Putnam
Tax Exempt
Money Market
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
There is no doubt that the past several months have represented a trying
time for most investors. Fortunately, the unprecedented string of
international events that rattled global stock and bond markets had a
relatively salutary effect on domestic money markets. Indeed, as foreign
investors panicked about plummeting stock markets, they began a flight to
quality -- selling hedge funds and emerging market funds in favor of the
relative safety of U.S. Treasury bonds and money market funds. At the same
time, however, short-term interest rates continued to fall, limiting the
yields available on money market securities. Putnam Tax Exempt Money
Market Fund's recent performance reflects this mixed environment. For the
12 months ended September 30, 1998, the fund returned 3.03% at net asset
value. You can find additional performance information on pages 5 and 6.
* SLOWER ECONOMY PROMPTS FEDERAL RESERVE ACTION
For most of the annual period, the U.S. economy continued to grow,
although its pace slowed considerably as the effects of Asian, Russian,
and Latin American financial crises began to emerge. After posting a
torrid 5.5% gain during the first quarter of 1998, Gross Domestic Product
growth dropped back to 1.8% in the second quarter. By the end of
September, government reports found exports slumping, manufacturing
activity deteriorating, construction spending flattening, and consumer
confidence slipping.
Against this backdrop of waning economic strength and escalating fears of
spreading global financial woes, many analysts and money market
participants began to expect the Federal Reserve Board to reduce
short-term interest rates. In fact, interest rates on money market
securities had already been trending downward for some time. Your fund's
manager, Brian Torpey, attributes this to global stock market volatility,
concerns about credit quality among lower-rated bonds, and the ongoing
flight to quality that drove securities prices up. At the end of
September, the Fed finally took action, lowering the federal funds rate
for the first time in nearly three years, by one quarter of a percentage
point.
In addition to falling interest rates, the annual period has also been
characterized by a dwindling supply of tax-exempt money market securities
as economic strength raised tax revenues and decreased municipalities'
borrowing needs. Amid these challenging conditions, Brian has redoubled
efforts to maintain current income while preserving capital and staying
focused on investments of superior quality. Extending portfolio duration
has been one of the most important elements of his strategy. While
portfolio duration was relatively neutral -- neither short nor long -- at
the fund's fiscal midpoint, he has since lengthened it to match or even
slightly exceed the average maintained by the fund's peer group. This
slightly longer duration has helped the fund lock in the highest available
money market yields while reducing the frequency with which the fund must
reinvest assets in the current falling interest-rate environment.
* CREDIT QUALITY AND CAPITAL PRESERVATION ARE KEY CONCERNS FOR MORE
INVESTORS
The downshift in the U.S. economy has brought concerns about credit
quality and capital preservation to the forefront for more and more
investors. In recent months, conservative, high-quality money market funds
like yours have experienced record inflows of new capital. Putnam Tax
Exempt Money Market Fund has always made capital preservation and credit
quality top priorities, investing in a wide spectrum of superior quality
money market securities. Over the past six months, your fund manager has
bolstered quality even further by eliminating all securities backed by
letters of credit from Japanese banks, even though the portfolio's
holdings were only backed by banks of the highest quality. As always, fund
management continues to seek portfolio investments that are rated by two
or more nationally recognized rating services, and that have at least two
ratings in the top two categories. If a security has been rated by only
one service, its rating must be within the service's top two categories.
In the coming months, your fund's manager will continue to pursue the
conservative strategies that have served shareholders well thus far. He
will remain focused on superior quality and preservation of capital, while
continuing to seek out appropriate opportunities to generate current
income in today's low interest-rate environment.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
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 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE COMPARISONS (9/30/98)
Current After-tax
return* return
- -------------------------------------------------------------------------
Passbook savings account 1.74% 1.05%
- -------------------------------------------------------------------------
Taxable money market fund 7-day yield 5.05 3.05
- -------------------------------------------------------------------------
3-month certificate of deposit 3.96 2.39
- -------------------------------------------------------------------------
Putnam Tax Exempt
Money Market Fund (7-day yield) 3.11 3.11
- -------------------------------------------------------------------------
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 on bank CDs is
generally insured up to certain limits by state and federal agencies.
Unlike stocks, which incur more risk, CDs offer a fixed rate of return.
Unlike money market funds, bank CDs may be subject to substantial
penalties for early withdrawals. After-tax return assumes a 39.6% maximum
federal income tax rate.
*Sources: BankBoston (passbook savings), Bank Rate Monitor (3-month CDs),
IBC/Donaghue's Money Fund Report (taxable money market fund compound 7-day
yield).
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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.
TOTAL RETURN AND YIELDS FOR PERIODS ENDED 9/30/98
Lipper
Tax Exempt Consumer
Fund shares Money Market Price
at NAV Fund Average Index
- ------------------------------------------------------------------------------
1 year 3.03% 3.03% 1.36%
- ------------------------------------------------------------------------------
5 years 15.06 15.32 12.61
Annual average 2.85 2.89 2.40
- ------------------------------------------------------------------------------
10 years 41.44 41.59 36.39
Annual average 3.53 3.54 3.15
- ------------------------------------------------------------------------------
Life of fund (10/26/87) 47.58 47.54 41.72
Annual average 3.63 3.62 3.25
- ------------------------------------------------------------------------------
Fund shares
Current return (end of period) at NAV
- ------------------------------------------------------------------------------
Current 7-day yield1 3.11%
- ------------------------------------------------------------------------------
Taxable equivalent2 5.15
- ------------------------------------------------------------------------------
Current 30-day yield1 2.88
- ------------------------------------------------------------------------------
Taxable equivalent2 4.77
- ------------------------------------------------------------------------------
1 The 7-day and 30-day yields are the two most common gauges for
measuring money market mutual fund performance.
2 Assumes 39.6% maximum federal income 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.
DISTRIBUTION INFORMATION
12 months ended 9/30/98
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $0.029857
- ------------------------------------------------------------------------------
Total $0.029857
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Fund performance data
do not take into account any adjustment for taxes payable on reinvested
distributions. Investment returns will fluctuate. An investment in the
fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the fund seeks to
preserve your investment at $1.00 per share, it is possible to lose money
by investing in the fund. The fund's holdings do not match those in the
Lipper average. Yield data more closely reflect the current earnings of
the fund.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
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.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
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 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.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Tax Exempt Money Market Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings),
and the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the
financial position of Putnam Tax Exempt Money Market Fund (the "fund") at
September 30, 1998, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at September
30, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 10, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (96.7%)(a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Arkansas (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 3,800,000 AR State Hosp. Equip. Fin. Auth. VRDN
(Baptist Hlth.) MBIA, 4.1s, 11/1/10
(Credit Suisse (LOC)) A-1+ $ 3,800,000
California (4.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,500,000 CA Pub. Cap. Impt. Fin. Auth. Rev. Bonds VRDN
(Pooled Project), Ser. C, 3.45s, 6/1/28
(National Westminster Bank (LOC)) VMIG1 3,500,000
Florida (13.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,800,000 FL Hsg. Fin. Agcy. VRDN (Woodlands), 4.1s,
12/1/17 (Northern Trust (LOC)) A-1+ 3,800,000
3,600,000 Hillsborough Cty, AMBAC, 5s, 10/1/98 Aaa 3,600,140
4,000,000 Orange Cnty., Hsg. Fin. Auth. VRDN
(Sundown Assoc. II), Ser. B, 4.15s, 6/1/04
(Fleet Bank (LOC)) A-1+ 4,000,000
--------------
11,400,140
Georgia (16.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Atlanta, Fin.Hsg. Auth. Multi-Fam. Hsg VRDN,
3.35s, 12/1/08 (Societe Generale (LOC)) A-1+ 4,000,000
2,000,000 De Kalb Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Wood Hills Apt.), 3.9s, 12/1/07
(Bank Of Montreal (LOC)) A-1+ 2,000,000
3,700,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Holcombs Landing Apts), 3.3s, 8/1/26
(First Union National Bank (LOC)) A-1+ 3,700,000
4,000,000 Marietta, Hsg. Auth. Multi-Fam. VRDN
(Wood Pointe Apts.), 3.3s, 10/1/07
(First Union National Bank (LOC)) A-1+ 4,000,000
--------------
13,700,000
Illinois (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,290,000 IL Dev. Fin. Auth. Indl. Dev. VRDN
(Cook Composites & Polymers), 4.4s, 2/1/09
(Societe Generale (LOC)) A-1+ 3,290,000
500,000 IL State Univ. Rev. Bonds, 7.4s, 4/1/13 Aaa 528,860
--------------
3,818,860
Indiana (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
750,000 Indianapolis, IN Arpt. Auth. Rev. Bonds FGIC,
5s, 7/1/99 Aaa 757,112
Kansas (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,600,000 Kansas City, KS Indl., VRDN, 4.1s, 8/1/15
(Bank Of New York (LOC)) VMIG1 3,600,000
Kentucky (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
3,600,000 Mayfield, KY Multi-City Lease, VRDN, 3.8s, 7/1/26
(PNC Bk. (LOC)) VMIG1 3,600,000
Louisiana (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,550,000 Caddo Parish Indl. Dev. Board VRDN (Atlas),
Ser. B, 3.5s, 12/1/26 (ABN AMRO Bank (LOC)) VMIG1 2,550,000
Massachusetts (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 MA State Indl. Fin. Auth. Rev.Bonds FSA,
5 1/4s, 7/1/99 Aaa 1,011,324
Michigan (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 MI Muni Bond Auth Rev. Bonds, 4 1/4s, 8/27/99
(Bank of Nova Scotia (LOC)) SP1+ 2,514,646
Mississippi (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Lee Cnty., Indl. VRDN (Hunter Douglas, Inc.),
3.825s, 10/1/00 (ABN AMRO Bank N.V. (LOC)) Aa1 3,000,000
New Jersey (6.1%)
- --------------------------------------------------------------------------------------------------------------------------
NJ Econ. Dev. Auth. (Credit Suisse (LOC))
2,500,000 (Eastman),VRDN, 4.07s, 3/28/10 A-1+ 2,500,000
2,500,000 (Webro),VRDN, 4.07s, 1/15/10 A-1+ 2,500,000
--------------
5,000,000
North Dakota (5%)
- --------------------------------------------------------------------------------------------------------------------------
4,100,000 Grand Forks, Hsg. Facs. Rev. Bonds VRDN
(Grand Forks Homes, Inc.), 4s, 12/1/99
(US Bank N.A. (LOC)) A-1+ 4,100,000
Pennsylvania (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.VRDN
(Philadelphia Presbytery), 4.05s, 7/1/25
(PNC Bk.(LOC)) VMIG1 4,000,000
2,000,000 Philadelphia Sch Dist, 4 1/4s, 6/30/99
(PNC Bk. (LOC)) MIG1 2,008,950
--------------
6,008,950
South Dakota (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,760,000 Rapid City Econ. Dev. VRDN (Civic Ctr. Assoc.
Partnership), 4.32s, 12/1/16 P-1 2,760,000
Texas (4.9%)
- --------------------------------------------------------------------------------------------------------------------------
3,500,000 Bowie Ctny., Ind. Dev. Corp. VRDN (Texarkana
Newspapers, Inc.), 4.1s, 11/1/25
(Bank of NY (LOC)) A-1+ 3,500,000
500,000 TX State G.O. Bonds, Ser. A, 4.9s, 10/1/98 Aa2 500,013
--------------
4,000,013
Utah (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,220,000 UT State Brd Of Regents Student AMBAC,
5.2s, 11/1/98 Aaa 2,222,522
Washington (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,920,000 WA State Hlth.Care Fac. Auth., 9s, 1/1/11 Aaa 1,983,268
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $79,326,835) (b) $ 79,326,835
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $82,048,647.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
September 30, 1998 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, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. 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 with a
demand or variable feature.
Moody's Investor Service, Inc.
MIGI/VMIGI = 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+ = Very strong capacity to pay principal and interest
SP-1 = Strong capacity to pay principal and interest
SP-2 = Satisfactory capacity to pay principal and interest
A-1+ = Extremely strong degree of safety
A-1 = Strong degree of safety
A-2 = Satisfactory capacity for timely repayment
(b) The aggregate identified cost on a tax basis is the same.
The rates shown on VRDN are the current interest rates at September 30, 1998, 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, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at amortized cost (Note 1) $79,326,835
- -----------------------------------------------------------------------------------------------
Cash 786,978
- -----------------------------------------------------------------------------------------------
Interest and other receivables 465,186
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,645,624
- -----------------------------------------------------------------------------------------------
Total assets 83,224,623
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 8,646
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 528,963
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 520,456
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 81,589
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 4,532
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 893
- -----------------------------------------------------------------------------------------------
Other accrued expenses 30,897
- -----------------------------------------------------------------------------------------------
Total liabilities 1,175,976
- -----------------------------------------------------------------------------------------------
Net assets $82,048,647
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $82,048,647
- -----------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share
($82,048,647 divided by 82,048,647 shares) $1.00
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1998
<S> <C>
Tax exempt interest income: $3,068,029
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 371,716
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 129,674
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,992
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,001
- -----------------------------------------------------------------------------------------------
Reports to shareholders 5,375
- -----------------------------------------------------------------------------------------------
Registration fees 79,816
- -----------------------------------------------------------------------------------------------
Auditing 4,254
- -----------------------------------------------------------------------------------------------
Legal 12,905
- -----------------------------------------------------------------------------------------------
Other 6,695
- -----------------------------------------------------------------------------------------------
Total expenses 618,428
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (123,447)
- -----------------------------------------------------------------------------------------------
Net expenses 494,981
- -----------------------------------------------------------------------------------------------
Net investment income 2,573,048
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $2,573,048
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 2,573,048 $ 3,057,311
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,573,048 3,057,311
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (2,573,048) (3,057,311)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (23,393,489) 4,628,163
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (23,393,489) 4,628,163
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 105,442,136 100,813,973
- ---------------------------------------------------------------------------------------------------------------
End of year $82,048,647 $105,442,136
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income $.0299 $.0304 $.0298 $.0312 $.0191
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .0299 .0304 .0298 .0312 .0191
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.0299) (.0304) (.0298) (.0312) (.0191)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.03 3.09 3.02 3.16 1.93
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $82,049 $105,442 $100,814 $73,066 $98,397
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75 .80 .90 .81 .71
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.12 3.02 2.86 3.10 1.97
- ------------------------------------------------------------------------------------------------------------------------------------
(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. (Note 2).
</TABLE>
Notes to financial statements
September 30, 1998
Note 1
Significant accounting policies
Putnam Tax Exempt Money Market Fund (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, 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.
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.
E) Amortization of bond premium and accretion of bond discount Premiums
and discounts from purchases of short-term investments are
amortized/accreted using the straight-line method.
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: 0.45% of the first $500 million of average net assets, 0.35%
of the next $500 million, 0.30% of the next $500 million, 0.25% of the
next $5 billion, 0.225% of the next $5 billion, 0.205% of the next $5
billion, 0.190% of the next $5 billion, 0.180% 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 year ended September 30, 1998, fund expenses were reduced by
$123,447 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 $170 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 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 to
the plan.
For the year ended September 30, 1998, Putnam Mutual Funds Corp., acting
as underwriter receives proceeds from contingent deferred sales charges.
These charges apply to certain shares that have been exchanged from other
Putnam funds. Putnam Mutual Funds received no monies in contingent
deferred sales charges from such redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales (including
maturities) of investment securities (all short-term obligations)
aggregated $637,342,920 and $654,161,700, 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, 1998, 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,
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1998 1997
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Shares sold $128,984,954 $ 956,290,369
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Shares issued in
connection with
reinvestment of
distributions 2,311,184 2,849,509
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131,296,138 959,139,878
Shares
repurchased (154,689,627) (954,511,715)
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Net increase
(decrease) $ (23,393,489) $ 4,628,163
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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 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
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
Steven M. Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Brian S. Torpey
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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AN057 47018 11/98
