Putnam
Tax Exempt
Money Market
Fund
SEMIANNUAL REPORT
March 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Once again, our steadfast commitment to superior quality,
diversification, capital preservation, and current tax-free income
produced positive results during the semiannual period. In fact, in the
aftermath of the Asian financial crisis, many investors rediscovered the
virtues of this conservative approach and our assets under management
continued to grow."
-- Brian S. Torpey, manager
Putnam Tax Exempt Money Market Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
The financial troubles in Asia continued to dominate the capital markets
during the first half of Putnam Tax Exempt Money Market Fund's fiscal year,
pushing aside worries that the continued strength in the U.S. economy would
have inflationary implications. The rush of funds to the relative safety of
the U.S. bond market did push yields on most bonds, including municipals,
lower -- and their prices higher.
The Federal Reserve Board kept close watch on these events as you might
expect. But in the end, the Fed remained on the sidelines, apparently content
that the economic engine was still sufficiently under control.
In this environment, Fund Manager Brian Torpey continued to focus on
maintaining capital preservation, superior credit quality, and liquidity,
regardless of market conditions. In the following report, Brian discusses his
strategy during the six months ended March 31, 1998, and looks at prospects
for the fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 20, 1998
Report from the Fund Manager
Brian S. Torpey
With the U.S. economic engine continuing to steam ahead and inflation
remaining low, Putnam Tax Exempt Money Market Fund's semiannual period ended
March 31, 1998, brought few changes for money market investors. Once again,
your fund delivered a competitive total return while maintaining a stable
$1.00 share price as its ongoing focus on superior quality, preservation of
capital, and current tax-free income continued to prove successful.
* ECONOMIC GROWTH CONTINUES; INFLATION REMAINS AT BAY
Despite concerns about fallout from the Asian financial crisis, the U.S.
economy maintained a rather heady pace of expansion during the past six
months. Indeed, U.S. economic data did not experience substantial negative
consequences from the Asian tsunami as weaker demand in Asia pushed down
worldwide commodities prices and long-term interest rates.
Isolated Asian-related pressures notwithstanding, most sectors and regions of
the U.S. economy continue to evidence strong growth. During the fourth quarter
of 1997, real gross domestic product rose at a robust 3.7% annual rate and
analysts anticipate similar vibrancy for the first quarter of 1998. Consumers
appear to be in excellent shape overall with strong employment and income
gains helping to boost consumer confidence and spending.
While the economy continues to expand at a rate that in the past would have
been considered a harbinger of inflationary pressures, current data seem to
show virtually no signs of higher inflation. The inflation rate for 1997 was
just 1.4% and so far the numbers for 1998 seem similarly low. Given such a
benign environment, the Federal Reserve Board has kept monetary policy on
hold. In fact, the Fed has not raised the federal funds rate, the benchmark
rate on overnight loans between banks, since March 1997. At that time,
policymakers feared that strong economic demand would result in increased
inflation.
* MONEY MARKET CONTINUES TO ATTRACT CASH
Money market funds continued to receive record inflows over the past six
months. Investors moved assets to more conservative high-quality investments
because of the increased volatility in the stock market, a potential
intervention by the Fed, and the Asian crisis. Money market funds are
especially attractive now not only because of their liquid, high-quality
assets but because of the flat yield curve environment that has resulted in
tighter spreads relative to long-term funds.
During the period, derivative products continued to grow in availability as
many investors sought to increase their income in today's flat interest-rate
environment. However, your fund has always avoided derivatives, preferring to
focus exclusively on more conservative tax-exempt money market securities of
the highest quality. These may include variable rate demand notes (VRDNs),
tax-exempt notes, and municipal commercial paper from large top-quality
issuers. VRDNs are instruments that pay variable interest rates that reset
daily, weekly, or monthly.
* FOCUS REMAINS ON QUALITY, DIVERSIFICATION
Superior quality remains a hallmark of your fund. With the exception of
general obligation bonds issued by state governments, the vast majority of
portfolio holdings are backed by letters of credit. As this report was being
written, more than two thirds of your fund's investments were enhanced by
letters of credit.
Diversification is another key element of your fund's conservative strategy.
In fact, because of Putnam Management's commitment to diversification, the
fund is already substantially in compliance with a stricter Securities and
Exchange Commission requirement under rule 2a-7. As of July 1, 1998, this
requirement will limit the amount of assets a national tax-exempt money market
fund may invest in securities of one issuer to 5%.
* SLIGHTLY SHORTER MATURITY STRUCTURE KEEPS FUND FLEXIBLE
In seeking to position the fund appropriately for the current interest-rate
environment and for any changes that may lie ahead, we have continued our
strategy of maintaining flexibility. At the end of the period, this meant
keeping the fund's average days to maturity slightly shorter relative to the
market. This positioning readies the fund to capitalize on the higher
tax-exempt security yields that typically become available during the second
quarter due to tax-exempt money market fund cash outflows for income tax
payments.
For the time being, it appears that economic strength and low inflation can
indeed go hand in hand. With the Fed waiting to see how and if the Asian
financial crisis will affect the U.S. economy, short-term interest rates
appear to be on hold for now. Should the economy begin to overheat, however,
the Fed may be forced to raise rates. Your fund's duration structure and
conservative, quality-focused strategy position it well for this environment
by providing the flexibility to capture any higher yields that become
available.
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 3/31/98, there is no guarantee the fund will continue to hold
these securities in the future. An investment in this fund is neither insured
nor guaranteed by the U.S. government, and there is no assurance that a $1.00
share price will be maintained.
PERFORMANCE COMPARISONS (3/31/98)
Current After-tax
return* return
- ------------------------------------------------------------------------------
Passbook savings account 2.00% 1.21%
- ------------------------------------------------------------------------------
Taxable money market fund 7-day yield 5.05 3.05
- ------------------------------------------------------------------------------
3-month certificate of deposit 4.12 2.49
- ------------------------------------------------------------------------------
Putnam Tax Exempt
Money Market Fund (7-day yield) 2.85 2.85
- ------------------------------------------------------------------------------
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 39.5% 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 FOR PERIODS ENDED 3/31/98
Lipper
Tax Exempt Consumer
Fund shares Money Market Price
at NAV Fund Average Index
- ------------------------------------------------------------------------------
6 months 1.52% 1.50% 0.62%
- ------------------------------------------------------------------------------
1 year 3.15 3.09 1.38
- ------------------------------------------------------------------------------
5 years 14.31 14.60 12.95
Annual average 2.71 2.76 2.47
- ------------------------------------------------------------------------------
Life of fund (10/26/87) 45.42 45.30 40.68
Annual average 3.66 3.65 3.33
- ------------------------------------------------------------------------------
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
6 months ended 3/31/98
- ------------------------------------------------------------------------------
Distributions (number) 6
- ------------------------------------------------------------------------------
Income $0.0150153
- ------------------------------------------------------------------------------
Total $0.0150153
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current 7-day yield1 2.95%
- ------------------------------------------------------------------------------
Taxable equivalent2 4.88
- ------------------------------------------------------------------------------
Current 30-day yield1 2.87
- ------------------------------------------------------------------------------
Taxable equivalent2 4.75
- ------------------------------------------------------------------------------
1The 7-day and 30-day yields are the two most common gauges for measuring
money market mutual fund performance.
2Assumes maximum 45.22% 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
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. 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGERS]
OTC & Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGERS]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGERS]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
+ Formerly Putnam Federal Income Trust
[DBL. DAGGERS] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Portfolio of investments owned
March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (83.8%) *
PRINCIPAL AMOUNT RATINGS** VALUE
California (4.1%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$3,500,000 CA Pub. Cap. Impt. Fin. Auth. Rev. Bonds VRDN
(Pooled Project), Ser. C, 5s, 6/1/28
(National Westminster Bank LOC) VMIG1 $3,500,000
Colorado (2.4%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 CO State Gen Fund TRAN, Ser. A, 4 1/2s, 6/26/98 SP1+ 2,003,153
Delaware (1.6%)
- ------------------------------------------------------------------------------------------------------------
DE State G.O. Bonds
400,000 Ser. A, 5.7s, 8/15/98 AA+ 402,796
1,000,000 Zero %, 5/1/98 AA+ 996,740
--------------
1,399,536
District of Columbia (4.7%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 District of Columbia, TRAN, Ser. B, 4 1/2s,
9/30/98 (Union Bk. of Switzerland (LOC)
and Morgan Guarantee Trust (LOC) MIG1 4,012,146
Florida (4.7%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 Orange Cnty., Hsg. Fin. Auth. VRDN
(Sundown Assoc. II), Ser. B, 3.95s, 6/1/04
(Fleet Bank (LOC)) A 4,000,000
Georgia (9.9%)
- ------------------------------------------------------------------------------------------------------------
4,200,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Holcombs Landing Apts), 4 1/2s, 8/1/26
(First Union National Bank (LOC)) A 4,200,000
4,200,000 Marietta, Hsg. Auth. Multi-Fam. VRDN
(Wood Pointe Apts.), 3.45s, 10/1/07
(First Union National Bank (LOC)) A 4,200,000
--------------
8,400,000
Idaho (2.9%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 ID State G.O. TAN, 4 5/8s, 6/30/98 SP1+ 2,504,468
Illinois (3.9%)
- ------------------------------------------------------------------------------------------------------------
3,290,000 IL Dev. Fin. Auth. Indl. Dev. VRDN
(Cook Composites & Polymers), 3.8s, 2/1/09
(Societe Generale (LOC)) A 3,290,000
Massachusetts (0.9%)
- ------------------------------------------------------------------------------------------------------------
750,000 MA State Hlth. & Edl. Fac. Auth. 144A Rev Bonds,
Ser. A., MBIA, 7.6s, 7/1/08 Aaa 775,583
Michigan (2.4%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Michigan Bldg. Auth. Rev. Bonds, 3.4s, 4/9/98 AA- 2,000,000
Minnesota (5.1%)
- ------------------------------------------------------------------------------------------------------------
4,315,000 Crystal, Coml. Dev. Rev. Bonds VRDN (Crystal
Gallery Mall), 3.8s, 4/15/14 A+ 4,315,000
Mississippi (3.5%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 Lee Cnty., Indl. VRDN (Hunter Douglas, Inc.), 3.83s,
10/01/00 (ABN AMRO Bank N.V. LOC) Aa1 3,000,000
North Carolina (5.0%)
- ------------------------------------------------------------------------------------------------------------
4,200,000 NC Med. Care Community Hosp. VRDN
(Aces-Pooled Fin.), Ser. A, 4 1/4s, 10/01/20
NationsBank of NC (LOC)) VMIG1 4,200,000
North Dakota (4.8%)
- ------------------------------------------------------------------------------------------------------------
4,100,000 Grand Forks, Hsg. Facs. Rev. Bonds VRDN
(Grand Forks Homes, Inc.), 4.05s, 12/1/99
(US Bank N.A. (LOC)) A-1 4,100,000
Oregon (4.9%)
- ------------------------------------------------------------------------------------------------------------
4,200,000 Medford, Hosp. Fac. VRDN, 3.7s, 10/1/16
(US National Bank (LOC)) VMIG1 4,200,000
Pennsylvania (5.5%)
- ------------------------------------------------------------------------------------------------------------
3,800,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. VRDN
(Philadelphia Presbytery), 4.1s, 7/1/25
(PNC Bank (LOC)) VMIG1 3,800,000
895,000 Venango, Indl. Dev. Auth. VRDN (Penzoil Co.)
3 1/2s, 12/1/12 (Mellon Bank (LOC)) A 895,000
--------------
4,695,000
South Dakota (3.3%)
- ------------------------------------------------------------------------------------------------------------
2,760,000 Rapid City Econ. Dev. VRDN (Civic Ctr. Assoc.
Partnership), 2 3/4s, 12/1/16 Aaa 2,760,000
Texas (4.7%)
- ------------------------------------------------------------------------------------------------------------
3,500,000 Bowie Ctny., Ind. Dev. Corp. VRDN
(Texarkana Newspapers, Inc.), 3.45s,
11/1/25 (Bank of NY (LOC)) A 3,500,000
500,000 TX State G.O. Bonds, Ser. A, 4.9s, 10/1/98 AA 502,510
--------------
4,002,510
Virginia (4.9%)
- ------------------------------------------------------------------------------------------------------------
4,200,000 Henrico Cnty., Indl. Dev. Auth. VRDN, 2.7s, 5/1/24
(Nationsbank of Virginia (LOC)) VMIG1 4,200,000
Wisconsin (4.6%)
- ------------------------------------------------------------------------------------------------------------
875,000 Middleton-Cross Plns., Sch. Dist. G.O. Bonds,
FGIC, 4 7/8s, 4/1/98 Aaa 875,025
3,000,000 WI State notes, 4 1/2s, 6/15/98 SP1+ 3,003,913
--------------
3,878,938
--------------
Total Municipal Bonds and Notes
(cost $71,236,271) $71,236,334
MUNICIPAL COMMERCIAL PAPER (9.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$2,000,000 Burlington, KS Poll. Control, 3 3/4s, 4/7/98 A-1+ $2,000,000
2,600,000 Claiborne Cty., MS PCRB (National Rural Utility),
3 3/4s, 4/7/98 A-1+ 2,600,000
3,500,000 Pendleton Cty., KY MCP, 3.55s, 4/9/98 A-1+ 3,500,000
--------------
Total Municipal Commercial Paper
(cost $8,100,000) $8,100,000
COMMERCIAL PAPER (4.7%) * (cost $4,000,000)
PRINCIPAL AMOUNT EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
$4,000,000 Mo St Env. Impt & Energy Auth D. Put Bonds, 3.95s
(Swiss Bank (LOC)) 6/1/14 $4,000,000
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $83,336,334) *** $83,336,334
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $84,976,770.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at March 31, 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 March 31, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated.
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 = 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 VRDN and D. Put Bonds are the current interest
rates at March 31, 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
March 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at amortized cost (Note 1) $83,336,334
- ---------------------------------------------------------------------------------------------------
Cash 140,999
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 838,779
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 271,430
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 718,203
- ---------------------------------------------------------------------------------------------------
Total assets 85,305,745
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 11,939
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 190,798
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 85,715
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 4,072
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 910
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 35,541
- ---------------------------------------------------------------------------------------------------
Total liabilities 328,975
- ---------------------------------------------------------------------------------------------------
Net assets $84,976,770
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $84,976,770
- ---------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per share
($84,976,770 divided by 84,976,770 shares) $1.00
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended March 31, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $1,617,339
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 193,896
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 61,891
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,867
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 1,230
- --------------------------------------------------------------------------------------------------
Registration fees 65,181
- --------------------------------------------------------------------------------------------------
Total expenses 325,065
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (65,702)
- --------------------------------------------------------------------------------------------------
Net expenses 259,363
- --------------------------------------------------------------------------------------------------
Net investment income 1,357,976
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $1,357,976
- --------------------------------------------------------------------------------------------------
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
March 31 September 30
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $1,357,976 $3,057,311
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,357,976 3,057,311
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (1,357,976) (3,057,311)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (20,465,366) 4,628,163
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (20,465,366) 4,628,163
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 105,442,136 100,813,973
- ----------------------------------------------------------------------------------------------------------------------
End of period $84,976,770 $105,442,136
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share March 31
operating performance (Unaudited) Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income $.0151 $.0304 $.0298 $.0312 $.0191 $.0184
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .0151 .0304 .0298 .0312 .0191 .0184
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (.0151) (.0304) (.0298) (.0312) (.0191) (.0184)
- ------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.52 3.09 3.02 3.16 1.93 1.85
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $84,977 $105,442 $100,814 $73,066 $98,397 $81,076
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .38 .80 .90 .81 .71 .99
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.57 3.02 2.86 3.10 1.97 1.85
- ------------------------------------------------------------------------------------------------------------------------------
(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
March 31, 1998 (Unaudited)
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 on short-term investments are amortized/accreted using the
straight-line method.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam 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, 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,
and 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 six months ended March 31, 1998, fund expenses were reduced by $65,702
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.
The Internal Revenue Service is currently examining the treatment of expense
offset arrangements in existence since 1994 for another Putnam tax-exempt
income fund. Should a determination be made that such amounts should be
treated as taxable income, it may give rise to a liability on the part of the
fund and require the fund to report these amounts as taxable income in the
future. The outcome of this matter cannot currently be predicted.
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 six months ended March 31, 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 six months ended March 31, 1998, purchases and sales (including
maturities) of investment securities (all short-term obligations) aggregated
$385,711,412 and $398,496,912, 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 March 31, 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:
Six months ended Year ended
March 31 September 30
1998 1997
- ------------------------------------------------------------
Shares sold 58,828,367 956,290,369
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,230,145 2,849,509
- ------------------------------------------------------------
60,058,512 959,139,878
Shares
repurchased (80,523,878) (954,511,715)
- ------------------------------------------------------------
Net increase
(decrease) (20,465,366) 4,628,163
- ------------------------------------------------------------
WELCOME TO
www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly.
So be sure to bookmark us at
http://www.putnaminv.com
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
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
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
William J. Curtin
Vice President
Jerome J. Jacobs
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
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
SA057-42048 062 5/98
