Putnam
Tax-Free
Insured
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-99
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "With the municipal bond curve steepening, we anticipate finding new
opportunities on the long end of the yield curve."
-- Richard P. Wyke, manager
Putnam Tax-Free Insured Fund
* "We're at historical highs in terms of muni yields relative to
Treasuries. They represent an unprecedented bargain and opportunity."
-- Money, Year-End 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
20 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Investors seeking tax-free income from municipal bonds have not seen such
a favorable yield environment relative to taxable bonds in more than a
decade. The rush of foreign investors to the safety of U.S. Treasury bonds
in recent months has driven prices on these securities markedly higher.
Because of the inverse relationship of yields to prices, yields on 30-year
Treasuries have declined to virtually the same level as those on long-term
municipals. This near parity has made tax-exempt bonds unusually
attractive for U.S. investors.
In the following report from Putnam Tax-Free Insured Fund's manager,
Richard Wyke, you will find more discussion of these developments and
other aspects of the fund's performance during the semiannual period that
ended on January 31, 1999. He also offers his views on prospects for the
fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 17, 1999
Report from the Fund Manager
Richard P. Wyke
Tax-free municipal bonds typically receive increased investor attention
each year as April 15 approaches. Yet municipal bonds have offered special
value to investors since last fall, when a rare convergence of factors
made them historically attractive relative to comparable taxable bonds.
Putnam Tax-Free Insured Fund parlayed some of this momentum to its
advantage, with class A shares gaining 4.15% at net asset value, but
losing -0.81% at public offering price for the six months ended January 31,
1999.
These returns were lower than the 4.67% return posted by the Lehman
Brothers Municipal Bond Index for the same period. The fund's more
conservative, slightly shorter duration relative to this benchmark limited
its potential when the bond market rallied in November and December. More
performance information can be found on pages 9 and 10.
* MUNICIPAL MARKET REMAINS CALM RELATIVE TO OTHER FIXED-INCOME SECTORS
For much of the period, municipal bond yields were extremely close or
equal to Treasury yields, making them an exceptional investment choice for
U.S. investors. A narrow yield differential between tax-free bonds and
comparable taxable bonds suggests municipal bonds are relatively cheap in
relation to Treasuries. This ratio has been in the 84% to 87% range for
most of the 1990's, compared with ratios over 90% at the end of the
period.
This narrow yield differential came about after a series of international
events this fall that triggered considerable stock market volatility and
bond market rallies. Investors began a flight to quality -- selling
investments with virtually any element of risk and rushing for the safety
of U.S. Treasury bonds. This buying drove up the prices of Treasuries
while pushing down their yields.
The yield relationship of Treasury bonds to municipal securities
contributed to a decline in the supply of tax-free securities. With
Treasury yields so close to municipal yields, it did not make as much
sense for issuers to prerefund existing bonds. In prerefunding, the issuer
floats a second bond at a lower interest rate to pay off an older bond at
its first call date. Proceeds from the new bond are invested in U.S.
Treasury securities but only if Treasury rates are economic for this
escrow. The tighter supply of municipals was further exacerbated by low
new issuance in January. Typically the new year is a busy period during
which issuers bring a flurry of new offerings to market. However, as
interest rates rose slightly, many issuers postponed new offerings. The
delay resulted in a 25% reduction in new issuance for the month compared
with levels of a year earlier. The reduced supply has been a positive
dynamic for the municipal bond market.
* YIELD CURVE STEEPENING BENEFITS FUND
A steeper yield curve reflects market expectations that future rates will
fall and bond prices will rise. The municipal yield curve steepened early
in the period, flattened during the bond market rally, and resumed its
steeper slope in January. Your fund's focus on bonds with 10- to 20-year
maturities -- nearly two thirds of total assets -- benefited from the
steepening. Given the outperformance of this sector, we anticipate selling
selected bonds with maturities of 10 years and buying combinations of
bonds with short and long maturities. The net result will be a new
configuration of bonds but should have little or no impact on the fund's
current duration. Duration is a measure of the portfolio's sensitivity to
interest-rate changes; a longer duration may offer greater appreciation
potential when interest rates are declining.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 21.8%
Transportation 16.5%
Health care 14.8%
Water and sewer 9.2%
Education 7.2%
Footnote reads:
*Based on net assets as of 1/31/99. Holdings will vary over time.
Over the course of the period, duration edged up from 6.7 years to 7.1
years. At this level it is still more conservative than that of many of
its competitors and underscores our preference for limiting market risk.
While we expect that the fund's duration will remain short of that of its
benchmark, we are in the process of extending it slightly as the market
corrects to allow the fund to take greater advantage of market rallies.
* FUND SEEKS LOWEST-RISK BONDS
Your fund also reduces risk by investing only in Aaa/AAA-rated and insured
bonds. Because insurance assures the timely payment of principal and
interest if the issuer of the debt is unable to meet its obligations,
insured bonds are granted the highest possible rating by rating agencies,
such as Standard & Poor's and Moody's. Higher-quality bonds are more
stable in volatile markets.
Bond insurance becomes particularly advantageous when we are purchasing
bonds whose performance is linked to a specific industry or company,
especially if the industry or company is experiencing uncertainty because
of short-term economic pressures or deregulation. While investors
generally view deregulation positively, municipal utilities are being
forced to become more cost competitive. The process will ultimately change
the industry as we know it and create new winners and losers. With such
concerns in the utility sector, insurance improves the attractiveness of
issues like Georgia Municipal Electric Authority and Washington State
Public Power.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Hernando County, Florida Criminal Justice Revenue
7.65% 7/1/16
Utah Intermountain Power Agency Revenue
6.15% 7/1/14
Fredericksburg, Virginia Ind. Dev. Authority Hospital Revenue
8.35% 8/15/23
Massachusetts State Tufts University Revenue Bonds
4.75% 2/15/28
New York State Energy Niagra Mohawk Revenue
7.20% 7/1/29
Massachusetts Turnpike Authority Revenue
5.00% 1/1/37
California General Obligation
5.50% 4/1/12
Nebraska Inv. Fin. Authority Housing Revenue
11.47% 3/15/22
Houston, Texas Water and Sewer Revenue
6.38% 12/1/17
District of Columbia General Obligation
6.00% 6/1/11
Footnote reads:
These holdings represent 19.7% of the fund's net assets as of 1/31/99.
Portfolio holdings will vary over time.
Similarly the health-care industry is undergoing great change. Within the
sector as a whole, we have seen some widening of credit spreads between
higher- and lower-yielding bonds as a result of the Philadelphia
Healthcare System bankruptcy. On a more positive note, the bonds issued by
Indiana's Parkview Hospital exemplify an insured holding that is
profitable and dominates the market it serves. While these holdings, as
well as others discussed in this report, were viewed favorably during the
period, all holdings are subject to review in accordance with the fund's
investment strategy and may vary in the future.
* ANTICIPATING VALUE IN LONGER MATURITIES
While the financial markets will always be susceptible to flight-to-safety
rallies, we may begin to re-position the fund slightly in line with our
expectations of a more positive market. The Federal Reserve Board's three
successive interest-rate cuts last fall brought down interest rates on
short-term securities faster than on longer-term securities. As a result,
long-term securities offer better value today. A shift to longer
maturities should enable the fund to participate more fully in market
rallies and capture higher yields, offering shareholders a more attractive
level of income.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 1/31/99, there is no guarantee the fund will
continue to hold these securities in the future. Shares of the fund are
not insured and their price will fluctuate with market conditions.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Tax-Free Insured Fund is designed for investors seeking high current
income free from federal income tax through investments primarily in
insured and Aaa-rated tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 1/31/99
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 4.15% -0.81% 4.25% -0.75% 3.99% 0.60%
- ------------------------------------------------------------------------------
1 year 5.35 0.34 5.57 0.58 4.97 1.59
- ------------------------------------------------------------------------------
5 years 30.26 24.06 28.27 26.30 27.51 23.37
Annual average 5.43 4.41 5.11 4.78 4.98 4.29
- ------------------------------------------------------------------------------
10 years 98.96 89.47 95.55 95.55 94.37 88.07
Annual average 7.12 6.60 6.94 6.94 6.87 6.52
- ------------------------------------------------------------------------------
Life of fund 181.97 168.49 177.14 177.14 175.45 166.53
Annual average 8.05 7.65 7.91 7.91 7.86 7.60
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/99
Lehman Bros.
Municipal Bond Consumer
Index Price Index
- ------------------------------------------------------------------------------
6 months 4.67% 0.86%
- ------------------------------------------------------------------------------
1 year 6.65 1.86
- ------------------------------------------------------------------------------
5 years 35.37 12.59
Annual average 6.24 2.40
- ------------------------------------------------------------------------------
10 years 118.46 35.92
Annual average 8.13 3.12
- ------------------------------------------------------------------------------
Life of fund 218.31 52.41
Annual average 9.01 3.19
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25%, respectively. Class B share returns for the 1-, 5-, and 10- periods
reflect the applicable contingent deferred sales charge (CDSC), which is
5% in the first year, declines to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class A and class M shares for periods prior
to their inception are derived from the historical performance of class B
shares, adjusted in the case of public offering price to reflect the
initial sales charge currently applicable to each class, but have not been
adjusted to reflect differences in expenses, which are lower for class A
and M shares than for class B shares. All returns assume reinvestment of
distributions at NAV. 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/99
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.358840 $0.375396 $0.335425
- ------------------------------------------------------------------------------
Capital gains1
- ------------------------------------------------------------------------------
Long-term 0.096500 0.096500 0.096500
- ------------------------------------------------------------------------------
Short-term 0.025100 0.025100 0.025100
- ------------------------------------------------------------------------------
Total $0.480440 $0.496996 $0.457025
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/98 $15.40 $16.17 $15.42 $15.39 $15.91
- ------------------------------------------------------------------------------
1/31/99 15.55 16.33 15.57 15.54 16.06
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.53% 4.31% 4.72% 4.22% 4.09%
- ------------------------------------------------------------------------------
Taxable equivalent3 7.50 7.14 7.81 6.99 6.77
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 3.80 3.62 4.00 3.51 3.39
- ------------------------------------------------------------------------------
Taxable equivalent3 6.29 5.99 6.62 5.81 5.61
- ------------------------------------------------------------------------------
1Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 3.03% -1.86% 3.14% -1.85% 2.81% -0.54%
- ------------------------------------------------------------------------------
1 year 4.89 -0.07 5.18 0.21 4.58 1.19
- ------------------------------------------------------------------------------
5 years 30.10 23.92 28.00 26.04 27.28 23.11
Annual average 5.40 4.38 5.06 4.74 4.94 4.25
- ------------------------------------------------------------------------------
10 years 99.24 89.79 95.81 95.81 94.71 88.35
Annual average 7.14 6.62 6.95 6.95 6.89 6.54
- ------------------------------------------------------------------------------
Life of fund 178.36 165.05 173.54 173.54 171.99 163.18
Annual average 8.00 7.60 7.85 7.85 7.81 7.54
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance summary for method of performance calculation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. Securities in the fund
do not match those in the indexes and performance of the fund will differ.
It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
January 31, 1999 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.8%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Alabama (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Alabama A&M U. Rev. Bonds, MBIA, 6 1/2s,
11/1/25 Aaa $ 3,525,000
Alaska (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. A, MBIA, 5.9s,
12/1/19 Aaa 6,330,000
Arizona (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser 31, MBIA, 7 1/4s, 8/1/09 Aaa 1,263,750
5,700,000 Ser 34, MBIA, 7 1/4s, 8/1/09 Aaa 7,203,375
4,540,000 Glendale, Indl. Dev. Auth. Rev. Bonds
(Midwestern U.), Ser. A, MBIA, 5 3/8s, 5/15/28 AAA 4,698,900
--------------
13,166,025
California (11.9%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 CA Hsg. Fin. Agcy. Rev. Bonds (Home Mtge.),
Ser. Q, MBIA, 5.85s, 8/1/16 AAA 4,240,000
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 AAA 10,735,000
3,000,000 CA Statewide Cmnty. Dev. Auth. Step-up
Recovery Floater COP (Motion Picture &
TV Fund), AMBAC, stepped-coupon 5.68s,
(5.35s, 1/25/04), 1/1/24 (STP) AAA 3,108,750
2,000,000 East Bay, Muni. Util. Dist. Wtr. Syst. Rev. Bonds,
MBIA, 4 3/4s, 6/1/34 AAA 1,917,500
Los Angeles Cnty. Trans. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6 3/4s, 7/1/20 AAA 2,743,750
4,000,000 (Proposition C), Ser. A, MBIA, 6 3/4s, 7/1/19 AAA 4,485,000
3,455,000 (Proposition C), Ser. A, MBIA, 6 1/2s, 7/1/20 Aaa 3,848,006
3,000,000 Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 3,251,250
5,000,000 Los Angeles Cnty., Pub. Wks. Fin. Auth. Lease Rev.
Bonds, Ser. A, MBIA, 5.2s, 9/1/09 Aaa 5,450,000
5,000,000 Sacramento Muni. Util. Dist. Elec. Rev. Bonds, Ser. Y,
MBIA, 6 3/4s, 9/1/19 Aaa 5,512,500
2,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC, 8.191s,
4/23/08 Aaa 2,525,000
5,000,000 San Diego, Regl. Bldg. Auth. Lease COP, MBIA,
6.9s, 5/1/23 Aaa 5,300,000
1,200,000 San Jacinto, U. School Dist. IF COP, FSA, 2.4s,
9/1/27 VMIGI 1,200,000
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Bldg. Fac.), Ser. A, MBIA,
6 1/4s, 7/1/17 Aaa 4,397,600
1,400,000 Santa Clara Cnty., Hsg. Auth. VRDN
(Foxchase Apt.), FGIC, 2.4s, 11/1/07 VMIGI 1,400,000
2,500,000 Southern CA Pub. Pwr. Auth. Rev. Bonds IFB,
FGIC, 6.72s, 7/1/12 Aaa 2,793,750
6,300,000 U. of CA Rev. Bonds (Multi-Purpose), Ser. A,
MBIA, 6 7/8s, 9/1/16 Aaa 7,119,000
2,000,000 Westminster, COP (Civic Ctr.), Ser. B.,
AMBAC, FRB 2.8s, 6/1/24 AAA 2,000,000
--------------
72,027,106
Colorado (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 4,583,040
Denver, City & Cnty. Arpt. Rev. Bonds, Ser. C, MBIA
1,180,000 6 3/4s, 11/15/22 Aaa 1,302,425
320,000 Prerefunded, 6 3/4s, 11/15/22 Aaa 359,200
1,765,000 6 3/4s, 11/15/13 Aaa 1,965,769
235,000 Prerefunded, 6 3/4s, 11/15/13 Aaa 263,788
6,000,000 Jefferson Cnty., School Dist. G.O. Bonds, MBIA,
6 1/2s, 12/15/10 Aaa 7,305,000
--------------
15,779,222
Delaware (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 DE State Econ. Dev. Auth. Poll. Control Rev. Bonds
(Delmarva Pwr.), Ser. B, FGIC, 7.15s, 7/1/18 Aaa 5,456,250
District of Columbia (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
9,000,000 DC Convention Ctr. Auth. Rev. Bonds, AMBAC,
4 3/4s, 10/1/28 AAA 8,550,000
District of Columbia, G.O. Bonds, Ser. B, MBIA
8,440,000 6s, 6/1/11 Aaa 9,695,450
435,000 Prerefunded, 6s, 6/1/11 Aaa 504,056
4,100,000 5 3/4s, 6/1/09 AAA 4,592,000
--------------
23,341,506
Florida (6.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,685,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds,
Ser. 1987 G2, Class B, GNMA Coll., 8.595s,
11/1/18 AAA 3,141,450
13,675,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 (acquired
on various dates between 2/8/89 and 5/10/90
cost $13,876,769) (RES) Aaa 18,495,438
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C,
MBIA, 9.364s, 10/29/21 Aaa 6,593,125
5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev.
Bonds (Expwy. Rev.), FGIC, 8 1/4s, 7/1/14 Aaa 7,068,750
4,000,000 Sumter Cnty., School Dist. Rev. Bonds
(Multi Dist. Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,235,000
--------------
40,533,763
Georgia (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
GA Muni. Elec. Auth. Pwr. Rev. Bonds
4,495,000 Ser. V, MBIA, 6 1/2s, 1/1/12 Aaa 5,444,569
635,000 Prerefunded, Ser. V, MBIA, 6 1/2s, 1/1/12 AAA 768,350
5,500,000 Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 6,593,125
7,500,000 Ser. B, AMBAC, 6 1/4s, 1/1/12 Aaa 8,906,250
5,700,000 Ser. A, FSA, 5 1/2s, 1/1/12 Aaa 6,348,375
--------------
28,060,669
Illinois (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
10,000,000 Chicago Board of Ed. G.O. Bonds, Class B, FGIC,
zero %, 12/1/09 Aaa 6,250,000
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B,
AMBAC, 6.85s, 1/1/17 Aaa 2,902,250
1,915,000 Chicago Res. Recvy. Mtge. Rev. Bonds, Ser. B,
MBIA, zero %, 10/1/09 Aaa 914,413
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A, AMBAC,
8s, 6/1/17 AAA 6,881,250
--------------
16,947,913
Indiana (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,250,000 Fort Wayne, Hosp. Auth. Rev. Bonds
(Parkview Hlth. Syst., Inc.), MBIA, 4 3/4s,
11/15/28 Aaa 5,859,375
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 9,421,875
--------------
15,281,250
Louisiana (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,214,804 East Baton Rouge, Mtge. Fin. Auth. Single Fam.
Mtge. Rev. Bonds (Mortgage-Backed Securities
Program), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 AAA 1,305,914
Massachusetts (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
11,000,000 MA State Tpk. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/37 Aaa 10,821,250
12,105,000 MA State Indl. Fin. Agcy. Rev. Bonds (Tufts U.),
Ser. H, MBIA, 4 3/4s, 2/15/28 AAA 11,681,325
6,000,000 MA State Wtr. Resources Auth. Rev. Bonds,
Ser. A, FSA, 4 3/4s, 8/1/37 Aaa 5,715,000
--------------
28,217,575
Michigan (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Grand Traverse Cnty., Hosp. Rev. Bonds
(Munson Healthcare), Ser. A, AMBAC,
5s, 7/1/28 Aaa 3,915,000
5,000,000 MI State Strategic Fund Ltd. Rev. Bonds
(Detroit Edison Co.), Ser. A, MBIA, 5.55s, 9/1/29 Aaa 5,106,250
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
4,000,000 AMBAC, 7s, 5/1/21 Aaa 5,145,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,437,500
7,000,000 Wayne Charter Cnty., Arpt. Rev. Bonds
(Detroit Met. Wayne Cnty), Ser. A, MBIA,
5s, 12/1/28 AAA 6,833,750
--------------
24,437,500
Missouri (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev.
Bonds (Heartland Hlth. Sys. Project), AMBAC,
6.35s, 11/15/17 Aaa 2,725,000
5,000,000 Sikeston Elec. Rev. Bonds, MBIA, 6s, 6/1/14 Aaa 5,812,500
--------------
8,537,500
Nebraska (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
NE Investment Fin. Auth. Single Fam. Mtge. IFB
3,400,000 Ser. 2, GNMA Coll., 11.895s, 9/10/30 Aaa 3,761,250
9,700,000 Ser. B, GNMA Coll., 11.47s, 3/15/22 Aaa 10,560,875
3,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA, 9.487s,
11/15/16 Aaa 3,585,000
--------------
17,907,125
Nevada (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Clark Cnty., Passenger Fac. Rev. Bonds
(Las Vegas McCarran Intl.), MBIA, 4 3/4s, 7/1/22 AAA 4,787,500
5,800,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A, MBIA,
7s, 6/1/10 (SEG) AAA 7,242,750
7,350,000 Nevada State G.O. Bonds, MBIA, 4 3/4s, 5/15/26 AAA 7,010,063
--------------
19,040,313
New Hampshire (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
NH Higher Ed.& Hlth. Fac. Auth. VRDN
(VHA New England Inc.)
1,900,000 Ser. B, AMBAC, 3.05s, 12/1/25 Aaa 1,900,000
1,400,000 Ser. D, AMBAC, 3.05s, 12/1/25 Aaa 1,400,000
2,500,000 NH State Tpk. Sys. IFB, FGIC, 10.245s, 11/1/17 AAA 3,425,000
--------------
6,725,000
New Jersey (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB, Ser. A, MBIA,
6 1/4s, 8/15/10 Aaa 3,577,500
2,480,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Barnabas Hlth.), Ser. B, MBIA, 5 1/4s, 7/1/12 Aaa 2,669,100
5,020,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA,
6 1/2s, 1/1/16 Aaa 6,099,300
6,000,000 NJ State Trans. Fund Auth. Rev. Bonds, Ser. A,
AMBAC, 5 1/4s, 6/15/09 Aaa 6,487,500
--------------
18,833,400
New Mexico (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
500,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 507,500
New York (13.8%)
- --------------------------------------------------------------------------------------------------------------------------
4,670,000 Long Island Pwr. Auth. FRB, Ser. 66, MBIA,
6.92s, 4/1/10 (acquired 11/3/98,
cost $5,270,660) (RES) AAA 5,475,575
Metropolitan Trans. Auth. Commuter Fac. Rev. Bonds
7,425,000 Ser. A, MBIA, 5.7s, 7/1/17 Aaa 8,037,563
4,500,000 MBIA, 5.7s, 7/1/17 Aaa 4,871,250
7,000,000 Ser. B, FGIC, 4 3/4s, 7/1/26 AAA 6,763,750
15,000,000 NY City, G.O. Bonds, MBIA, zero %, 8/1/09 Aaa 9,618,750
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
7,265,000 Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 9,517,150
2,735,000 Prerefunded, Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 3,541,825
5,000,000 Ser. C, MBIA, 5 1/2s, 6/15/17 Aaa 5,275,000
8,000,000 Ser. D, MBIA, 4 3/4s, 6/15/25 Aaa 7,730,000
3,000,000 NY City, Transitional Fin. Auth. Rev. Bonds, Ser. A,
FGIC, 5 1/4s, 11/15/13 AAA 3,213,750
5,000,000 NY State Dorm. Auth. Rev. Bonds
(State U. Edl. Facs.), Ser. A, MBIA, 4 3/4s, 5/15/25 AAA 4,831,250
3,000,000 NY State Energy Res. & Dev. Auth. IFB, MBIA,
7.539s, 7/8/26 Aaa 3,255,000
9,750,000 NY State Energy Res. & Dev. Auth. Poll. Control
Rev. Bonds (Niagra Mohawk Pwr. Corp.),
Ser. A, FGIC, 7.2s, 7/1/29 AAA 11,322,187
--------------
83,453,050
North Carolina (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
(No. 1, Catawba Elec.), MBIA, 5.6s, 1/1/20 Aaa 4,290,000
Ohio (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
3,695,000 Ser. C, GNMA Coll., 8 1/8s, 3/1/20 AAA 3,810,173
2,010,000 Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 419,588
--------------
4,229,761
Pennsylvania (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Oaks, School Dist IFB, AMBAC,
8.95s, 9/1/16 Aaa 2,377,500
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds (Sacred Heart Hosp.
Norristown), Ser. A, MBIA, 6.8s, 2/1/13 Aaa 2,019,500
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Peabody), MBIA, 8.15s, 9/1/13 Aaa 3,633,750
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,182,500
--------------
10,213,250
Puerto Rico (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,100,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. EE, MBIA,
5s, 7/1/09 AAA 5,533,500
South Carolina (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
Piedmont, Muni. Pwr. Agcy. Rev. Bonds, Ser. A, MBIA
1,500,000 5 1/2s, 1/1/13 AAA 1,653,750
1,100,000 5 1/4s, 1/1/12 AAA 1,190,750
3,500,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. IFB
(St. Francis Hosp.-Franciscan Sisters),
AMBAC, 7.02s, 8/1/15 Aaa 3,775,625
--------------
6,620,125
Tennessee (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
6,895,000 Johnson, Hlth. & Edl. Rev. Bonds (Johnson City
Med. Ctr.), MBIA, 5 1/2s, 7/1/12 AAA 7,593,119
4,840,000 Knox Cnty., Hlth., Ed. & Hsg. Fac. Rev. Bonds
(Fort Sanders Alliance), MBIA, 5 3/4s, 1/1/14 Aaa 5,396,600
--------------
12,989,719
Texas (9.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,680,000 Austin, Arpt. Syst. Rev. Bonds, Ser. A, MBIA, 6.1s,
11/15/11 Aaa 6,304,800
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds,
MBIA, 5 1/4s, 11/15/31 AAA 5,075,000
3,490,000 Brownsville, Util. Syst. Rev. Bonds, AMBAC,
6 1/4s, 9/1/11 Aaa 4,144,375
82,000 Dallas Cnty. Hsg. Fin. Corp. Single Fam. Mtge.
Rev. Bonds, MBIA, 10s, 10/1/07 Aaa 83,079
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Bonds,
AMBAC, 7.4s, 2/15/10 Aaa 6,206,250
Houston, Wtr. & Swr. Syst. Rev. Bonds, Ser. C, AMBAC
9,400,000 6 3/8s, 12/1/17 Aaa 10,140,250
600,000 Prerefunded, 6 3/8s, 12/1/17 Aaa 658,500
5,965,000 Hurst Euless Bedford Indpt. School Dist. G.O.
Bonds, Permanent School Funding Gtd., 4.9s,
8/15/20 AAA 5,935,175
3,500,000 Katy, Independent School Dist. VRDN, Ser. A,
Permanent School Funding Gtd., 2.9s, 2/15/20 A-1+ 3,500,000
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds,
MBIA, 6 5/8s, 4/1/12 Aaa 7,463,747
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. Rev. Bonds,
MBIA, 6.4s, 8/1/12 Aaa 5,437,500
--------------
54,948,676
Utah (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
12,400,000 Utah Pwr. Supply Rev. Bonds
(Intermountain Pwr. Agcy.), Ser. A, MBIA,
6.15s, 7/1/14 Aaa 14,089,500
Virginia (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 8.354s, 8/15/23 Aaa 11,937,500
Washington (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Chelan Cnty., Pub. Util. Dist. No. 1 Rev. Bonds,
Ser. A, MBIA, zero %, 6/1/29 Aaa 420,000
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 8.942s, 1/2/15 AAA 2,307,500
WA State Pub. Pwr. Supply Syst. Rev. Bonds
3,400,000 (Nuclear No. 2), Ser. C, FGIC, 7 3/8s, 7/1/11 AAA 3,714,500
6,000,000 (Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,650,000
5,000,000 (Nuclear No. 1), Ser. A, MBIA, 5 3/4s, 7/1/10 Aaa 5,543,750
5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,556,250
--------------
25,192,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $545,140,498) (b) $ 599,457,612
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $606,555,021.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
January 31, 1999, for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings
do not necessarily represent what the agencies would ascribe to these securities at January 31, 1999. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $545,161,592, resulting in gross unrealized appreciation and
depreciation of $54,627,114 and $331,094, respectively, or net unrealized appreciation of $54,296,020.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at January 31, 1999 was $23,971,013 or 4.0% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at January 31, 1999.
The rates shown on FRB are the current interest rates shown at January 31, 1999, which are subject to change
based on the terms of the security.
The rates shown on IFB and IF COP, which are securities paying interest rates that vary inversely to changes
in the market interest rates, and VRDN's are the current interest rates at January 31, 1999.
The fund had the following industry group concentrations greater than 10% at January 31, 1999 (as a percentage
of net assets):
Utilities 21.8%
Transportation 16.5
Health care 14.9
The fund had the following insurance concentrations greater than 10% at January 31, 1999 (as a percentage of
net assets):
MBIA 54.3%
FGIC 17.6
AMBAC 16.3
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at January 31, 1999 (Unaudited)
Total Aggregate Face Expiration Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Municipal Bond Index
(Short) $39,546,000 $38,576,908 Mar-99 $(969,092)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $545,140,498) (Note 1) $599,457,612
- -----------------------------------------------------------------------------------------------
Cash 2,738,391
- -----------------------------------------------------------------------------------------------
Interest and other receivables 5,981,131
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,293,151
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 5,161,754
- -----------------------------------------------------------------------------------------------
Total assets 614,632,039
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 5,000,000
- -----------------------------------------------------------------------------------------------
Payable for variation margin 78,000
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 996,027
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,521,475
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 297,819
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 61,215
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,361
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,324
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 42,241
- -----------------------------------------------------------------------------------------------
Other accrued expenses 64,556
- -----------------------------------------------------------------------------------------------
Total liabilities 8,077,018
- -----------------------------------------------------------------------------------------------
Net assets $606,555,021
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $561,146,879
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (979,287)
- -----------------------------------------------------------------------------------------------
Distributions in excess of gains on investments (Note 1) (6,960,593)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 53,348,022
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $606,555,021
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($245,442,427 divided by 15,788,612 shares) $15.55
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $15.55)* $16.33
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($358,647,662 divided by 23,035,665 shares)+ $15.57
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,464,932 divided by 158,663 shares) $15.54
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.54)** $16.06
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more an on group
sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended January 31, 1999 (Unaudited)
<S> <C>
Tax exempt interest income: $15,523,720
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,736,617
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 353,464
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,170
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,285
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 239,250
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,632
- -----------------------------------------------------------------------------------------------
Reports to shareholders 26,613
- -----------------------------------------------------------------------------------------------
Registration Fees 6,545
- -----------------------------------------------------------------------------------------------
Auditing 17,785
- -----------------------------------------------------------------------------------------------
Legal 5,958
- -----------------------------------------------------------------------------------------------
Postage 15,157
- -----------------------------------------------------------------------------------------------
Other 25,628
- -----------------------------------------------------------------------------------------------
Total expenses 2,445,104
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (63,020)
- -----------------------------------------------------------------------------------------------
Net expenses 2,382,084
- -----------------------------------------------------------------------------------------------
Net investment income 13,141,636
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,462,669
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (2,080,049)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 11,432,150
- -----------------------------------------------------------------------------------------------
Net gain on investments 10,814,770
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $23,956,406
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
1999* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 13,141,636 $ 27,565,470
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (617,380) 1,833,865
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 11,432,150 (3,409,371)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 23,956,406 25,989,964
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,426,586) (10,576,810)
- ---------------------------------------------------------------------------------------------------------------
Class B (8,330,199) (16,563,021)
- ---------------------------------------------------------------------------------------------------------------
Class M (47,826) (69,217)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (1,869,573) (969,004)
- ---------------------------------------------------------------------------------------------------------------
Class B (2,780,386) (1,476,320)
- ---------------------------------------------------------------------------------------------------------------
Class M (18,696) (6,563)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 32,667,963 12,564,138
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 38,151,103 8,893,167
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 568,403,918 559,510,751
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $979,287 and
$316,312, respectively) $606,555,021 $568,403,918
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 Sept. 20, 1993+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.40 $15.50 $14.94 $14.86 $14.67 $15.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .34(c) .74(c) .79 .81 .83 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 (.04) .67 .08 .19 (1.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .63 .70 1.46 .89 1.02 (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.73) (.80) (.81) (.82) (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.12) (.07) (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.80) (.90) (.81) (.83) (.82)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.55 $15.40 $15.50 $14.94 $14.86 $14.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.15* 4.63 10.09 6.06 7.21 (2.49)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $245,442 $230,283 $219,265 $196,948 $184,241 $143,079
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .47* .94 .92 .90 .89 .80*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.17* 4.80 5.22 5.37 5.68 4.73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.90 40.38 36.13 54.58 37.62 47.72
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share January 31
operating performance (Unaudited) Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.42 $15.52 $14.96 $14.87 $14.68 $15.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .35(c) .77(c) .74 .71 .73 .74
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 (.04) .68 .09 .20 (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .73 1.42 .80 .93 .01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.76) (.76) (.71) (.73) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.12) (.07) (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (.83) (.86) (.71) (.74) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.57 $15.42 $15.52 $14.96 $14.87 $14.68
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.25* 4.83 9.76 5.44 6.53 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $358,648 $336,286 $339,354 $354,431 $377,443 $432,895
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .37* .74 1.22 1.58 1.54 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.27* 5.00 4.93 4.72 5.05 4.81
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.90 40.38 36.13 54.58 37.62 47.72
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 June 1, 1995+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.39 $15.50 $14.94 $14.86 $15.11
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .32(c) .69(c) .74 .76 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 (.04) .67 .08 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .61 .65 1.41 .84 (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.69) (.75) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.12) (.07) (.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.76) (.85) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.54 $15.39 $15.50 $14.94 $14.86
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.99* 4.24 9.76 5.74 (0.87)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,465 $1,835 $892 $325 $17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .62* 1.24 1.22 1.19 .14*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.02* 4.50 4.87 4.99 .73*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.90 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 (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
Notes to financial statements
January 31, 1999 (Unaudited)
Note 1
Significant accounting policies
Putnam Tax-Free Insured Fund (the "fund") is a series of Putnam Tax-Free
Income Trust (the "Trust") which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund pursues its objective of seeking high current
income exempt from federal income tax by investing in tax exempt
securities that are covered by insurance guaranteeing the timely payment
of principal and interest, are rated AAA or Aaa, or are backed by the U.S.
government.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
D) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended January 31, 1999, the fund had no borrowings against the line of
credit.
E) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
It is also the intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. Capital gain distributions if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
G) Expenses of the trust Expenses directly charged or attributable to any
fund will be paid from the assets of that fund. Generally, expenses of the
trust will be allocated among and charged to the assets of each fund on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each fund or the nature of the services performed and
relative applicability to each fund.
H) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. The premium in excess of the call
price, if any, is amortized to the call date; thereafter, the remaining
excess premium is amortized to maturity. Discounts on zero coupon bonds
and original issue discount are accreted according to the
yield-to-maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Investment Management Inc., ("Putnam Management")
the fund's manager, a wholly-owned subsidiary of Putnam Investments, Inc.
for management and investment advisory services is paid quarterly based on
the average net assets of the fund. Such fee is based on the following
annual rates: 0.60% of the first $500 million of average net assets, 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 fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended January 31, 1999, fund expenses were reduced by
$63,020 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $520 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.20%, 0.60% and 0.50% of the average net assets attributable to
class A, class B and class M shares respectively. Effective May 16, 1997,
the Trustees agreed to temporarily suspend the payment of the class B
Plan.
For the six months ended January 31, 1999, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $16,823 and $1,264 from
the sale of class A and class M shares, respectively and $124,658 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the six months ended January 31, 1999, Putnam Mutual
Funds Corp., acting as underwriter received no monies on class A
redemptions.
Note 3
Purchase and sales of securities
During the six months ended January 31, 1999, purchases and sales of
investment securities other than short-term investments aggregated
$79,153,201 and $68,870,454, respectively. There were no purchases and
sales of U.S. government obligations. In determining the net gain or loss
on securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At January 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,760,647 $ 27,300,116
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 285,131 4,422,182
- -----------------------------------------------------------------------------
2,045,778 31,722,298
Shares
repurchased (1,208,597) (18,806,276)
- -----------------------------------------------------------------------------
Net increase 837,181 $ 12,916,022
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,565,662 $54,957,758
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 422,298 6,519,264
- -----------------------------------------------------------------------------
3,987,960 61,477,022
Shares
repurchased (3,182,810) (48,957,254)
- -----------------------------------------------------------------------------
Net increase 805,150 $12,519,768
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,052,586 $ 47,479,905
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 462,010 7,175,288
- -----------------------------------------------------------------------------
3,514,596 54,655,193
Shares
repurchased (2,284,949) (35,518,508)
- -----------------------------------------------------------------------------
Net increase 1,229,647 $ 19,136,685
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,236,109 $65,348,127
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 710,130 10,974,575
- -----------------------------------------------------------------------------
4,946,239 76,322,702
Shares
repurchased (5,006,852) (77,226,385)
- -----------------------------------------------------------------------------
Net decrease (60,613) $ (903,683)
- -----------------------------------------------------------------------------
Six months ended
January 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 49,202 $ 765,450
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,443 37,881
- -----------------------------------------------------------------------------
51,645 803,331
Shares
repurchased (12,160) (188,075)
- -----------------------------------------------------------------------------
Net increase 39,485 $ 615,256
- -----------------------------------------------------------------------------
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 102,035 $1,568,065
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,074 62,868
- -----------------------------------------------------------------------------
106,109 1,630,933
Shares
repurchased (44,505) (682,880)
- -----------------------------------------------------------------------------
Net increase 61,604 $ 948,053
- -----------------------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
Insured Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
SA043-49949 035/438/629 3/99
