Putnam
Tax Exempt
Money Market
Fund
ANNUAL REPORT
September 30, 1996
[LOGO: BONTON * LONDON * TOKYO]
Fund highlights
* "We will continue to monitor the interest-rate environment
closely, while retaining our focus on securities of the very highest
quality."
-- Lindsey C. Strong, Manager
Putnam Money Market Fund
* "Total assets in money funds . . . reached $856.7 billion at the
end of August, according to IBC/Financial Data in Ashland, MA,
surpassing for the first time the $806.4 billion that the Investment
Company Institute, the Washington trade group, counted in
bond/income funds."
-- The New York Times, September 29, 1996
CONTENTS
4 Report from Putnam Management
7 Fund performance summary
10 Portfolio holdings
13 Financial statements
From the Chairman
[PHOTO OF GEORGE PUTNAM OMITTED]
(copyright) Karsh, Ottawa
Dear Shareholder:
Unsettled fixed-income markets and uncertainty over the course of
short-term interest rates provided most of the challenges for Fund
Manager Lindsey Strong throughout Putnam Tax Exempt Money Market
Fund's fiscal year that ended on September 30, 1996. By continually
adjusting the average maturity of the portfolio and maintaining the
fund's conservative strategy of investing in high-quality short-term
investments, she was able to deliver another year of competitive
performance while maintaining a stable net asset value.
As your fund moves into fiscal 1997, Lindsey sees a continuation of
this general environment in prospect, especially as Washington and
the rest of the nation adjust to the results of the November
elections. In the report that follows, Lindsey discusses in detail
the driving forces behind your fund's fiscal 1996 performance and
her outlook for the fiscal year ahead.
Respectfully yours,
/S/ George Putnam
George Putnam
Chairman of the Trustees
November 20, 1996
Report from the Fund Manager
Lindsey C. Strong
In the fiscal year ended September 30, 1996, Putnam Tax Exempt Money
Market Fund once again provided shareholders with a competitive
total return while continuing to focus on capital preservation and
maintaining a stable $1.00 share price. The fund's conservative
investment strategy, which emphasizes superior quality, tax-exempt
short-term instruments, and the pursuit of current income, served
shareholders well during the year's environment of continued
economic strength, slightly higher interest rates, and diminished
inflationary expectations.
*ECONOMIC STRENGTH WITHOUT INFLATION
Economic strength continued throughout the period, although certain
indicators showed some softening as September drew to a close.
Unemployment figures stayed low, while retail sales, home and
vehicle sales, and consumer confidence remained relatively robust.
At the same time, inflationary pressures did not materialize,
despite ongoing market worries to the contrary. The Federal Reserve
Board, believing that the economy would soon slow enough on its own,
did not raise short-term interest rates in September as many had
expected. In fact, over the summer, demand did seem to be tapering a
bit as retail sales growth edged lower, exports softened, and home
sales came off their earlier peaks.
*PORTFOLIO FOCUSED ON NEUTRAL DURATION AND HIGH-QUALITY HOLDINGS
With the economy's strength, the potential for inflation, and the
possibility of a Fed interest-rate increase somewhat unclear, your
portfolio remained in a flexible position throughout the period.
This meant keeping portfolio duration relatively neutral -- rather
than short or long -- in order to be ready to take advantage of
incrementally higher yields, should interest rates begin to rise.
Throughout the period, we continued to seek out securities offering
strong value and solid yield.
The supply of municipal securities fluctuates throughout the year,
broadly following seasonal patterns. Typically, June and July are
months of heavier issuance of tax-exempt securities, and this year
was no exception. Demand, however, assumed a rather cautious tone
during the period as buyers exhibited renewed enthusiasm for the
most conservative money-market investments. Essentially, most market
participants are getting back to basics, eschewing the derivative
investments that were once such popular income vehicles and
scrutinizing the credit quality even of securities once thought to
be above question.
Your fund has always maintained extremely strict standards for high
quality and liquidity in the securities it purchases. In this time
of interest-rate uncertainty and increased credit consciousness, we
have redoubled efforts to find well-valued tax-exempt securities
that meet our criteria. We continue to concentrate the fund's
holdings in variable rate demand notes (VRDNs) and municipal
commercial paper from large, top-quality issuers. VRDNs are
instruments that can be redeemed on short notice. They pay a
variable interest rate that resets at daily, weekly, or monthly
intervals. They are helpful in managing the fund's average maturity
and liquidity. Commercial paper is a type of security issued by a
municipality to finance capital or operating needs.
Currently, up to 80% of your fund's investments are insured or
backed by bank letters of credit. The insurance and letters of
credit guarantee that the short-term debt (money-market instruments)
in which your fund invests will be paid within a certain period.
These features add a significant measure of quality assurance even
to those issues rated in the highest categories by nationally
recognized rating services, making many of the fund's holdings among
the highest-quality securities available. We intend to maintain the
portfolio's high percentage of insured and bank-backed securities
going forward or even to expand it, should appropriate investment
opportunities arise.
*SLOWER ECONOMY PROMPTS LOWER-RATE FORECASTS AND CAUTIOUS OPTIMISM
Economic growth would appear to have begun to moderate, while
inflationary pressures remain subdued. After expecting the Fed to
raise interest rates, many market participants even see the
possibility of an ease in rates should the economy slow
significantly. Given these mixed signals, we expect the market to
remain somewhat unsettled over the near term. We believe the
portfolio's neutral duration and concentration in superior-quality
issues should continue to serve shareholders well by preserving
share price and income stream amid this challenging environment.
The views expressed throughout the report are exclusively those of
Putnam Management and are not meant as investment advice. Although
the described holdings were viewed favorably as of 9/30/96, there is
no guarantee the fund will continue to hold these securities in the
future.
PERFORMANCE COMPARISONS (9/30/96)
Current After-tax
return return
- --------------------------------------------------------------------
Passbook savings account 2.01% 1.21%
- --------------------------------------------------------------------
Taxable money-market fund 7-day yield 4.86 2.94
- --------------------------------------------------------------------
3-month certificate of deposit 4.04 2.44
- --------------------------------------------------------------------
Putnam Tax Exempt
Money Market Fund (7-day yield) 3.15 3.15
- --------------------------------------------------------------------
The net asset value of money-market mutual funds is uninsured and
designed to be fixed, while distributions vary daily. Investment
returns will fluctuate. The principal value on passbook savings and
bank CDs are generally insured up to certain limits by state and
federal agencies. CDs, unlike stocks which incur more risk, offer a
fixed rate of return. Unlike money-market funds, early withdrawals
from bank CDs may be subject to substantial penalties. After-tax
return is based on a 39.6% maximum federal income tax bracket.
Sources: Bank of Boston (passbook savings), Bank Rate Monitor (3-
month CDs), IBC/Donaghue's Money Fund Report (taxable money market
fund 7-day yield).
Performance summary
Performance should always be considered in light of a fund's
investment strategy. Putnam Tax Exempt Money Market Fund is designed
for investors seeking current income exempt from federal income tax,
consistent with capital preservation, stable principal,
and liquidity.
This section provides, at a glance, information about your fund's
performance. 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.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
Lipper
Tax Exempt Consumer
Fund shares Money Market Price
at NAV Fund Average Index
- --------------------------------------------------------------------
1 year 3.02% 3.02% 3.00%
- --------------------------------------------------------------------
5 years 13.66 14.04 15.02
Annual average 2.59 2.66 2.84
- --------------------------------------------------------------------
Life of fund (10/26/87) 38.96 38.84 36.86
Annual average 3.75 3.75 3.58
- --------------------------------------------------------------------
Fund performance data do not take into account any adjustment for
taxes payable on reinvested distributions. Performance data
represent past results and are not indicative of future returns.
Investment returns will fluctuate. An investment in the fund is
neither insured nor guaranteed by the U.S. government. There can be
no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share. The fund's holdings do not match
those in the Lipper Average.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/96
- --------------------------------------------------------------------
Distributions (number) 12
- --------------------------------------------------------------------
Income $0.029772
- --------------------------------------------------------------------
Total $0.029772
- --------------------------------------------------------------------
Current return
End of period
- --------------------------------------------------------------------
Current 7-day yield1 3.15%
- --------------------------------------------------------------------
Taxable equivalent2 5.22
- --------------------------------------------------------------------
Current 30-day yield1 3.07
- --------------------------------------------------------------------
Taxable equivalent2 5.08
- --------------------------------------------------------------------
1The 7-day and 30-day yields are the two most common gauges for
measuring money market mutual fund performance.
2Assumes maximum 39.6% combined federal and state tax rate. Results
for investors subject to lower tax rates would not be as
advantageous. 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.
TERMS AND DEFINITIONS
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.
COMPARATIVE BENCHMARKS
Lipper Tax Exempt Money Market Fund Average, used for performance
comparison purposes, is an arithmetic average of the total return of
all tax exempt money market mutual funds tracked by Lipper
Analytical Services. Lipper is an independent rating organization
for the mutual fund industry. Lipper rankings vary for other
periods. The fund's holdings do not match those in the Lipper
Average. 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.
Report of independent accountants
For the fiscal year ended September 30, 1996
To the Trustees and Shareholders of
Putnam Tax Exempt Money Market Fund
We have audited the accompanying statement of assets and liabilities
of Putnam Tax Exempt Money Market Fund, including the portfolio of
investments owned, as of September 30, 1996, and the related
statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Tax Exempt Money Market Fund as of
September 30, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 8, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1996
Key to Abbreviations
G.O. Bonds -- General Obligation Bonds
LOC -- Letter of Credit
RAN -- Revenue Anticipation Notes
TRAN -- Tax Revenue Anticipation Notes
VRDN -- Variable Rate Demand Notes
<S> <C> <C> <C> <C>
Municipal Bonds and Notes (46.9%) *
PRINCIPAL AMOUNT RATINGS ** VALUE
California (9.4%)
- -------------------------------------------------------------------------------------------------------------------------------
$3,500,000 CA. Public Cap. Impts. Fin. Auth. VRDN Ser.C
5s, 6/1/28 (National Westminister Bank USA (LOC)) VMIG1 3,500,000
2,000,000 California St. RAN, Ser. A, 4.5s, 6/30/97 MIG1 2,007,625
4,000,000 Pomona CA Redev. Agcy. Multi-Fam. Hsg. VRDN (Bauer
Group Apts.) 2.55s, 12/1/07 (Mercury S & L(LOC)) VMIG1 4,000,000
----------
9,507,625
Georgia (1.0%)
- -------------------------------------------------------------------------------------------------------------------------------
1,000,000 De Kalb Cnty. Hsg. Auth. Multi-Fam. VRDN (Wood
Hills Apt. Project ) 4s, 12/1/07 (Bank of
Montreal (LOC)) A-1+ 1,000,000
Illinois (3.3%)
- -------------------------------------------------------------------------------------------------------------------------------
3,300,000 Chicago IL Tender Notes, VRDN 3.1s, 1/31/98
(Landesbank Hessen-Thuringen (LOC)) VMIG1 3,300,000
Kentucky (6.2%)
- -------------------------------------------------------------------------------------------------------------------------------
1,895,000 Clark Cnty. Poll. Control VRDN (Kentucky Pwr.
Natural Resources) 3.7s, 10/15/14 VMIG1 1,895,000
1,370,000 Jefferson Cnty. Indl. Dev. VRDN 3.35s, 12/01/14
(Chemical Bank (LOC)) A-1 1,370,000
3,000,000 Ohio Cnty. Ky. Poll. Control VRDN (Big Rivers Elec. Corp.)
3.3s, 10/1/15 (Chemical Bank (LOC)) P-1 3,000,000
----------
6,265,000
Massachusetts (1.0%)
- -------------------------------------------------------------------------------------------------------------------------------
1,000,000 MA Bay Trans. Auth. VRDN 3.05s, 3/1/14
(State Street Bank & Trust Co. (LOC)) VMIG1 1,000,000
Michigan (1.9%)
- -------------------------------------------------------------------------------------------------------------------------------
1,900,000 MI State Job. Dev. Auth. VRDN 2.7s,
12/1/14 (First Bank N.A. (LOC)) A-1 1,900,000
Minnesota (3.5%)
- -------------------------------------------------------------------------------------------------------------------------------
3,500,000 Duluth Tax Increment VRDN (Lake Superior Paper)
4.75s, 9/1/10 (National Australia Bank(LOC)) VMIG1 3,500,000
Mississippi (6.7%)
- -------------------------------------------------------------------------------------------------------------------------------
2,800,000 Jackson Cnty. VRDN (Wtr. System) 4.45s,
11/1/24 (Chevron Corp. (LOC)) VMIG1 2,800,000
4,000,000 Perry Co. Poll. Control VRDN 4.75s, 3/1/03
(Credit Suisse (LOC)) P-1 4,000,000
----------
6,800,000
North Dakota (1.6%)
- -------------------------------------------------------------------------------------------------------------------------------
1,600,000 Mercer Cnty. Solid Waste Disposal VRDN
(National Rural Utilities, United Power Project)
3.95s, 12/1/18 VMIG1 1,600,000
South Dakota (2.8%)
- -------------------------------------------------------------------------------------------------------------------------------
2,865,000 Rapid City Economic. Dev. VRDN (Civic Ctr. Assoc.
Partnership)2.75s, 12/1/16 (Citibank N.A. (LOC)) P-1 2,865,000
Texas (5.5%)
- -------------------------------------------------------------------------------------------------------------------------------
2,500,000 Lower Neches Valley Auth. Poll. Control VRDN
(Chevron USA Project) 2.7s, 2/15/17 A-1+ 2,500,000
3,000,000 Texas ST. G.O. Trans. 4.75s, 8/29/97 MIG1 3,021,050
----------
5,521,050
Virginia (4.0%)
- -------------------------------------------------------------------------------------------------------------------------------
4,000,000 Peninsula Port Auth. VRDN, Ser. A, 4.1s, 10/1/15 (Shell Oil) Aa 4,000,000
Total Municipal Bonds and Notes (cost $47,258,675) 47,258,675
MUNICIPAL COMMERCIAL PAPER (36.4%) *
PRINCIPAL AMOUNT RATINGS ** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
$3,500,000 City of Austin, TX (Travis & Williamson Counties)
Combined Util. Syst. 3.45s, 10/10/96 (Swiss Bank
Corporation (LOC)) P-1 3,500,000
4,500,000 Burke Cnty. GA Dev. Auth. Poll. Control 3.15s,
11/7/96 (Credit Suisse (LOC)) P-1 4,500,000
2,000,000 Burlington KS Poll. Control 3.15s, 10/9/96
(Toronto Dominion Bank (LOC)) P-1 2,000,000
2,500,000 Burlington KS Poll. Control 3.15s, 10/22/96
(Toronto Dominion Bank (LOC)) P-1 2,500,000
2,500,000 Clairborne Cnty. MS Poll. Control (National Rural
Utilities) 3 1/4s, 12/11/96 VMIG1 2,500,000
2,000,000 Gillette WY. Poll. Control 3.24s, 11/5/96
(Deutsche Bank (LOC)) P-1 2,000,000
1,500,000 Hillsboro Cnty. Fl Aviation Auth. (Tampa Intl. Arpt.)
3.10s, 11/8/96 (National Westminster (LOC)) P-1 1,500,000
3,000,000 Intermountain Pwr. Agcy., 3.3s, 12/11/96
(Bank of America (LOC)) VMIG1 3,000,000
3,000,000 Montgomery AL Indl. Dev. Board Poll. Control
(General Electric) 3.2s, 2/10/97 P-1 3,000,000
3,000,000 MA Wtr. Res. Auth., 3 1/4s, 10/17/96 (Morgan Guaranty (LOC)) P-1 3,000,000
1,500,000 North Carolina Muni. Pwr. 3.55s, 10/1/96
(Union Bank Of Switzerland(LOC)) P-1 1,500,000
3,500,000 Pendelton Cnty. KY 3.4s, 12/11/96 (Commonwealth
Bank of Australia (LOC)) A-1+ 3,500,000
2,000,000 Sunshine State Gov. Fin. Comm. FL 3.2s, 10/24/96
(Union Bank of Switzerland (LOC)) VMIG1 2,000,000
1,200,000 Toledo Lucas Cnty. OH Port Auth. 3 1/4s, 10/4/96
(Bank of Novia Scotia (LOC)) VMIG1 1,200,000
1,000,000 Venago PA Indl. Dev. Auth. 3.35s, 12/11/96
(National Westminster Bank PLC (LOC)) P-1 1,000,000
----------
Total Municipal Commercial Paper (cost $36,700,000) 36,700,000
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $83,958,675) *** 83,958,675
- -------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $100,813,973.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at
September 30,1996 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 September 30,1996. Ratings are
not covered by the Report of independent accountants.
Moody's Investor Service, Inc. and Standard & Poor's Corp.
are the leading independent rating agencies for debt
securities. Moody's uses the designation "Moody's Investment
Grade", or "MIG", for most short-term municipal obligations,
adding a "V" ("VMIG") for bonds with a demand or variable
feature; the designation "P" is used for tax exempt
commercial paper. Standard & Poor's uses "SP" for notes
maturing in three years or less, "A" for bonds or variable
feature.
Moody's Investor Service, Inc.
MIG1/VMIG1 = Best quality; strong protection of cash flows, superior
liquidity and broad access to refinancing
MIG2/VMIG2 = High quality; ample protection of cash flows, liquidity
support and ability to refinance
AAA = Extremely strong capacity to pay interest and repay principal
AA = Strong capacity to pay interest and repay principal and differs
from the higher rated issues only in a small degree
P-1 = Superior capacity for repayment
P-2 = Strong capacity for repayment
Standard & Poor's Corp.
SP-1 = Overwhelming safety characteristics
SP-2 = Strong capacity to pay interest and repay principal.
A-1+ = Overwhelming degree of credit and protection
A-1 = Strong degree of safety
A-2 = Considered strong but lacks solid strength for timely repayment
*** The aggregate identified cost on a tax basis is the same.
The rates shown on Variable Rate Demand Notes (VRDN) are the current interest
rates at September 30, 1996, which are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------
Investments in securities, at amortized cost (Note 1) $83,958,675
- -----------------------------------------------------------------------------------------------------
Cash 14,324
- -----------------------------------------------------------------------------------------------------
Interest and other receivables 506,893
- -----------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 16,860,890
- -----------------------------------------------------------------------------------------------------
Receivable for securities sold 55,000
- -----------------------------------------------------------------------------------------------------
Total assets 101,395,782
Liabilities
- -----------------------------------------------------------------------------------------------------
Distributions payable to shareholders $20,541
- -----------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 360,327
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 82,969
- -----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,076
- -----------------------------------------------------------------------------------------------------
Other accrued expenses 116,896
- -----------------------------------------------------------------------------------------------------
Total liabilities 581,809
- -----------------------------------------------------------------------------------------------------
Net assets $100,813,973
Represented by
- -----------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $100,813,973
- -----------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share
($100,813,973 divided by 100,813,973 shares) $1.00
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30,1996
<S> <C>
Tax exempt interest income $2,981,924
- ---------------------------------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) $375,635
- ---------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 169,491
- ---------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,217
- ---------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,592
- ---------------------------------------------------------------------------------------------------
Reports to shareholders 36,840
- ---------------------------------------------------------------------------------------------------
Registration fees 46,434
- ---------------------------------------------------------------------------------------------------
Auditing 17,362
- ---------------------------------------------------------------------------------------------------
Legal 7,383
- ---------------------------------------------------------------------------------------------------
Postage 89,850
- ---------------------------------------------------------------------------------------------------
Other 1,008
- ---------------------------------------------------------------------------------------------------
Total Expenses 752,812
- ---------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (160,399)
- ---------------------------------------------------------------------------------------------------
Net expenses 592,413
- ---------------------------------------------------------------------------------------------------
Net investment income 2,389,511
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,389,511
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $2,389,511 $2,842,467
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,389,511 2,842,467
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- ---------------------------------------------------------------------------------------------------------------
From net investment income: (2,389,511) (2,842,467)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital shares transactions (Note 4) 27,747,785 (25,331,139)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 27,747,785 (25,331,139)
- ---------------------------------------------------------------------------------------------------------------
Net Assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 73,066,188 98,397,327
- ---------------------------------------------------------------------------------------------------------------
End of year $100,813,973 $73,066,188
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended September 30
------------------------------------------------
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $.0298 $.0312 $.0191
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .0298 .0312 .0191
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.0298) (.0312) (.0191)
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 3.02 3.16 1.93
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $100,814 $73,066 $98,397
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .90 .81 .71
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 2.86 3.10 1.97
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
Year ended September 30
------------------------------------------
1993 1992
------------------------------------------
<S> <C> <C>
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income $.0184 $.0297(c)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .0184 .0297
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (.0184) (.0297)
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 1.85 3.02
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $81,076 $81,820
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .99 .87(c)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 1.85 2.99(c)
- ---------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended September 30,
1995 and thereafter, includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts. (See Note 2).
(c) Reflects a voluntary expense limitation in effect during the period. As a result
of such limitation, expenses of the fund for the period ended September 30, 1992
and September 30, 1991 reflect reductions of approximately $0.0029 and $0.0030
per share, respectively.
</TABLE>
Notes to financial statements
September 30, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company.
The fund seeks as high a level of current income exempt from federal
income tax as is consistent with maintenance of liquidity and
stability of principal by investing primarily in a diversified
portfolio of short-term tax-exempt securities.
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 valuations The valuation of the fund's portfolio
instruments is determined by means of the amortized cost method as
set forth in Rule 2a-7 under the Investment Company Act of 1940. The
amortized cost of an instrument is determined by valuing it at cost
originally and thereafter amortizing any discount or premium from
its face value at a constant rate until maturity.
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).
C) 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.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for
excise tax on income and capital gains.
D) Interest income and distributions to shareholders Interest is
recorded on the accrual basis. Income dividends (and distributions
of realized gains, if any) are recorded daily by the fund and are
distributed monthly to the shareholders.
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.
Note 2
Management fee, administrative
ices and other transactions
Compensation of Putnam Investment Management, Inc. ("Putnam
Management") 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: 0.45% of the first $500 million
of average net assets, 0.35% of the next $500 million, 0.30% of the
next $500 million, and 0.25% of any amount over $1.5 billion,
subject, under current law, to reduction in any year by the amount
of certain brokerage commissions and fees (less expenses) received
by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management 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 wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended September 30, 1996, fund expenses were reduced by
$160,399 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.
Trustees of the fund receive an annual Trustees fee of $410 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 adopted a Trustee Fee Deferral Plan (the "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 Plan.
The fund has adopted a distribution plan (the "Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The purpose of
the Plan 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 Plan
provides for payment by the fund to Putnam Mutual Funds Corp. at an
annual rate of up to 0.35% of the fund's average net assets.
Currently, no payments are being made under the plan.
Note 3
Purchase and sales of securities
During the year ended September 30, 1996, purchases and sales
(including maturities) of investment securities (all short-term
obligations) aggregated $836,670,410, and $844,827,000,
respectively. 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 September 30, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares at a
constant net asset value of $1.00 per share were as follows:
Year ended September 30
- ----------------------------------------------------
1996 1995
- ----------------------------------------------------
Shares sold 785,297,019 561,608,126
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,296,709 2,587,440
- ----------------------------------------------------
787,593,728 564,195,566
Shares
repurchased (759,845,943) (589,526,705)
- ----------------------------------------------------
Net increase
(decrease) 27,747,785 (25,331,139)
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 1997 will show the tax status
of all distributions paid to your account in calendar 1996.
Results of September 5, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on September
5, 1996. At the meeting, each of the nominees for Trustees was
elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 57,190,794 428,579
Hans H. Estin 57,192,929 426,444
John A. Hill 57,190,794 428,579
R.J. Jackson 57,192,929 426,444
Elizabeth T. Kennan 57,189,797 429,577
Lawrence J. Lasser 57,188,158 431,215
Robert E. Patterson 57,192,929 426,444
Donald S. Perkins 57,190,794 428,579
William F. Pounds 57,186,023 433,350
George Putnam 57,177,659 441,714
George Putnam, III 57,192,929 426,444
Eli Shapiro 57,139,333 480,040
A.J.C. Smith 57,186,023 433,350
W. Nicholas Thorndike 57,129,776 489,597
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 56,260,210 votes for,
and 465,306 votes against, with 893,857 abstentions and broker non-
votes.
A proposal to amend the fund's fundamental investment restriction
with respect to diversification of investments was approved as
follows: 50,720,485 votes for, and 3,361,837 votes against, with
3,537,051 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in the securities of a single issuer was
approved as follows: 49,808,419 votes for, and 4,074,746 votes
against, with 3,736,208 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in real estate was approved as follows:
48,339,380 votes for, and 5,645,946 votes against, with 3,634,047
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to concentration of its assets was approved as follows:
49,565,693 votes for, and 4,316,943 votes against, with 3,736,737
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to making loans was approved as follows: 48,136,814
votes for, and 5,779,832 votes against, with 3,702,728 abstentions
and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to senior securities was approved as follows:
50,274,841 votes for, and 3,443,293 votes against, with 3,901,239
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in securities of issuers in
which management of the fund or Putnam Investment Management, Inc.
owns securities was approved as follows: 48,148,770 votes for, and
5,400,920 votes against, with 4,069,683 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to margin transactions was approved as
follows: 47,486,561 votes for, and 6,104,266 votes against, with
4,028,546 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to short sales was approved as follows:
47,856,434 votes for, and 5,717,466 votes against, with 4,045,473
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to pledging assets was approved as follows:
47,577,648 votes for, and 5,990,007 votes against, with 4,051,723
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in restricted securities was
approved as follows: 47,591,642 votes for, and 5,770,065 votes
against, with 4,257,666 abstentions and broker nonvotes.
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
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
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
Gary N. Coburn
Vice President
William J. Curtin
Vice President
William F. McGue
Vice President
Lindsey C. Strong
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax
Exempt Money Market 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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
28361-062 11/96
