fiduciary, or a surviving joint
owner. ^ For more information concerning Putnam's signature
guarantee and documentation requirements, contact Putnam Investor
Services ^.
* When will the fund pay me? The 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.
* Redemption by the fund. If you own fewer shares than the minimum
set by the Trustees (presently 20 shares), the fund may redeem
your shares without your permission and send you the proceeds. The
fund may also redeem shares if you own more than a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees could set a maximum that would apply to both present and
future shareholders.
How do I exchange fund shares?
If you want to switch your investment from one Putnam fund to
another, you can exchange your fund shares for shares of the same
class of another Putnam fund at NAV. Not all Putnam funds offer
all classes of shares or are open to new investors. If you
exchange shares subject to a deferred sales charge, the
transaction will not be subject to the deferred sales charge. When
you redeem the shares acquired through the exchange, the
redemption may be subject to the deferred sales charge, depending
upon when you originally purchased the shares. The deferred sales
charge 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 deferred sales charge applicable to your
class of shares. For purposes of computing the deferred sales
charge, 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, complete an Exchange Authorization Form
and send it to Putnam Investor Services. The form is available
from Putnam Investor Services. A Telephone Exchange Privilege is
currently available for amounts up to $500,000. The Telephone
Exchange Privilege is not available if the fund issued
certificates for your shares. Ask your financial advisor or Putnam
Investor Services for prospectuses of other Putnam funds. Some
Putnam funds are not available in 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 otherwise to
promote the best interests of the fund, the fund reserves the
right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. The fund
into which you would like to exchange may also reject your
exchange. These actions may apply to all shareholders or only to
those shareholders whose exchanges Putnam Management determines
are likely to have a negative effect on the fund or other Putnam
funds. Consult Putnam Investor Services before requesting an
exchange.
Fund distributions and taxes
The fund declares all of its net investment income as a
distribution ^ each day it is open for business ^. It distributes
any net investment income ^ once a month and any net realized
capital gains at least once a year. You may choose to:
* reinvest all distributions in additional shares;
* receive any distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares; or
* receive all distributions in cash.
If you do not select an option when you open your account, all
distributions will be reinvested. If you do not cash a
distribution check within a specified period or notify Putnam
Investor Services to issue a new check, the distribution will be
reinvested in the fund. You will not receive any interest on
uncashed distribution or redemption checks. Similarly, if any
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.
For federal income tax purposes, distributions of investment
income other than "tax-exempt dividends" (as described below) are
taxable as ordinary income. Generally, gains realized by the fund
on the sale or exchange of investments^ will be taxable to you
even though the income from ^ such investments generally will be
tax-exempt^. Taxes on distributions of capital gains, if any, are
determined by how long the fund owned the investments that
generated them, rather than how long you have owned your shares.
Distributions are taxable to you even if they are paid from income
or gains earned by the fund before your investment (and thus were
included in the price you paid). Distributions of gains from
investments that the fund owned for more than one year will be
taxable as capital gains. Distributions of gains from investments
that the fund owned for one year or less will be taxable as
ordinary income. Distributions are taxable whether you received
them in cash or reinvested them in additional shares.
Fund distributions designated as "tax-exempt dividends" are not
generally subject to federal income tax. However, if you receive
social security or railroad retirement benefits, you should
consult your tax advisor to determine what effect, if any, an
investment in the fund may have on the federal taxation of your
benefits. In addition, an investment in the fund may result in
liability for federal alternative minimum tax, both for individual
and corporate shareholders.
The fund's investments in certain debt obligations may cause the
fund to recognize taxable income in excess of the cash generated
by such obligations. Thus, the fund could be required at times to
liquidate other investments in order to satisfy its distribution
requirements.
Any gain resulting from the sale or exchange of your shares will
generally also be subject to tax. You should consult your tax
advisor for more information on your own tax situation, including
possible state and local taxes.
Financial highlights
The financial highlights table is intended to help you understand
the fund's recent financial performance. Certain information
reflects financial results for a single fund share. The total
returns represent the rate that an investor would have earned or
lost on an investment in the fund, assuming reinvestment of all
dividends and distributions. This information has been derived
from the fund's financial statements, which have been audited by
PricewaterhouseCoopers LLP. Its report and the fund's financial
statements are included in the fund's annual report to
shareholders, which is available upon request.
Financial highlights
CLASS A
(For a share outstanding throughout the period)
^ Per-share
operating performance
Year ended July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$15.40
$15.50
$14.94
$14.86
$14.67
Investment operations
Net investment income
.72
.74
(c)
.79
.81
.83
Net realized and unrealized
gain (loss) on investments
(.56)
(.04)
.67
.08
.19
Total from
investment operations
.16
.70
1.46
.89
1.02
Less distributions:
From net
investment income
(.72)
(.73)
(.80)
(.81)
(.82)
From net realized gain
on investments
(.12)
(.07)
(.10)
--
--
In excess of net realized
gain on investments
--
--
--
--
(.01)
Total distributions
(.84)
(.80)
(.90)
(.81)
(.83)
Net asset value,
end of period
$14.72
$15.40
$15.50
$14.94
$14.86
Ratios and supplemental data
Total return at
net asset value (%)(a)
0.96
4.63
10.09
6.06
7.21
Net assets, end of period
(in thousands)
$243,845
$230,283
$219,265
$196,948
$184,241
Ratio of expenses to
average net assets (%)(b)
.94
.94
.92
.90
.89
Ratio of net investment income
to average net assets (%)
4.65
4.80
5.22
5.37
5.68
Portfolio turnover (%)
35.60
40.38
36.13
54.58
37.62
^(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios exclude
these amounts.
(c)
Per share net investment income has been determined on the basis
of the weighted average number
of shares outstanding during the period.
Financial highlights
CLASS B
(For a share outstanding throughout the period)
^ Per-share
operating performance
Year ended July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$15.42
$15.52
$14.96
$14.87
$14.68
Investment operations
Net investment income
.72
.77
(c)
.74
.71
.73
Net realized and unrealized
gain (loss) on investments
(.56)
(.04)
.68
.09
.20
Total from
investment operations
.16
.73
1.42
.80
.93
Less distributions:
From net
investment income
(.72)
(.76)
(.76)
(.71)
(.73)
From net realized gain
on investments
(.12)
(.07)
(.10)
--
--
In excess of net realized
gain on investments
--
--
--
--
(.01)
Total distributions
(.84)
(.83)
(.86)
(.71)
(.74)
Net asset value,
end of period
$14.74
$15.42
$15.52
$14.96
$14.87
Ratios and supplemental data
Total return at
net asset value (%)(a)
1.00
4.83
9.76
5.44
6.53
Net assets, end of period
(in thousands)
$327,920
$336,286
$339,354
$354,431
$377,443
Ratio of expenses to
average net assets (%)(b)
.90
.74
1.22
1.58
1.54
Ratio of net investment income
to average net assets (%)
4.69
5.00
4.93
4.72
5.05
Portfolio turnover (%)
35.60
40.38
36.13
54.58
37.62
^(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios exclude
these amounts.
(c)
Per share net investment income has been determined on the basis
of the weighted average number
of shares outstanding during the period.
Financial highlights
CLASS C
(For a share outstanding throughout the period)
^
For the period
Per-share
July 26, 1999+
operating performance
to July 31
1999
Net asset value,
beginning of period
$14.83
Investment operations
Net investment income (c)
.01
Net realized and unrealized
gain (loss) on investments
(.11)
Total from
investment operations
(.10)
Less distributions:
From net
investment income
(.01)
From net realized gain
on investments
--
In excess of net realized
gain on investments
--
Total distributions
(.01)
Net asset value,
end of period
$14.72
Ratios and supplemental data
Total return at
net asset value (%)(a)
(0.66)
*
Net assets, end of period
(in thousands)
$1
Ratio of expenses to
average net assets (%)(b)
.03
*
Ratio of net investment income
to average net assets (%)
.08
*
Portfolio turnover (%)
35.60
+
Commencement of operations.
*
Not annualized.
(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios exclude
these amounts.
(c)
Per share net investment income has been determined on the basis
of the weighted average number
of shares outstanding during the period.
Financial highlights
^
CLASS M
(For a share outstanding throughout the period)
For the period
Per-share
June 1, 1995+
operating performance
Year ended July 31
to July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$15.39
$15.50
$14.94
$14.86
$15.11
Investment operations
Net investment income
.66
^
.69
(c)
.74
.76
.12
Net realized and unrealized
gain (loss) on investments
(.51)
(.04)
.67
.08
(.25)
Total from
investment operations
.15
.65
1.41
.84
(.13)
Less distributions:
From net
investment income
(.66)
(.69)
(.75)
(.76)
(.12)
From net realized gain
on investments
(.12)
(.07)
(.10)
--
--
In excess of net realized
gain on investments
--
--
--
--
--
Total distributions
(.78)
(.76)
(.85)
(.76)
(.12)
Net asset value,
end of period
$14.76
$15.39
$15.50
$14.94
$14.86
Ratios and supplemental data
Total return at
net asset value (%)(a)
0.91
4.24
9.76
5.74
(0.87)
*
Net assets, end of period
(in thousands)
$1,866
$1,835
$892
$325
$17
Ratio of expenses to
average net assets (%)(b)
1.24
1.24
1.22
1.19
.14
*
Ratio of net investment income
to average net assets (%)
4.35
4.50
4.87
4.99
.73
*
Portfolio turnover (%)
35.60
40.38
36.13
54.58
37.62
+
Commencement of operations.
*
Not annualized.
(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios exclude
these amounts.
(c)
Per share net investment income has been determined on the basis
of the weighted average number
of shares outstanding during the period.
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.
For more information about Putnam Tax-Free Insured Fund
The fund's statement of additional information (SAI) and annual
and semi-annual reports to shareholders include additional
information about the fund. The SAI, and the auditor's report and
financial statements included in the fund's most recent annual
report to its shareholders, are incorporated by reference into
this prospectus, which means they are part of this prospectus for
legal purposes. The fund's annual report discusses the market
conditions and investment strategies that significantly affected
the fund's performance during its last fiscal year. You may get
free copies of these materials, request other information about
the fund and other Putnam funds, or make shareholder inquiries, by
contacting your financial advisor ^, by visiting Putnam's Web
site, or by calling Putnam toll-free at 1-800-225-1581.
You may review and copy information about the fund, including its
SAI, at the Securities and Exchange Commission's public reference
room in Washington, D.C. You may call the Commission at 1-800-SEC-
0330 for information about the operation of the public reference
room. You may also access reports and other information about the
fund on the Commission's Internet site at http://www.sec.gov. You
may get copies of this information, with payment of a duplication
fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. You may need to refer to the fund's
file number.
PUTNAM INVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
1-800-225-1581
Address correspondence to:
Putnam Investor Services
P.O. Box 989
Boston, MA 02103
www.putnaminv.com
File No. 811 - 4345 ^ NP04356268 11/99
Prospectus
NOVEMBER 30, 1999
Putnam Tax-Free High Yield Fund
Class A, B, C and M shares
Investment Category: Tax-Advantaged
This prospectus explains what you should know about this mutual
fund before you invest. Please read it carefully.
Putnam Investment Management, Inc. (Putnam Management), which has
managed mutual funds since 1937, manages the ^ fund. These
securities have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the
accuracy or adequacy of this prospectus. Any statement to the
contrary is a crime.
CONTENTS
^ 2 Fund summary
^ 2 Goal
^ 2 Main investment strategies
^ 2 Main risks
^ 2 Performance information
^ 4 Fees and expenses
^ 5 What are the fund's main investment strategies and related
risks?
^ 10 Who manages the fund?
^ 10 How does the fund price its shares?
^ 11 How do I buy fund shares?
^ 14 How do I sell fund shares?
^ 15 How do I exchange fund shares?
^ 16 Fund distributions and taxes
^ 18 Financial highlights
LOGO
BOSTON ( LONDON(TOKYO
Fund summary
GOAL
The fund seeks high current income exempt from federal income tax.
MAIN INVESTMENT STRATEGIES - TAX EXEMPT BONDS
We invest mainly in bonds that
* pay interest that is exempt from federal income tax but may be
subject to the federal alternative minimum tax (AMT),
* are a combination of lower-rated and^ investment grade ^
securities, and
* have intermediate- to long-term maturities (three years or ^
longer).
MAIN RISKS
The main risks that could adversely affect the value of this
fund's shares and the total return on your investment include:
* The risk that movements in the securities markets will adversely
affect the value of the fund's investments. This risk includes
interest rate risk, which means that the prices of the fund's
investments are likely to fall if interest rates rise. Interest
rate risk is generally highest for investments with long
maturities.
* The risk that the issuers of the fund's investments will not
make timely payments of interest and principal. This credit risk
is higher for debt that is below investment grade in quality.
Because the fund invests significantly in junk bonds, this risk is
heightened for the fund. Investors should carefully consider the
risks associated with an investment in the fund.
* The risk that interest the fund receives might become taxable or
be determined to be taxable.
You can lose money by investing in the fund. The fund may not
achieve its goals and is not intended as a complete investment
program. An investment in the fund is not a deposit ^ in a bank
and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
PERFORMANCE INFORMATION
The following information provides some indication of the fund's
risks. The chart shows year-to-year changes in the performance of
one of the fund's classes of shares, class B shares. The table
following the chart compares the fund's performance to that of a
broad measure of market performance. Of course, the fund's past
performance is not an indication of future performance.
CALENDAR YEAR TOTAL RETURNS FOR CLASS B SHARES
1998
4.72%
1997
8.43%
1996
2.50%
1995
15.99%
1994
- -5.98%
1993
12.55%
1992
10.60%
1991
11.70%
1990
3.77%
1989
8.70%
Performance figures in the bar chart do not reflect the impact of
sales charges. If they did, performance would be less than that
shown. Year-to-date performance through 9/30/99 was ^-1.53%.
During the periods shown in the bar chart, the highest return for
a quarter was 6.05% (quarter ending 3/31/95) and the lowest return
for a quarter was -4.67% (quarter ending 3/31/94).
Average Annual Total Returns (for periods ending 12/31/98)
Past
1 year
Past
5 years
Past
10 years
Class A
^ 0.27%
4.50%
6.96%
Class B
- -^ 0.27%
4.56%
7.13%
Class C
3.41%
4.67%
^ 6.61%
Class M
1.63%
4.44%
6.89%
Lehman ^ Brothers Municipal Bond
Index
6.48%
6.23%
8.22%
Unlike the bar chart, this performance information reflects the
impact of sales charges. Class A and class M share performance
reflects the current maximum initial sales charges; class B and
class C share performance reflects the maximum applicable deferred
sales charge if shares had been redeemed on 12/31/98 and ^, for
class B, assumes conversion only to class A shares after eight
years. For periods before the inception of class A shares
(9/20/93), class C shares (7/26/99) and class M shares (6/1/95)^
performance shown for these classes in the table is based on the
performance of the fund's class B shares, adjusted to reflect the
appropriate sales charge and, in the case of class C shares, the
higher 12b-1 fees paid by such shares. The fund's performance is
compared to the Lehman Brothers Municipal Bond Index, an unmanaged
index of long-term fixed-rate investment-grade tax-exempt bonds
representative of the municipal bond market.
FEES AND EXPENSES
This table summarizes the fees and expenses you may pay if you
invest in the fund. Except as noted, expenses are based on the
fund's last fiscal year.
Shareholder Fees (fees paid directly from your investment)
Class A
Class B
Class C
Class M
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage
of the offering price
4.75%
NONE^
NONE^
3.25%^
Maximum Deferred Sales Charge (Load) (as a percentage of the
original purchase price or redemption proceeds, whichever is
lower)
NONE*^
5.00%
1.00%
NONE
Annual Fund Operating Expenses (expenses that are deducted from
fund assets)
Management
Fees
Distribution
(12b-1) Fees
Other
Expenses
Total Annual
Fund
Operating
Expenses
Class A
0.54%
0.20%
0.13%
0.87%
Class B
0.54%
0.80%+
0.13%
1.47%
Class C
0.54%
1.00%++
0.13%
1.67%
Class M
0.54%
0.50%
0.13%
1.17%
+ The 12b-1 fees for class B shares reflect the maximum amount
expected to be paid under the class B distribution plan.
++ The 12b-1 fees shown for class C shares reflect the maximum
amount expected to be paid under the class C distribution plan.
^* A deferred sales charge of up to 1% may be imposed on certain
redemptions of class A shares bought without an initial sales
charge.
EXAMPLE
^ The example translates ^ expenses ^ shown in the preceding table
into dollar amounts. By doing this, you can more easily compare
the cost of investing in the fund to the cost of investing in
other mutual funds. The example makes certain assumptions. It
assumes that you invest $10,000 in the fund for the time periods
shown and then, except as shown for class B and class C shares,
redeem all your shares at the end of those periods. It also
assumes a 5% return on your investment each year and that the
fund's operating expenses remain the same. The example is
hypothetical; your actual costs and returns may be higher or
lower.
1 year
3 years
5 years
10 years
Class A
$560
$739
$934
$1,497
Class B
$650
$765
$1,003
$1,595*
Class B (no redemption)
$150
$465
$803
$1,595*
Class C
$270
$526
$907
$1,976
Class C (no redemption)
$170
$526
$907
$1,976
Class M
$440
$685
$948
$1,699
* Reflects the conversion of class B shares to class A shares,
which pay lower 12b-1 fees. Conversion occurs no more than eight
years after purchase.
What are ^ the fund's main investment strategies and related
risks?
Any investment carries with it some level of risk that generally
reflects its potential for reward. We normally pursue the fund's
goal by investing at least 80% of the fund's net assets in tax-
exempt securities. This investment policy cannot be changed
without the approval of the fund's shareholders. We will consider,
among other things, credit, interest rate and prepayment risks as
well as general market conditions when deciding whether to buy or
sell investments for the fund. A description of the risks
associated with the fund's main investment strategies follows.
* Tax-exempt investments. These investments are issued by public
authorities or private enterprises to raise money for public
purposes, such as loans for the construction of housing, schools
or hospitals, or to provide temporary financing in anticipation of
the receipt of taxes and other revenue. They also include ^
private activity bonds, ^ such as industrial development bonds and
other notes of public authorities to finance privately owned or
operated facilities. Changes in law or adverse determinations by
the Internal Revenue Service or state tax authority may make the
income from some of these obligations taxable.
Private activity bonds may be subject to the federal ^ AMT for
individuals. ^ Because these investments are not tax-exempt, we
cannot ^ include them for the purpose of complying with the 80%
investment policy described above. Corporations will be required
to include all tax-exempt interest dividends in determining their
federal AMT. For more information, including possible state and
other taxes, contact your tax advisor.
General obligations. These are backed by the issuer's authority to
levy taxes and are considered an obligation of the issuer. They
are payable from the issuer's general unrestricted revenues,
although payment may depend upon government appropriation or aid
from other governments. These investments may be vulnerable to
legal limits on a government's power to raise revenue or increase
taxes, as well as economic or other developments that can reduce
revenues.
Special revenue obligations. These are payable from revenues
earned by a particular project or other revenue source. These
include ^ private activity bonds such as industrial development
bonds and other notes of public authorities to finance privately
owned or operated facilities. Investors can look only to the
revenue generated by the project or the private company operating
the project rather than the credit of the state or local
government authority issuing the bonds. Special revenue
obligations are typically subject to greater credit risk than
general obligations because of the relatively limited source of
revenue.
* Interest rate risk. The values of bonds and other debt usually
rise and fall in response to changes in interest rates. Declining
interest rates generally raise the ^ values of existing debt
instruments, and rising interest rates generally lower the ^
values of existing debt instruments. Changes in a debt
instrument's value usually will not affect the amount of income
the fund receives from it, but will affect the value of the fund's
shares. Interest rate risk is generally greater for investments
with longer maturities.
Some investments give the issuer the option to call, or redeem,
these investments before their maturity date. If an issuer "calls"
its ^ investments during a time of declining interest rates, we
might have to reinvest the proceeds in an investment offering a
lower yield, and therefore might not benefit from any increase in
value as a result of declining interest rates.
"Premium investments"^ offer interest rates higher than prevailing
market rates. However, they involve a greater risk of loss,
because their values tend to decline over time. You may find it
useful to compare the fund's yield, which factors out the effect
of premium securities, with its current dividend rate, which does
not factor out that effect.
* Credit risk. Investors normally expect to be compensated in
proportion to the risk they are assuming. Thus, debt of issuers
with poor credit prospects usually offers higher yields than debt
of issuers with more secure credit. Higher-rated investments
generally offer lower credit risk, but not necessarily lower
interest rate risk. The values of higher-rated investments still
fluctuate in response to changes in interest rates.
We invest ^ in a combination of higher-rated and lower-rated
investments. The fund's lower-rated investments consist of higher-
yielding, higher-risk debt ^ securities that are rated below BBB
(or its equivalent) at the time of purchase by each nationally
recognized securities rating agency rating the security, or are
unrated investments that we think are of comparable quality. We
may invest up to 10% of the fund's total assets in debt
investments rated, at the time of purchase, below CC (or its
equivalent) by each agency rating such investments, including
investments in the lowest rating category of the rating agency,
and unrated investments that we think are of comparable quality.
We will not necessarily sell an investment if its rating is
reduced after we buy it.
Lower rated debt. Fixed income investments rated below BBB (or its
equivalent) are known as "junk bonds." They reflect a greater
possibility that the issuers may be unable to make timely payments
of interest and principal and thus default. If this happens, or is
perceived as likely to happen, the values of those investments
will usually be more volatile. A default or expected default could
also make it difficult for us to sell the investments at prices
approximating the values we had previously placed on them. Tax-
exempt debt, particularly lower-rated tax-exempt debt, usually has
a more limited market than taxable debt, which may at times make
it difficult for us to buy or sell certain debt instruments or to
establish their fair value. Credit risk is generally greater for
investments that are issued at less than their face value and make
payments of interest only at maturity rather than at intervals
during the life of the investment.
Credit ratings are based largely on the issuer's historical
financial condition and the rating agencies' investment analysis
at the time of rating. The rating assigned to any particular
investment does not necessarily reflect the issuer's current
financial condition, and does not reflect an assessment of an
investment's volatility or liquidity.
Although we consider credit ratings in making investment
decisions, we perform our own investment analysis and do not rely
only on ratings assigned by the rating agencies. However, the
amount of information about the financial condition of issuers of
tax-exempt debt may not be as extensive as that which is made
available by companies whose stock or debt is publicly traded.
Successful investing in lower rated debt depends more on our
ability than does buying investment grade debt.
We may have to participate in legal proceedings or to take
possession of and manage assets that secure the issuer's
obligations. Our ability to enforce rights in bankruptcy
proceedings may be more limited than would be the case for taxable
debt. This could increase the fund's operating expenses and
decrease its net asset value. Any income that arises from
ownership or operation of assets would be taxable.
Although investment-grade investments generally have lower credit
risk, they may share some of the risks of lower-rated investments.
* Concentration of investments. ^ We make significant investments
in a broad segment of the tax-exempt debt market, such as revenue
bonds for ^ health care facilities, housing or airports^. We may
also make significant investments in the debt of issuers located
in the same state. ^ These investments may cause the value of the
fund's shares to change more than the values of shares of funds ^
that invest in a greater variety of investments. Certain events
may adversely affect all ^ investments within a particular market
segment. Examples ^ include legislation or court decisions ^ or
concerns about ^ pending legislation or court ^ decisions, or
lower demand for the services or products provided by a particular
market segment. Investing in issuers located in the same state
may make the fund more vulnerable to that state's economy and to
issues affecting its tax exempt issuers, such as their ability to
collect revenues to meet payment obligations.
At times, the mutual ^ fund and other accounts ^ that we and our
affiliates^ manage may own all or most of the debt of a particular
public issuer. This concentration of ownership may make it more
difficult to sell, or to determine the fair value of, these
investments.
> Derivatives. We may engage in a variety of transactions
involving derivatives, such as futures, options, warrants and swap
contracts. Derivatives are financial instruments whose value
depends upon, or is derived from, the value of something else,
such as one or more underlying investments, pools of investments,
indexes or currencies. We may use derivatives both for hedging
and non-hedging purposes. For example, the fund may use
derivatives to increase or decrease it exposure to long- or short-
term interest rates. However, we may also choose not to ^ use
derivatives, based on our evaluation of market conditions or the
availability of suitable derivatives.
Derivatives involve special risks and may result in losses.
The fund depends on our ability to handle these sophisticated
instruments. The prices of derivatives may move in unexpected
ways, especially in abnormal market conditions. Some derivatives
are "leveraged" and therefore may magnify or otherwise increase
investment losses. Our use of derivatives may also cause the fund
to receive taxable income which could increase the taxes payable
by shareholders.
Other risks arise from our potential inability to terminate or
sell derivatives positions. A liquid secondary market may not
always exist for the fund's derivatives positions at any time. In
fact, many over-the-counter instruments (investments not traded on
an exchange) will not be liquid. Over-the-counter instruments
also involve the risk that the other party to the derivative
transaction will not meet its obligations. For further
information about the risks of derivatives, see the statement of
additional information (SAI).
* Alternative strategies. At times we may judge that market
conditions make pursuing ^ the fund's usual investment strategies
inconsistent with the best interests of ^ the shareholders. We
then may temporarily use alternative strategies that are mainly
designed to limit our losses, including investing in taxable
obligations. However, we may choose not to use these strategies
for a variety of reasons, even in very volatile market conditions.
These strategies may cause us to miss out on investment
opportunities, and may prevent us from achieving the fund's goal.
* Other investments. In addition to the main investment
strategies described above, we may also make other types of
investments, such as investments in ^ repurchase agreements^ and
forward commitments, which may produce taxable income and may be
subject to other risks, as described in the statement of
additional information (SAI).
* Changes in policies. The Trustees may change the fund's goal,
investment strategies and other policies without shareholder
approval, except as otherwise indicated.
Who manages the fund?
The fund's Trustees oversee the general conduct of the fund's
business. The Trustees have retained Putnam Management to be the
fund's investment manager, responsible for making investment
decisions for the fund and managing the fund's other affairs and
business. The fund pays Putnam Management a quarterly management
fee for these services based on the fund's average net assets. The
fund paid Putnam Management a management fee of 0.54% of average
net assets for the fund's last fiscal year. Putnam Management's
address is One Post Office Square, Boston, MA 02109.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year shown below. His experience as a
portfolio manager or investment analyst over at least the last
five years is also shown.
Manager Since Experience
Blake Anderson 1988 ^ 1987-Present Putnam Management ^
Managing Director
Year 2000 issues. The fund could be adversely affected if the
computer systems ^ that we and the fund's other service providers
use do not properly process and calculate date-related information
relating to the end of this century and the beginning of the next.
While year 2000-related computer problems could have a negative
effect on the fund, both in its operations and in its investments,
^ we are working to avoid such problems and to obtain assurances
from service providers that they are taking similar steps. No
assurances, though, can be provided that the fund will not be
adversely impacted by these matters.
How does the fund price its shares?
The price of the fund's shares is based on its net asset value
(NAV). The NAV per share of each class equals the total value of
its assets, less its liabilities, divided by the number of its
outstanding shares. Shares are only valued as of the close of
regular trading on the New York Stock Exchange each day the
exchange is open.
The fund values its investments for which market quotations are
readily available at market value. It values short-term
investments that will mature within 60 days at amortized cost,
which approximates market value. It values all other investments
and assets at their fair value.
At times, the mutual fund and other accounts that we and our
affiliates manage may own all or most of the debt of a particular
public issuer. This concentration of ownership may make it more
difficult to sell, or to determine the fair value of, these
investments.
How do I buy fund shares?
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50 ($25
through systematic investing). The fund sells its shares at the
offering price, which is the NAV plus any applicable sales charge.
Your financial advisor or Putnam Investor Services generally must
receive your completed buy order before the close of regular
trading on the New York Stock Exchange for your shares to be
bought at that day's offering price.
You can buy shares
* Through a financial advisor. Your advisor will be responsible
for furnishing all necessary documents to Putnam Investor
Services, and may charge you for his or her services.
* 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
through your advisor or Putnam Investor Services at 1-800-225-
1581.
You may also complete an order form and write a check for the
amount you wish to invest, payable to the fund. Return the check
and completed form to Putnam Mutual Funds.
The fund may periodically close to new purchases of shares or
refuse any order to buy shares if the fund determines that doing
so would be in the best interests of the fund and its
shareholders.
WHICH CLASS OF SHARES IS BEST FOR ME?
This prospectus offers you a choice of four classes of fund
shares: A, B, C and M. This allows you to choose among different
types of sales charges and different levels of ongoing operating
expenses, as illustrated in the "Fees and expenses" section. The
class of shares that is best for you depends on a number of
factors, including the amount you plan to invest and how long you
plan to hold the shares. Here is a summary of the differences
among the classes of shares:
Class A shares
* Initial sales charge of up to 4.75%
* Lower sales charge for investments of $25,000 or more
* No deferred sales charge (except on certain redemptions of
shares bought without an initial sales charge)
* Lower annual expenses, and higher dividends, than class B, C or
M shares because of lower 12b-1 fee
Class B shares
* No initial sales charge; your entire investment goes to work for
you
* Deferred sales charge of up to ^ 5.00% if you sell shares within
6 years after you bought them
* Higher annual expenses, and lower dividends, than class A or M
shares because of higher 12b-1 fee
* Convert automatically to class A shares after 8 years, reducing
the future 12b-1 fee (may convert sooner in some cases)
* Orders for class B shares for ^ $250,000 or more are treated as
orders for class A shares or refused
Class C shares
* No initial sales charge; your entire investment goes to work for
you
* Deferred sales charge of up to 1.00% if you sell shares within
one year after you bought them
* Higher annual expenses, and lower dividends, than class A or M
shares because of higher 12b-1 fee
* No conversion to class A shares, so future 12b-1 fee does not
decrease
* Orders of $1,000,000 or more and orders ^ that because of a
right of accumulation or statement of intent would qualify for the
purchase of class A shares without an initial sales charge will be
treated as orders for class A shares or declined.
Class M shares
* Initial sales charge of up to 3.25%
* Lower sales charges for ^ investments of $50,000 or more
* No deferred sales charge
* Lower annual expenses, and higher dividends, than class B or
class C shares because of lower 12b-1 fee
* Higher annual expenses, and lower dividends, than class A shares
because of higher 12b-1 fee
* No conversion to class A shares, so future 12b-1 fee does not
decrease
Initial sales charges for class A and M shares
Class A sales charge Class M sales charge
as a percentage of: as a percentage of:
------------------------------ --------------------------
- --
Amount of purchase Net amount Offering Net amount
Offering
at offering price ($) invested price* invested price*
- ------------------------------------------------------------------
- ----------------------------------------------------------
Under 25,000 4.99% 4.75% 3.36% 3.25%
25,000 but under 50,000 4.71 4.50 3.36 3.25
50,000 but under 100,000 4.71 4.50 2.30 2.25
100,000 but under 250,000 3.90 3.75 1.52 1.50
250,000 but under 500,000 3.09 3.00 1.01 1.00
500,000 but under 1,000,000 2.04 2.00 NONE NONE
1,000,000 and above NONE NONE NONE NONE
- ------------------------------------------------------------------
- ---------------------------------------------------------
* Offering price includes sales charge.
Deferred sales charges for class B, class C and certain class A
shares
If you sell (redeem) class B shares within six years after you
bought them, you will generally pay a deferred sales charge
according to the following schedule.
Year after ^ purchase 1 2 3 4 5 6 7+
Charge 5% 4% 3% 3% 2% 1% 0%
A deferred sales charge of up to 1% will apply to class C shares
if redeemed within one year of purchase. A deferred sales charge
of up to 1% may apply to class A shares purchased without an
initial sales charge, if redeemed within two years ^ of purchase.
Deferred sales charges will be based on the lower of the shares'
cost and current NAV. Shares not subject to any charge will be
redeemed first, followed by shares held longest. You may sell
shares acquired by reinvestment of distributions without a charge
at any time.
* You may be eligible for reductions and waivers of sales charges.
Sales charges may be reduced or waived under certain circumstances
and for certain groups. Information about reductions and waivers
of sales charges is included in the SAI. You may consult your
financial advisor or Putnam Mutual Funds for assistance.
* Distribution (12b-1) plans. The fund has adopted distribution
plans to pay for the marketing of fund shares and for services
provided to shareholders. The plans provide for payments at annual
rates (based on average net assets) of up to 0.35% on class A
shares and 1.00% on class B, class C and class M shares. The
Trustees currently limit payments on class A, class B and class M
shares to 0.20% and 0.80% and 0.50% of average net assets,
respectively. Because these fees are paid out of the fund's assets
on an ongoing basis, they will increase the cost of your
investment. The higher fees for class B, class C and class M
shares may cost you more than paying the initial sales charge for
class A shares. Because class C and class M shares, unlike class B
shares, do not convert to class A shares, class C and class M
shares may cost you more over time than class B shares.
How do I sell fund shares?
You can sell your shares back to the fund any day the New York
Stock Exchange is open, either through your financial advisor or
directly to the fund. Payment for redemption may be delayed until
the fund collects the purchase price of shares, which may take up
to 15 calendar days after the purchase date.
* Selling shares through your financial advisor. Your advisor must
receive your request in proper form before the close of regular
trading on the New York Stock Exchange for you to receive that
day's NAV, less any applicable deferred sales charge. Your advisor
will be responsible for furnishing all necessary documents to
Putnam Investor Services on a timely basis and may charge you for
his or her services.
* Selling shares directly to the fund. Putnam Investor Services
must receive your request in proper form before the close of
regular trading on the New York Stock Exchange in order to receive
that day's NAV, less any applicable sales charge.
By mail. Send a ^ letter of instruction signed by all registered
owners or their legal representatives to Putnam Investor Services.
If you have certificates for the shares you want to sell, you must
include them along with completed stock power forms.
By telephone. You may use Putnam's ^ telephone redemption
privilege to redeem shares valued at less than $100,000 unless you
have notified Putnam Investor Services of an address change within
the preceding 15 days, in which case other requirements may apply.
Unless you indicate otherwise on the account application, Putnam
Investor Services will be authorized to accept redemption ^
instructions received by telephone.
The ^ telephone redemption privilege is not available if there are
certificates for your shares. The ^ telephone redemption privilege
may be modified or terminated without notice.
* Additional ^ requirements. In certain situations, for example,
if you ^ sell shares with a value of $100,000 or more, ^ the
signatures of all registered owners or their legal representatives
must be guaranteed by a bank, broker-dealer or certain other
financial institutions. In addition, ^ Putnam Investor Services
usually requires additional documents for the sale of shares by a
corporation, partnership, agent or fiduciary, or a surviving joint
owner. ^ For more information concerning Putnam's signature
guarantee and documentation requirements, contact Putnam Investor
Services ^.
* When will the fund pay me? The 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.
* Redemption by the fund. If you own fewer shares than the minimum
set by the Trustees (presently 20 shares), the fund may redeem
your shares without your permission and send you the proceeds. The
fund may also redeem shares if you own more than a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees could set a maximum that would apply to both present and
future shareholders.
How do I exchange fund shares?
If you want to switch your investment from one Putnam fund to
another, you can exchange your fund shares for shares of the same
class of another Putnam fund at NAV. Not all Putnam funds offer
all classes of shares or are open to new investors. If you
exchange shares subject to a deferred sales charge, the
transaction will not be subject to the deferred sales charge. When
you redeem the shares acquired through the exchange, the
redemption may be subject to the deferred sales charge, depending
upon when you originally purchased the shares. The deferred sales
charge 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 deferred sales charge applicable to your
class of shares. For purposes of computing the deferred sales
charge, 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, complete an Exchange Authorization Form
and send it to Putnam Investor Services. The form is available
from Putnam Investor Services. A ^ telephone exchange privilege is
currently available for amounts up to $500,000. The ^ telephone
exchange privilege is not available if the fund issued
certificates for your shares. Ask your financial advisor or Putnam
Investor Services for prospectuses of other Putnam funds. Some
Putnam funds are not available in 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 otherwise to
promote the best interests of the fund, the fund reserves the
right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. The fund
into which you would like to exchange may also reject your
exchange. These actions may apply to all shareholders or only to
those shareholders whose exchanges Putnam Management determines
are likely to have a negative effect on the fund or other Putnam
funds. Consult Putnam Investor Services before requesting an
exchange.
Fund distributions and taxes
The fund declares all of its net investment income as a
distribution ^ each day it is open for business ^. It distributes
any net investment income ^ once a month and any net realized
capital gains at least once a year. You may choose to:
* reinvest all distributions in additional shares;
* receive any distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares; or
* receive all distributions in cash.
If you do not select an option when you open your account, all
distributions will be reinvested. If you do not cash a
distribution check within a specified period or notify Putnam
Investor Services to issue a new check, the distribution will be
reinvested in the fund. You will not receive any interest on
uncashed distribution or redemption checks. Similarly, if any
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.
For federal income tax purposes, distributions of investment
income other than "tax-exempt dividends" (as described below) are
taxable as ordinary income. Generally, gains realized by the fund
on the sale or exchange of investments^ will be taxable to
shareholders even though the income from such investments
generally will be tax-exempt. Taxes on distributions of capital
gains, if any, are determined by how long the fund owned the
investments that generated them, rather than how long you have
owned your shares. Distributions are taxable to you even if they
are paid from income or gains earned by the fund before your
investment (and thus were included in the price you paid).
Distributions of gains from investments that the fund owned for
more than one year will be taxable as capital gains. Distributions
of gains from investments that the fund owned for one year or less
will be taxable as ordinary income. Distributions are taxable
whether you received them in cash or reinvested them in additional
shares.
^ Fund distributions designated as "tax-exempt dividends" are not
generally subject to federal income tax. However, if you receive
social security or railroad retirement benefits, you should
consult your tax advisor to determine what effect, if any, an
investment in the fund may have on the federal taxation of your
benefits. In addition, an investment in the fund may result in
liability for federal alternative minimum tax, both for individual
and corporate shareholders.
The fund's investments in certain debt obligations may cause the
fund to recognize taxable income in excess of the cash generated
by such obligations. Thus, the fund could be required at times to
liquidate other investments in order to satisfy its distribution
requirements.
Any gain resulting from the sale or exchange of your shares will
generally also be subject to tax. You should consult your tax
advisor for more information on your own tax situation, including
possible state and local taxes.
Financial highlights
The financial highlights table is intended to help you understand
the fund's recent financial performance. Certain information
reflects financial results for a single fund share. The total
returns represent the rate that an investor would have earned or
lost on an investment in the fund, assuming reinvestment of all
dividends and distributions. This information has been derived
from the fund's financial statements, which have been audited by
PricewaterhouseCoopers LLP. Its report and the fund's financial
statements are included in the fund's annual report to
shareholders, which is available upon request.
Financial highlights
^
CLASS A
(For a share outstanding throughout the period)
Per-share
operating performance
Year ended July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$14.61
$14.56
$14.05
$14.14
$14.24
Investment operations
Net investment income
.81
.80
(c)
.84
.90
.94
Net realized and unrealized
gain (loss) on investments
(.48)
.06
.52
(.10)
(.10)
Total from
investment operations
.33
.86
1.36
.80
.84
Less distributions:
From net
investment income
(.81)
(.81)
(.85)
(.89)
(.94)
Total distributions
(.81)
(.81)
(.85)
(.89)
(.94)
Net asset value,
end of period
$14.13
$14.61
$14.56
$14.05
$14.14
Ratios and supplemental data
Total return at
net asset value (%)(a)
2.25
6.08
9.97
5.76
6.24
Net assets, end of period
(in thousands)
$1,157,920
$934,747
$625,602
$540,607
$474,984
Ratio of expenses to
average net assets (%) (b)
.87
.88
.85
.84
.87
Ratio of net investment income
to average net assets (%)
5.56
5.60
5.94
6.27
6.73
Portfolio turnover (%)
12.16
39.62
56.22
67.70
60.41
^
(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios
exclude these amounts.
(c)
Per share net investment income has been determined on the basis
of
the weighted number of shares outstanding during the period.
Financial highlights
^ CLASS B
^(For a share outstanding throughout the period)
Per-share
operating performance
Year ended July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$14.62
$14.56
$14.05
$14.14
$14.24
Investment operations
Net investment income
.74
.73
(c)
.75
.80
.85
Net realized and unrealized
gain (loss) on investments
(.47)
.05
.51
(.09)
(.10)
Total from
investment operations
.27
.78
1.26
.71
.75
Less distributions:
From net
investment income
(.74)
(.72)
(.75)
(.80)
(.85)
Total distributions
(.74)
(.72)
(.75)
(.80)
(.85)
Net asset value,
end of period
$14.15
$14.62
$14.56
$14.05
$14.14
Ratios and supplemental data
Total return at
net asset value (%)(a)
1.81
5.47
9.26
5.08
5.54
Net assets, end of period
(in thousands)
$743,456
$1,052,827
$1,427,365
$1,421,448
$1,436,481
Ratio of expenses to
average net assets (%) (b)
1.37
1.53
1.50
1.50
1.51
Ratio of net investment income
to average net assets (%)
5.03
4.95
5.30
5.62
6.10
Portfolio turnover (%)
12.16
39.62
56.22
67.70
60.41
^(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios
exclude these amounts.
(c)
Per share net investment income has been determined on the basis
of
the weighted number of shares outstanding during the period.
Financial highlights
^ CLASS C
^(For a share outstanding throughout the period)
For the period
Per-share
^ Feb. 1, 1999
operating performance
to July 31
1999
Net asset value,
beginning of period
$14.73
Investment operations
Net investment income
.36
Net realized and unrealized
gain (loss) on investments
(.60)
Total from
investment operations
(.24)
Less distributions:
From net
investment income
(.36)
Total distributions
(.36)
Net asset value,
end of period
$14.13
Ratios and supplemental data
Total return at
net asset value (%)(a)
(1.58)
*
Net assets, end of period
(in thousands)
$2,738
Ratio of expenses to
average net assets (%)(b)
.83
*
Ratio of net investment income
to average net assets (%)
2.47
*
Portfolio turnover (%)
12.16
+
Commencement of operations.
*
Not annualized.
(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios
exclude these amounts.
(c)
Per share net investment income has been determined on the basis
of
the weighted number of shares outstanding during the period.
Financial highlights
^ CLASS M
^(For a share outstanding throughout the period)
For the period
Per-share
Dec. 29, 1994+
operating performance
Year ended July 31
to July 31
1999
1998
1997
1996
1995
Net asset value,
beginning of period
$14.61
$14.55
$14.04
$14.13
$13.43
Investment operations
Net investment income
.77
^
.78
(c)
.80
.84
.58
Net realized and unrealized
gain (loss) on investments
(.47)
.05
.51
(.08)
.70
Total from
investment operations
.30
.83
1.31
.76
1.28
Less distributions:
From net
investment income
(.77)
(.77)
(.80)
(.85)
(.58)
Total distributions
(.77)
(.77)
(.80)
(.85)
(.58)
Net asset value,
end of period
$14.14
$14.61
$14.55
$14.04
$14.13
Ratios and supplemental data
Total return at
net asset value (%)(a)
2.01
5.84
9.64
5.44
9.69
*
Net assets, end of period
(in thousands)
$23,693
$18,082
$16,192
$9,984
$2,331
Ratio of expenses to
average net assets (%)(b)
1.17
1.18
1.15
1.13
.71
*
Ratio of net investment income
to average net assets (%)
5.27
5.30
5.63
5.87
3.98
*
Portfolio turnover (%)
12.16
39.62
56.22
67.70
60.41
+
Commencement of operations.
*
Not annualized.
(a)
Total 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 and thereafter,
includes amounts paid through expense offset arrangements. Prior
period ratios
exclude these amounts.
(c)
Per share net investment income has been determined on the basis
of
the weighted number of shares outstanding during the period.
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.
For more information about Putnam Tax-Free High Yield Fund
The fund's statement of additional information (SAI) and annual
and semi-annual reports to shareholders include additional
information about the fund. The SAI, and the auditor's report and
financial statements included in the fund's most recent annual
report to its shareholders, are incorporated by reference into
this prospectus, which means they are part of this prospectus for
legal purposes. The fund's annual report discusses the market
conditions and investment strategies that significantly affected
the fund's performance during its last fiscal year. You may get
free copies of these materials, request other information about
the fund and other Putnam funds, or make shareholder inquiries, by
contacting your financial advisor ^, by visting Putnam's Web site,
or by calling Putnam toll-free at 1-800-225-1581.
You may review and copy information about the fund, including its
SAI, at the Securities and Exchange Commission's public reference
room in Washington, D.C. You may call the Commission at 1-800-SEC-
0330 for information about the operation of the public reference
room. You may also access reports and other information about the
fund on the Commission's Internet site at http://www.sec.gov. You
may get copies of this information, with payment of a duplication
fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. You may need to refer to the fund's
file number.
PUTNAM INVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
1-800-225-1581
Address correspondence to:
Putnam Investor Services
P.O. Box 989
Boston, MA 02103
www.putnaminv.com
File No. 811 - 4345 ^ NP042 56269 11/99
PUTNAM TAX-FREE HIGH YIELD FUND
PUTNAM TAX-FREE INSURED FUND
(SERIES OF PUTNAM TAX-FREE INCOME TRUST)
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
NOVEMBER 30, 1999
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectuses of
Putnam Tax-Free Income Trust (the "Trust") dated November 30,
1999, as revised from time to time, relating to the series of
shares of the Trust the investor is considering purchasing (the
"prospectus"). This SAI contains information which may be useful
to investors but that is not included in the prospectuses. If the
Trust has more than one form of current prospectus, each reference
to the prospectus in this SAI shall include all of the Trust's
prospectuses, unless otherwise noted. The SAI should be read
together with the applicable prospectus. Certain disclosure has
been incorporated by reference from the fund's annual report. For
a free copy of the fund's annual report or prospectus, call Putnam
Investor Services at 1-800-225-1581 or write Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-
1203.
Part I of this SAI contains specific information about the Trust.
Part II includes information about the Trust and the other Putnam
funds.
Table of Contents
Part I Page
FUND ORGANIZATION AND CLASSIFICATION I-3
INVESTMENT RESTRICTIONS I-4
CHARGES AND EXPENSES I-6
INVESTMENT PERFORMANCE I-17
ADDITIONAL OFFICERS I-19
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS I-19
Part II
MISCELLANEOUS INVESTMENTS, INVESTMENT PRACTICES AND RISKS II-1
TAXES.... II-25
MANAGEMENT II-28
DETERMINATION OF NET ASSET VALUE II-36
HOW TO BUY SHARES II-37
DISTRIBUTION PLANS II-^ 47
INVESTOR SERVICES II-^ 51
SIGNATURE GUARANTEES II-^ 55
SUSPENSION OF REDEMPTIONS II-^ 55
SHAREHOLDER LIABILITY II-56
STANDARD PERFORMANCE MEASURES II-^ 56
COMPARISON OF PORTFOLIO PERFORMANCE II-^ 60
SECURITIES RATINGS II-^ 65
DEFINITIONS II-66
PUTNAM TAX-FREE HIGH YIELD FUND
PUTNAM TAX-FREE INSURED FUND
(SERIES OF PUTNAM TAX-FREE INCOME TRUST)
STATEMENT OF ADDITIONAL INFORMATION
PART I
FUND ORGANIZATION AND CLASSIFICATION
Putnam Tax-Free High Yield Fund and Putnam Tax-Free Insured Fund
are series of Putnam Tax-Free Income Trust, 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,
Each fund is an open-end management investment company with an
unlimited number of authorized shares of beneficial interest. The
Trustees may, without shareholder approval, create two or more
series of shares of the Trust representing separate investment
portfolios. Shares of the Trust are currently divided into two
series: Putnam Tax-Free High Yield Fund and Putnam Tax-Free
Insured Fund. Any such series of shares may be 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. Each fund offers 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 certain classes 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 are freely transferable,
are entitled to dividends 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 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.
Each fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to
75% of its total assets, each fund may not invest more than 5% of
its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of its total assets is
not subject to this restriction. To the extent each fund invests
a significant portion of its assets in the securities of a
particular issuer, it will be subject to an increased risk of loss
if the market value of such issuer's securities declines.
INVESTMENT RESTRICTIONS
Without a vote of a majority of the outstanding voting securities
of a fund created under the Trust, the Trust shall not take any of
the following actions with respect to such fund:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of the fund's total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate, and securities which
represent interests in real estate, and it may acquire and dispose
of real estate or interests in real estate acquired through the
exercise of its rights as a holder of debt obligation secured by
real estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except
that the fund may purchase and sell financial futures contracts
and options and may enter into foreign exchange contracts and
other financial transactions not involving physical commodities.
(5) Make loans, except by purchase of debt obligations in which
the fund may invest consistent with its investment policies, by
entering into repurchase agreements, or by lending its portfolio
securities.
(6) With respect to 75% of its total assets, invest in the
securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the fund (taken at current
value) would be invested in the securities of such issuer;
provided that this limitation does not apply to obligations issued
or guaranteed as to interest and principal by the U.S. government
or its agencies or instrumentalities and that insurers of tax-
exempt securities are not considered issuers of securities for
this purpose. (Insurance policies of which the Trust is a
beneficiary are not considered securities for purposes of this
restriction.)
(7) With respect to 75% of the fund's total assets, acquire more
than 10% of the voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S
government, its agencies or instrumentalities or tax-exempt
securities, except tax-exempt securities backed only by the assets
and revenues of non-governmental issuers) if, as a result of such
purchase, more than 25% of the fund's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the fund's
shares of beneficial interest, except for permitted borrowings.
(10) Invest less than 80% of a fund's net assets in tax-exempt
securities, except when investing for defensive purposes.
Although certain of the Trust's fundamental investment
restrictions permit the funds to borrow money to a limited extent,
the funds do not currently intend to do so and did not do so last
year.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the Trust or a
fund means the affirmative vote of the lesser of (1) more than 50%
of the outstanding shares of the Trust or that fund, as the case
may be, or (2) 67% or more of the shares present at a meeting if
more than 50% of the outstanding shares of the Trust or that fund
are represented at the meeting in person or by proxy.
It is contrary to the Trust's present policy with respect to any
fund created under the Trust, which may be changed by the Trustees
without shareholder approval, to take any of the following actions
with respect to such fund:
(1) Invest in (a) securities which are not readily marketable,
(b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated
by the Trustees of the Trust to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in
more than seven days, if, as a result, more than 15% of a fund's
net assets (taken at current value) would be invested in the
aggregate in securities described in (a), (b) and (c) above.
All percentage limitations on investments (other than pursuant to
the non-fundamental restriction) will apply at the time of the
making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after
and as a result of such investment.
CHARGES AND EXPENSES
Management fees
Each fund pays a monthly fee to Putnam Management based on the
average net assets of that fund, as determined at the close of
each business day during the month, at the following annual rates
expressed as a percentage of each fund's average net assets:
Fund name Contract date Rates
Putnam Tax-Free 7/1/99 0.65% of the first $500 million;
High Yield Fund 0.55% of the next $500 million;
0.50% of the next $500 million;
0.45% of the next $5 billion;
0.425% of the next $5 billion;
0.405% of the next $5 billion;
0.39% of the next $5 billion; and
0.38% thereafter.
Putnam Tax-Free 7/1/99 the lesser of: (i) 0.50% of the
average
Insured Fund net asset value of the fund or (ii)
0.60% of the first $500 million;
0.50% of the next $500 million;
0.45% of the next $500 million;
0.40% of the next $5 billion;
0.375% of the next $5 billion;
0.355% of the next $5 billion;
0.34% of the next $5 billion; and
0.33% thereafter.
For the past three fiscal years, pursuant to its management
contract and, in the case of Putnam Tax-Free Insured Fund, a
management contract in effect prior to July 1, 1999, under which
the management fee payable to Putnam Management was paid at the
following rates: 0.60% of the first $500 million; 0.50% of the
next $500 million; 0.45% of the next $500 million; 0.40% of the
next $5 billion; 0.375% of the next $5 billion; 0.355% of the next
$5 billion; 0.34% of the next $5 billion; and 0.33% thereafter,
the funds paid Putnam Management the following amounts:
Fiscal Management
year fee paid
- ------ ----------
Putnam Tax-Free High Yield Fund
1999 $10,757,953
1998 $10,911,248
1997 $10,809,869
Putnam Tax-Free Insured Fund
1999 $3,464,735
1998 $3,301,507
1997 $3,251,097
Brokerage commissions
The following table shows brokerage commissions paid during the
fiscal periods indicated:
Fiscal Brokerage
year commissions
- ------ -----------------
Putnam Tax-Free High Yield Fund
1999 $42,575
1998 $97,734
1997 $99,593
Putnam Tax-Free Insured Fund
1999 $19,247
1998 $29,133
1997 $40,651
The following table shows transactions placed with brokers and
dealers during the most recent fiscal year to recognize research,
statistical and quotation services received by Putnam Management
and its affiliates:
Dollar
value Percent of
of these total Amount of
transactions transactions commissions
---------------- ---------------- ----------------
Putnam Tax-Free
High Yield Fund $0 0% $0
Putnam Tax-Free
Insured Fund $0 0% $0
Administrative expense reimbursement
The funds reimbursed Putnam Management for administrative services
during fiscal 1999 including compensation of certain Trust
officers and contributions to the Putnam Investments, Inc. Profit
Sharing Retirement Plan for their benefit, as follows:
Portion of total
reimbursement for
compensation
Total and
reimbursement contributions
------------- ---------------
Putnam Tax-Free
High Yield Fund $19,144 $15,689
Putnam Tax-Free
Insured Fund $9,759 $7,998
Trustee fees
Each Trustee receives a fee for his or her services. Each Trustee
also receives fees for serving as Trustee of other Putnam funds.
The Trustees periodically review their fees to assure that such
fees continue to be appropriate in light of their responsibilities
as well as in relation to fees paid to trustees of other mutual
fund complexes. The Trustees meet monthly over a two-day period,
except in August. The Board Policy Committee, which consists
solely of Trustees not affiliated with Putnam Management and is
responsible for recommending Trustee compensation, estimates that
Committee and Trustee meeting time together with the appropriate
preparation requires the equivalent of at least three business
days per Trustee meeting. The following table shows the year each
Trustee was first elected a Trustee of the Putnam funds, the fees
paid to each Trustee by each fund for fiscal 1999 the fees paid to
each Trustee by all of the Putnam funds during calendar 1998:
COMPENSATION TABLE Pension or retirement
accrued as part of
Aggregate compensation fund expenses
from (1): from: Estimated
-------------------------------- ---------------------
- ----------- annual
Putnam Putnam Putnam Putnam benefits
Tax-Free Tax-Free Tax-Free Tax-Free from all
High Yield Insured All Putnam High Yield
Insured Putnam funds
Trustee/Year Fund Fund funds (2) Fund Fund upon retirement (3)
- ------------------------------------------------------------------
- ------------------------------------------------------------------
- ---------------------------------------------------------
Jameson A. Baxter/1994 $1,588 $636 $207,000(4) $372 $141
$95,000
Hans H. Estin/1972 1,588 636 182,500 797 304 95,000
John A. Hill/1985 (4)(5) 2,045 768 200,500 354 135
115,000
Ronald J. Jackson/1996 (4) 1,623 639 200,500 312
120 95,000
Paul L. Joskow/1997 (4) 1,588 636 180,500 83 32
95,000
Elizabeth T. Kennan/1992 1,588 636 200,500 467 178
95,000
Lawrence J. Lasser/1992 1,588 636 178,500 354 135
95,000
John H. Mullin III/1997 (4) 1,648 648 180,500 125
48 95,000
Robert E. Patterson/1984 1,580 633 181,500 254 97
95,000
William F. Pounds/1971 (5) 1,973 741 215,000 891
340 95,000
George Putnam/1957 1,588 636 179,500 857 326 95,000
George Putnam, III/1984 1,588 636 181,500 170 65
95,000
A.J.C. Smith/1986 1,579 633 176,500 555 211 95,000
W. Thomas Stephens/1997 (4) 1,583 635 181,500 117
45 95,000
W. Nicholas Thorndike/1992 1,588 636 182,500 662
253 95,000
(1) Includes an annual retainer and an attendance fee for each
meeting attended.
(2) As of December 31, 1998, there were 113 funds in the Putnam
family.
(3) Assumes that each Trustee retires at the normal retirement
date. Estimated benefits for each Trustee are based on Trustee
fee rates in effect during calendar 1997.
(4) Includes compensation deferred pursuant to a Trustee
Compensation Deferral Plan. The total amounts of deferred
compensation payable by Putnam Tax-Free High Yield Fund to Mr.
Hill, Mr. Jackson, Mr. Joskow, Mr. Mullin and Mr. Stephens as of
July 31, 1999 were $14,732, 6,818, $1,634, $2,775 and $3,490,
respectively, and the total amounts of deferred compensation
payable by Putnam Tax-Free Insured Fund to Mr. Hill, Mr. Jackson,
Mr. Joskow, Mr. Mullin and Mr. Stephens as of July 31, 1999 were
$5,976, $2,715, $602, $1,077 and $1,335, respectively, including
income earned on such amounts.
(5) Includes additional compensation for service as Vice Chairman
of the Putnam funds.
Under a Retirement Plan for Trustees of the Putnam funds (the
"Plan"), each Trustee who retires with at least five years of
service as a Trustee of the funds is entitled to receive an annual
retirement benefit equal to one-half of the average annual
compensation paid to such Trustee for the last three years of
service prior to retirement. This retirement benefit is payable
during a Trustee's lifetime, beginning the year following
retirement, for a number of years equal to such Trustee's years of
service. A death benefit is also available under the Plan which
assures that the Trustee and his or her beneficiaries will receive
benefit payments for the lesser of an aggregate period of (i) ten
years or (ii) such Trustee's total years of service.
The Plan Administrator (a committee comprised of Trustees that are
not "interested persons" of the fund, as defined in the Investment
Company Act of 1940) may terminate or amend the Plan at any time,
but no termination or amendment will result in a reduction in the
amount of benefits (i) currently being paid to a Trustee at the
time of such termination or amendment, or (ii) to which a current
Trustee would have been entitled had he or she retired immediately
prior to such termination or amendment.
For additional information concerning the Trustees, see
"Management" in Part II of this SAI.
At August 31, 1999, the officers and Trustees of the Trust as a
group owned less than 1% of the outstanding shares of each class
of the relevant fund, and, except as noted below, to the knowledge
of each fund no person owned of record or beneficially 5% or more
of the shares of any class of shares of that fund:
Putnam Tax-Free High Yield Fund
Class Shareholder name and address Percentage owned
----- ---------------------------------------- ------
- ----------------
B Merrill Lynch, Pierce, Fenner & Smith 14.60%
4800 Deerlake Drive E.
Jacksonville, FL
C Edward D. Jones & Co. 9.20%
201 Progress Parkway
Maryland Hts., MO
C NFSC FEBO #E39-901695 6.90%
200 Liberty St.
New York, NY
M Merrill Lynch, Pierce, Fenner & Smith 20.00%
c/o Crumpler Investment Limited 20.40%
50 Old Vermont PL NW
Atlanta, GA
M Edward D. Jones & Co. 18.50%
201 Progress Parkway
Maryland Hts., MO
Putnam Tax-Free Insured Fund
Class Shareholder name and address Percentage owned
----- --------------------------------------- -----------
- -----------
C Putnam Investments, Inc. 100%
One Post Office Square
Boston, MA
M Edward D. Jones & Co. 19.10%
201 Progress Parkway
Maryland Hts., MO
M NFSC FEBO #BAH-456152 14.40%
200 Liberty Street
New York, NY
M David A. Humphrey 7.20%
2841 Bent Oaks Drive
Burleson, TX
M Polous L. Hummbard 6.50%
c/o Putnam Investments, Inc.
One Post Office Square
Boston, MA
Distribution fees
During fiscal 1999, the funds paid the following 12b-1 fees to
Putnam Mutual Funds:
Class A Class B Class C Class M
---------- ---------- ----------- -------------
Putnam Tax-Free
High Yield Fund $2,114,568 $6,432,047 $9,748
$110,651
Putnam Tax-Free
Insured Fund $484,858 $565,933 $0 $10,685
Class A sales charges and contingent deferred sales charges
Putnam Mutual Funds received sales charges with respect to class A
shares in the following amounts during the periods indicated:
Sales charges
retained by Putnam Contingent
Total Mutual Funds deferred
front-end after dealer sales
sales charges concessions charges
---------------- ------------------------ ------------
Putnam Tax-Free
High Yield Fund
Fiscal year
- --------------
1999 $1,657,471 $109,487 $33,500
1998 $1,791,735 $116,216 $19,643
1997 $1,840,463 $120,283 $13,626
Putnam Tax-Free
Insured Fund
Fiscal year
- -----------
1999 $493,864 $32,325 $9,702
1998 $395,026 $32,308 $98
1997 $285,700 $18,616 $10,436
Class B contingent deferred sales charges
Putnam Mutual Funds received contingent deferred sales charges
upon redemptions of class B shares in the following amounts during
the periods indicated:
Contingent deferred
sales charges
-------------------
Putnam Tax-Free High Yield Fund
Fiscal year
- -----------
1999 $1,275,474
1998 $2,184,733
1997 $2,395,942
Putnam Tax-Free Insured Fund
Fiscal year
- -----------
1999 $371,865
1998 $318,736
1997 $488,391
Class C contingent deferred sales charges
Putnam Mutual Funds received contingent deferred sales charges
upon redemptions of class C shares in the following amounts during
the periods indicated:
Contingent deferred
sales charges
-------------------
Putnam Tax-Free High Yield Fund
Fiscal year
- -----------
1999 $1,886
Putnam Tax-Free Insured Fund
Fiscal year
- -----------
1999 $0
Class M sales charges
Putnam Mutual Funds received sales charges with respect to class M
shares in the following amounts during the periods indicated:
Sales charges
retained by Putnam
Mutual Funds
Total after
sales charges dealer concessions
------------- ------------------
Putnam Tax-Free
High Yield Fund
1999 $60,264 $6,465
1998 $55,870 $5,795
1997 $83,372 $8,096
Putnam Tax-Free
Insured Fund
1999 $11,300 $1,398
1998 $15,784 $1,435
1997 $7,403 $711
Investor servicing and custody fees and expenses
During the 1999 fiscal year, each fund incurred the following fees
and out-of-pocket expenses for investor servicing and custody
services provided by Putnam Fiduciary Trust Company:
Putnam Tax-Free
High Yield Fund $1,969,290
Putnam Tax-Free
Insured Fund $708,454
INVESTMENT PERFORMANCE
Standard performance measures
(for periods ended July 31, 1999)
Putnam Tax-Free High Yield Fund
Class A
Class B
Class C
Class M
Inception Date
9/20/93
9/9/85
2/1/99
12/29/94
Average annual total return
1 year
- -2.62%
- -3.03%
0.39%
- -1.30%
5 years
5.00%
5.40%
5.15%
4.97%
10 years
6.19%
6.33%
5.84%
6.12%
Yield
30-day yield
4.85%
4.60%
4.16%
4.63%
Tax-equivalent yield *
8.03%
7.62%
6.89%
7.67%
Putnam Tax-Free Insured Fund
Class A
Class B
Class C
Class M
Inception Date
9/20/93
9/9/85
7/26/99
6/1/95
Average annual total return
Class A
Class B
Class C
Class M
1 year
- -3.85%
- -3.78%
- -1.04
- -2.39%
5 years
4.72%
5.15%
4.88
4.69%
10 years
5.66%
5.98%
5.61
5.58%
Yield
30-day yield
4.85%
4.60%
- ---**
4.63%
Tax-equivalent yield *
8.03%
7.62%
- ---**
7.67%
* Assumes the maximum individual federal tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
Does not include any federal alternative minimum tax liability.
** Due to their brief performance history, no yield information is
yet available for class C shares of Putnam Tax-Free Insured Fund.
Returns for class A and class M shares reflect the deduction of
the current maximum initial sales charges of 4.75% for class A
shares and 3.25% for class M shares.
Returns for class B shares reflect the deduction of the applicable
contingent deferred sales charge ("CDSC") which is 5% in the first
year, declining to 1% in the sixth year, and is eliminated
thereafter.
Returns shown for class A, class C and class M shares for periods
prior to their inception are derived from the historical
performance of class B shares, adjusted to reflect the deduction
of the initial sales charge applicable to class A and M shares and
the 1% CDSC applicable to class C shares. The returns for class
A, class C and class M shares have not been adjusted to reflect
the higher operating expenses applicable to class B shares (which
in some cases are higher than those for the other classes of
shares.)
All returns assume reinvestment of distributions at net asset
value and represent past performance; they do not guarantee future
results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
See "Standard Performance measures" in Part II of this SAI for
information on how performance is calculated.
ADDITIONAL OFFICERS
In addition to the persons listed as fund officers in Part II of
this SAI, each of the following persons is also a Vice President
of each fund and certain of the other Putnam funds, the total
number of which is noted parenthetically. Officers of Putnam
Management hold the same offices in Putnam Management's parent
company, Putnam Investments, Inc.
Blake Anderson (age 43) (5 funds), Managing Director of Putnam
Management.
Jerome J. Jacobs (age 41) (27 funds), Managing Director of Putnam
Management. Prior to October, 1996 Mr. Jacobs was Principal at
The Vanguard Group.
Stephen Oristaglio (age 44) (73 funds). Managing Director of
Putnam Management. Prior to July, 1998, Mr. Oristaglio was a
Managing Director at Swiss Bank Corp.
Richard P. Wyke (age 43) (7 funds), Senior Vice President of
Putnam Management.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers, LLP, 160 Federal Street, Boston, MA 02110
are each fund's independent accountants, providing audit services,
tax return review and other tax consulting services and assistance
and consultation in connection with the review of various
Securities and Exchange Commission filings. The Report of
Independent Accountants, financial statements and financial
highlights included in each fund's Annual Report for the fiscal
year ended July 31, 1999, filed electronically on September 23,
1998 and September 17, 1999 for Putnam Tax-Free Insured Fund and
Putnam Tax-Free High Yield Fund, respectively, (File No. 811-
4345), are incorporated by reference into this SAI. The financial
highlights included in the prospectuses and incorporated by
reference into this SAI and the financial statements incorporated
by reference into the prospectuses and this SAI have been so
included and incorporated in reliance upon the reports of the
independent accountants, given on their authority as experts in
auditing and accounting.
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