PUTNAM DIVERSIFIED INCOME TRUST
ONE POST OFFICE SQUARE, BOSTON, MA 02109
CLASS A SHARES
INVESTMENT STRATEGY: INCOME
PROSPECTUS - February 1, 1994, as revised May 15, 1994
This Prospectus explains concisely what you should know before
investing in Class A shares of the Fund offered without a sales
charge through eligible employer-sponsored defined contribution
plans ("defined contribution plans"). Please read it carefully
and keep it for future reference. You can find more detailed
information about the Fund in the February 1, 1994 Statement of
Additional Information, as amended from time to time. For a free
copy of the Statement or for other information, including
Prospectuses regarding another class of Fund shares or Class A
shares for other investors, call Putnam Investor Services at 1-
800-752-9894. The Statement has been filed with the Securities
and Exchange Commission and is incorporated into this Prospectus
by reference.
PUTNAM DIVERSIFIED INCOME TRUST (THE "FUND") MAY INVEST A
SIGNIFICANT PORTION OF ITS ASSETS IN LOWER-RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PUTNAMINVESTMENTS
PUTNAM
DEFINED
CONTRIBUTION
PLANS
<PAGE>
ABOUT THE FUND
Expenses
summary ..................................... 2
Financial
highlights ................................. 3
Objective ...........................................
. 5
How objective is
pursued ............................. 5
How performance is
shown ............................. 18
How the Fund is
managed .............................. 19
Organization and
history ............................. 19
ABOUT YOUR INVESTMENT
How to buy
shares.................................... 21
Distribution
Plan.................................... 21
How to sell
shares................................... 23
How to exchange
shares............................... 23
How the Fund values its
shares ....................... 23
How distributions are made; tax
information .......... 24
ABOUT PUTNAM INVESTMENTS, INC.
........................... 25
APPENDIX
Description of bond ratings
......................... 26
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes your maximum
transaction costs from investing in the Fund and expenses
incurred by the Fund based on its most recent fiscal year. The
Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in the Fund over specified
periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
0.68%
12b-1 Fees
0.25%
Other Expenses
0.30%
Total Fund Operating Expenses
1.23%
EXAMPLE
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of each
period:
1 3 5 10
year years years years
$13 $39 $68 $149
The table is provided to help you understand the expenses of
investing in the Fund and your share of the operating expenses
which the Fund incurs. The 12b-1 fees shown in the table
reflect the amount to which the Trustees have currently limited
payments under the Class A Distribution Plan. Actual 12b-1
fees and total operating expenses for the Fund's last
fiscal year were 0.24% and 1.22%, respectively. The
Example does not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the Example to assume a 5% annual
return, but actual annual return has varied. The Example does
not reflect any charges or expenses related to your employer's
plan.
FINANCIAL HIGHLIGHTS
The table on the following page presents per share financial
information for the life of the Fund. This information has
been derived from the Fund's financial statements, which
have been audited and reported on by the Fund's independent
accountants. The Report of Independent Accountants and financial
statements included in the Fund's Annual Report to shareholders
for the 1993 fiscal year are incorporated by reference into this
Prospectus. The Fund's Annual Report, which contains additional
unaudited performance information, will be made available without
charge upon request.
FINANCIAL HIGHLIGHTS *
(for a share outstanding throughout the period)
<PAGE>
(The table appears on page 4a.)
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS*
(FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
<S> <C> <C> <C> <C> <C> <C>
For the period
October 3, 1988
(commencement
Year ended of operations) to
September 30 September 30
1993 1992 1991 1990 1989
CLASS A
NET ASSET VALUE, BEGINNING OF PERIOD $12.66 $11.85 $10.91 $12.03 $12.50
INVESTMENT OPERATIONS
NET INVESTMENT INCOME .96 1.04 1.05(A) 1.14(A) 1.13(A)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS .56 .97 1.15 (.92) (.37)
TOTAL FROM INVESTMENT OPERATIONS 1.52 2.01 2.20 .22 .76
DISTRIBUTIONS TO SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.94) (1.01) (1.05) (1.16) (1.11)
NET REALIZED GAIN ON INVESTMENTS (.42) (.19) (.21) (.12)
PAID-IN CAPITAL (B) (.18)
TOTAL DISTRIBUTIONS (1.36) (1.20) (1.26) (1.34) (1.23)
NET ASSET VALUE, END OF PERIOD $12.82 $12.66 $11.85 $10.91 $12.03
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE (%) (D) 12.85 17.88 21.43 1.99 6.38(E)
NET ASSETS, END OF PERIOD (IN THOUSANDS) $874,937 $365,253 $168,106 $125,301 $106,818
RATIO OF EXPENSES TO AVERAGE NET ASSETS (%) 1.21 1.36 1.47(A) 1.25(A) 1.26(A)(E)
RATIO OF NET INVESTMENT INCOME TO AVERAGE
NET ASSETS (%) 6.80 8.27 9.18(A) 9.98(A) 9.71(A)(E)
PORTFOLIO TURNOVER (%) 243.73 221.09(C) 481.06 264.09 163.96
*FINANCIAL HIGHLIGHTS FOR PERIODS ENDED THROUGH SEPTEMBER 30, 1992 HAVE BEEN RESTATED TO CONFORM WITH REQUIREMENTS
ISSUED BY THE SEC IN APRIL 1993.
(A)REFLECTS AN EXPENSE LIMITATION APPLICABLE DURING THE YEARS ENDED SEPTEMBER 30, 1991, AND 1990 AND THE PERIOD ENDED
SEPTEMBER 30, 1989. AS A RESULT OF SUCH LIMITATION, EXPENSES OF THE FUND FOR THE YEAR ENDED SEPTEMBER 30, 1991 REFLECT A
REDUCTION OF LESS THAN $0.01 PER SHARE. EXPENSES FOR THE YEAR ENDED SEPTEMBER 30, 1990 AND THE PERIOD ENDED SEPTEMBER
30, 1989 REFLECT REDUCTIONS OF $0.04 AND $0.05 PER SHARE, RESPECTIVELY.
(B)SEE NOTE 1 TO FINANCIAL STATEMENTS.
(C)PORTFOLIO TURNOVER EXCLUDES THE IMPACT OF ASSETS RECEIVED FROM THE ACQUISITION OF PUTNAM DIVERSIFIED PREMIUM INCOME
TRUST AND SUBSEQUENT SALES TO REALIGN THE PORTFOLIO. (SEE NOTE 5)
(D)TOTAL INVESTMENT RETURN ASSUMES DIVIDEND REINVESTMENT AND DOES NOT REFLECT THE EFFECT OF SALES CHARGES.
(E)ANNUALIZED.
/TABLE
<PAGE>
OBJECTIVE
PUTNAM DIVERSIFIED INCOME TRUST SEEKS HIGH CURRENT INCOME
CONSISTENT WITH PRESERVATION OF CAPITAL. The Fund is not
intended to be a complete investment program, and there is no
assurance it will achieve its objective.
The Fund's monthly distributions will at times include both
interest income earned on its investments and net short-term
capital gains realized on portfolio transactions. In an effort
to provide more level monthly payments to shareholders, the Fund
currently pays monthly distributions based on projections by
Putnam Management of the investment income and short-term gains
that the Fund is likely to earn over the longer term. At times
the Fund may continue to pay monthly distributions at a level
rate even though the Fund's earnings for a given period may be
below such projections. In such cases the Fund's distributions
may include a return of capital to shareholders. However, this
was not the case in the last three fiscal years but may be the
case in the fiscal year ending 1994. At other times Putnam
Management may realize short-term capital gains on some portfolio
securities while at the same time seeking to avoid realizing
losses on other securities held in the portfolio. In such cases
the Fund's monthly distribution could exceed its total return for
such period. See "How distributions are made; tax information "
and "Financial highlights ."
HOW OBJECTIVE IS PURSUED
BASIC INVESTMENT STRATEGY
The Fund will allocate its investments among the following three
sectors of the fixed-income securities markets:
* a U.S. GOVERNMENT SECTOR, consisting primarily of debt
obligations of the U.S. Government, its agencies and
instrumentalities;
* a HIGH YIELD SECTOR, consisting of high yielding, lower-rated,
higher risk U.S. and foreign fixed-income securities; and
* an INTERNATIONAL SECTOR, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities denominated in foreign currencies.
PUTNAM MANAGEMENT BELIEVES THAT DIVERSIFYING THE FUND'S
INVESTMENTS AMONG THESE SECTORS, AS OPPOSED TO INVESTING IN ANY
ONE SECTOR, WILL BETTER ENABLE THE FUND TO PRESERVE CAPITAL WHILE
PURSUING ITS OBJECTIVE OF HIGH CURRENT INCOME. Historically, the
markets for U.S. Government securities, high yielding corporate
fixed-income securities, and debt securities of foreign issuers
have tended to behave independently and have at times moved in
opposite directions. For example, U.S. Government securities
have generally been affected negatively by inflationary concerns
resulting from increased economic activity. High yield corporate
fixed-income securities, on the other hand, have generally
benefitted from increased economic activity due to improvement in
the credit quality of corporate issuers. The reverse has
generally been true during periods of economic decline.
Similarly, U.S. Government securities have often been negatively
affected by a decline in the value of the dollar against foreign
currencies, while the bonds of foreign issuers held by U.S.
investors have generally benefitted from such decline. Putnam
Management believes that, when financial markets exhibit such a
lack of correlation, a pooling of investments among these markets
may produce greater preservation of capital over the long term
than would be obtained by investing exclusively in any one of the
markets.
PUTNAM MANAGEMENT WILL DETERMINE THE AMOUNT OF ASSETS TO BE
ALLOCATED TO EACH OF THE THREE MARKET SECTORS IN WHICH THE FUND
WILL INVEST BASED ON ITS ASSESSMENT OF THE RETURNS THAT CAN BE
ACHIEVED FROM A PORTFOLIO WHICH IS INVESTED IN ALL THREE SECTORS.
In making this determination, Putnam Management will rely in part
on quantitative analytical techniques that measure relative risks
and opportunities of each market sector based on current and
historical market data for each sector, as well as on its own
assessment of economic and market conditions. Putnam Management
will continuously review this allocation of assets and make such
adjustments as it deems appropriate, although there are no fixed
limits on allocations among sectors, including investments in the
High Yield Sector. Because of the importance of sector
diversification to the Fund's investment policies, Putnam
Management expects that a substantial portion of the Fund's
assets will normally be invested in each of the three market
sectors. See "Defensive strategies." The Fund's assets
allocated to each of these market sectors will be managed in
accordance with particular investment policies, which are
described below. At times, the Fund may hold a portion of its
assets in cash and money market instruments. The Fund may also
purchase and sell futures contracts and related options. See
"Financial futures and options" below.
U.S. GOVERNMENT SECTOR
THE FUND WILL INVEST ASSETS ALLOCATED TO THE U.S. GOVERNMENT
SECTOR PRIMARILY IN U.S. GOVERNMENT SECURITIES. As used in this
Prospectus, the term "U.S. Government securities" refers to debt
securities issued or guaranteed by the U.S. government, by
various of its agencies, or by various instrumentalities
established or sponsored by the U.S. government. Certain of
these obligations, including U.S. Treasury bills, notes and
bonds, certain mortgage participation certificates and
collateralized mortgage obligations ("CMOs") issued or guaranteed
by the U.S. government or one of its agencies or
instrumentalities, and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States.
Other U.S. Government securities issued or guaranteed by federal
agencies or government-sponsored enterprises are not supported by
the full faith and credit of the United States. These securities
include obligations supported by the right of the issuer to
borrow from the U.S. Treasury, such as obligations of Federal
Home Loan Banks, and obligations supported only by the credit of
the instrumentality, such as Federal National Mortgage
Association bonds. In purchasing securities for the U.S.
Government Sector, Putnam Management may take full advantage of
the entire range of maturities of U.S. Government securities and
may adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of
relative yields of securities of different maturities and its
expectations of future changes in interest rates. Under normal
market conditions, the Fund will invest at least 20% of its net
assets in U.S. Government securities, and 65% of the assets
allocated to the U.S. Government Sector will be invested in U.S.
Government securities.
The Fund may invest assets allocated to the U.S. Government
Sector in a variety of debt securities, including asset-backed
and mortgage-backed securities, such as CMOs, that are issued by
private U.S. issuers. With respect to assets allocated to the
U.S. Government Sector, the Fund will only invest in privately
issued debt securities that are rated at the time of purchase at
least A by Moody's Investor Services, Inc. ("Moody's") or
Standard & Poor's Corporation ("Standard & Poor's"), or in
unrated securities that Putnam Management determines are of
comparable quality. The rating services' descriptions of these
rating categories are included in the Appendix to this
Prospectus. The Fund will not necessarily dispose of a security
if its rating is reduced below these levels, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
Fund's investment objective.
Mortgage-backed securities represent a participation in, or are
secured by, mortgage loans and include securities issued or
guaranteed by the United States government or one of its agencies
or instrumentalities; securities issued by private issuers that
represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; or securities issued by
private issuers that represent an interest in or are
collateralized by mortgage loans or mortgage-backed securities
without a government guarantee but usually having some form of
private credit enhancement.
Asset-backed securities are structured like mortgage-backed
securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
RISK FACTORS. U.S. Government securities are considered among
the most creditworthy of fixed-income investments. Because of
this added safety, the yields available from U.S. Government
securities are generally lower than the yields available from
corporate debt securities. The values of U.S. Government
securities (like those of fixed-income securities generally) will
change as interest rates fluctuate. During periods of falling
U.S. interest rates, the values of outstanding long-term U.S.
Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be
greater for securities with longer maturities, and the Fund
expects that its portfolio will be weighted towards the longer
maturities at least to the extent that it has written call
options thereon. Although changes in the value of U.S.
Government securities will not affect investment income from
those securities, they will affect the Fund's net asset value.
Privately issued debt securities are subject to varying degrees
of risk of default depending upon, among other factors, the
creditworthiness of the issuer and the ability of the borrower to
meet its obligations.
Mortgage-backed and asset-backed securities have yield and
maturity characteristics corresponding to the underlying assets.
Thus, unlike traditional debt securities, which may pay a fixed
rate of interest until maturity when the entire principal amount
comes due, payments on mortgage-backed and asset-backed
securities include both interest and a partial payment of
principal. In addition to scheduled loan amortization, payments
of principal may result from voluntary prepayment, refinancing or
foreclosure of the underlying mortgage loans or other assets.
Such prepayments significantly shorten the effective maturities
of the securities, especially during periods of declining
interest rates.
Due to their prepayment aspect, mortgage-backed and asset-backed
securities are less effective than other types of securities as a
means of "locking in" attractive long-term interest rates. This
is caused by the need to reinvest prepayments of principal
generally and the possibility of significant unscheduled
prepayments resulting from declines in interest rates. These
prepayments would have to be reinvested at lower rates. As a
result, these securities may have less potential for capital
appreciation during periods of declining interest rates than
other securities of comparable maturities, although they may have
a comparable risk of decline in market value during periods of
rising interest rates. At times, some of the mortgage-backed and
asset-backed securities in which the Fund may invest will have
higher than market interest rates, and will therefore be
purchased at a premium above their par value. Unscheduled
prepayments, which are made at par, will cause the Fund to suffer
a loss equal to any unamortized premium. However, Putnam
Management believes, based upon independent historical market
studies, that such "premium" mortgage-backed and asset-backed
securities are usually less subject to a risk of decline than
those sold at or below par. This may not be true, however,
during periods of very rapidly rising interest rates.
HIGH YIELD SECTOR
THE FUND WILL INVEST ASSETS ALLOCATED TO THE HIGH YIELD SECTOR
PRIMARILY IN HIGH YIELDING, LOWER-RATED HIGHER RISK U.S. AND
FOREIGN CORPORATE FIXED-INCOME SECURITIES, INCLUDING DEBT
SECURITIES, CONVERTIBLE SECURITIES AND PREFERRED STOCKS. As
described below, however, the Fund may invest all or any part of
the High Yield Sector portfolio in higher-rated and unrated
fixed-income securities. The Fund will not necessarily invest in
the highest yielding securities available if in Putnam
Management's opinion the differences in yield are not sufficient
to justify the higher risks involved.
Differing yields on fixed-income securities of the same maturity
are a function of several factors, including the relative
financial strength of the issuers. Higher yields are generally
available from securities in the lower categories of recognized
rating agencies: Baa or lower by Moody's, or BBB or lower by
Standard & Poor's. The High Yield Sector may invest in any
security which is rated, at the time of purchase, at least Caa as
determined by Moody's or CCC as determined by Standard & Poor's
or in any unrated security which Putnam Management determines is
at least of comparable quality, although up to 5% of the net
assets of the Fund may be invested in securities rated below such
quality, or in unrated securities which Putnam Management
determines are of comparable quality. Securities rated below Caa
by Moody's or CCC by Standard & Poor's are of poor standing and
may be in default. The rating services' descriptions of these
rating categories, including the speculative characteristics of
the lower categories, are included in the Appendix to this
Prospectus.
Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment
analysis at the time of rating. Consequently, the rating
assigned to any particular security is not necessarily a
reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate. Although
Putnam Management considers security ratings when making
investment decisions for the High Yield Sector, it performs its
own investment analysis and does not rely principally on the
ratings assigned by the rating services. It also considers
relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage and earnings prospects.
Because of the greater number of investment considerations
involved in investing in lower-rated securities, the achievement
of the Fund's objective depends more on Putnam Management's
analytical abilities than would be the case if it were investing
only in securities in the higher rating categories.
The Fund may invest assets allocated to the High Yield Sector in
lower-rated securities of foreign corporate and governmental
issuers denominated either in U.S. dollars or in foreign
currencies. For a discussion of the risks associated with
foreign investing, see "International Sector" below.
RISK FACTORS. Investors should carefully consider their ability
to assume the risks of owning shares of a mutual fund which
invests in lower-rated securities, commonly known as "junk
bonds," before making an investment in the Fund. The lower
ratings of certain securities in the High Yield Sector reflect a
greater possibility that adverse changes in the financial
condition of the issuer, or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely
payments of interest and principal would likely make the values
of securities held by the Fund more volatile and could limit the
Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of
a liquid trading market for securities held by it, the Fund may
be unable at times to establish the fair value of such
securities. The rating assigned to a security by Moody's or
Standard & Poor's does not reflect an assessment of the
volatility of the security's market value or of the liquidity of
an investment in the security. For more information about the
rating services' descriptions of lower-rated securities, see the
Appendix to this Prospectus.
Like those of other fixed-income securities, the values of
lower-rated securities fluctuate in response to changes in
interest rates. Thus, a decrease in interest rates will
generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the
value of the Fund's assets will generally decline. In addition,
the values of such securities are affected by changes in general
economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized
rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments.
Changes in the value of portfolio securities generally will not
affect income derived from such securities, but will affect the
Fund's net asset value.
The table below shows the percentages of the Fund's assets
invested during fiscal 1993 in securities assigned to the various
rating categories by Moody's and Standard & Poor's and in unrated
securities determined by Putnam Management to be of comparable
quality:<PAGE>
<TABLE>
<CAPTION>
RATED SECURITIES, UNRATED SECURITIES OF
AS PERCENTAGE OF COMPARABLE QUALITY, AS
RATING FUND'S ASSETS PERCENTAGE OF FUND'S ASSETS
- ------------------------------------------------------------------------------
<C> <C> <C>
"AAA"/"Aaa" 55.08% --%
- ------------------------------------------------------------------------------
"AA"/"Aa" 5.03% --%
- ------------------------------------------------------------------------------
"A"/"A" 0.20% --%
- ------------------------------------------------------------------------------
"BBB"/"Baa" 0.81% --%
- ------------------------------------------------------------------------------
"BB"/"Ba" 6.54% --%
- ------------------------------------------------------------------------------
"B"/"B" 27.83% 1.96%
- ------------------------------------------------------------------------------
"CCC"/"Caa" 2.50% 0.07%
- ------------------------------------------------------------------------------
"CC/"Ca" --% --%
- ------------------------------------------------------------------------------
Total 97.98% 2.02%
======
=====
/TABLE
<PAGE>
In connection with its investment in the High Yield Sector, the
Fund may invest in securities which are not publicly traded and
for which market quotations are not readily available. Putnam
Management believes that opportunities to earn high yields may
exist from time to time in securities which are not publicly
traded and which may be considered speculative. The sale of
these securities is usually restricted under federal securities
laws. As a result, the Fund may not be able to sell these
securities when Putnam Management considers it desirable to do so
or may have to sell them at less than fair market value.
At times, a substantial portion of the Fund's assets may be
invested in securities as to which the Fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds and payment-
in-kind bonds is subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in
cash currently. Both zero-coupon bonds and payment-in-kind bonds
allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve
greater credit risks than bonds paying interest currently. Even
though such bonds do not pay current interest in cash, the Fund
is nonetheless required to accrue interest income on such
investments and to distribute such amounts at least annually to
shareholders. Thus, the Fund could be required at times to
liquidate other investments in order to satisfy its distribution
requirements.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
FOR ADDITIONAL INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTMENTS BY THE FUND IN SECURITIES IN THE LOWER RATING
CATEGORIES, SEE THE STATEMENT OF ADDITIONAL INFORMATION.
INTERNATIONAL SECTOR
THE FUND WILL INVEST THE ASSETS ALLOCATED TO THE INTERNATIONAL
SECTOR IN DEBT OBLIGATIONS AND OTHER FIXED-INCOME SECURITIES
DENOMINATED IN NON-U.S. CURRENCIES. These securities include:
- - debt obligations issued or guaranteed by foreign, national,
provincial, state, or other governments with taxing
authority, or by their agencies or instrumentalities;
- - debt obligations of supranational entities (described
below); and
- - debt obligations and other fixed-income securities of
foreign and U.S. corporate issuers.
When investing in the International Sector, the Fund will
purchase only debt securities of issuers whose long-term debt
obligations are rated A or better at the time of purchase by
Moody's or Standard & Poor's or in unrated securities that Putnam
Management determines are of comparable quality. The Fund may,
however, make investments in international debt securities rated
below A with respect to assets allocated to the High Yield
Sector.
In the past, yields available from securities denominated in
foreign currencies have often been higher than those of
securities denominated in U.S. dollars. Although the Fund has
the flexibility to invest in any country where Putnam Management
sees potential for high income, it presently expects to invest
primarily in securities of issuers in industrialized Western
European countries (including Scandinavian countries) and in
Canada, Japan, Australia, and New Zealand. Putnam Management
will consider expected changes in foreign currency exchange rates
in determining the anticipated returns of securities denominated
in foreign currencies.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support.
Obligations of foreign governmental entities include obligations
issued or guaranteed by national, provincial, state or other
governments with taxing power or by their agencies. These
obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations
designated or supported by governmental entities to promote
economic reconstruction or development and international banking
institutions and related government agencies. Examples include
the International Bank for Reconstruction and Development (the
World Bank), the European Steel and Coal Community, the Asian
Development Bank, and the Inter-American Development Bank. The
governmental members or "stockholders" usually make initial
capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if
the supranational entity is unable to repay its borrowing. Each
supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital"
contributed by members at the entity's call), reserves, and net
income.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Fund may engage in
foreign currency exchange transactions to protect against
uncertainty in the level of future exchange rates. Putnam
Management may engage in foreign currency exchange transactions
in connection with the purchase and sale of portfolio securities
("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging").
The Fund may engage in "transaction hedging" to protect against a
change in the foreign currency exchange rate between the date on
which the Fund contracts to purchase or sell the security and the
settlement date, or to "lock in" the U.S. dollar equivalent of a
dividend or interest payment in a foreign currency. For that
purpose, the Fund may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities
denominated in that foreign currency.
If conditions warrant, the Fund may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures
contracts as a hedge. A foreign currency forward contract is a
negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate.
Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. For transaction
hedging purposes, the Fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies.
The Fund may engage in "position hedging" to protect against the
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the foreign currencies for
securities which the Fund intends to buy, when the Fund holds
cash reserves and short-term investments). For position hedging
purposes, the Fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts, and put and call
options on foreign currency futures contracts and on foreign
currencies on exchanges or over-the-counter markets. In
connection with position hedging, the Fund may also purchase or
sell foreign currencies on a spot basis.
The Fund's currency hedging transactions may call for the
delivery of one foreign currency in exchange for another foreign
currency and may at times not involve currencies in which its
portfolio securities are then denominated. Putnam Management
will engage in such "cross hedging" activities when it believes
that such transactions provide significant hedging opportunities
for the Fund. Cross hedging transactions by the Fund involve the
risk of imperfect correlation between changes in the value of the
currencies to which such transactions relate and changes in the
value of the currency or other asset or liability which is the
subject of the hedge.
FOR A MORE DETAILED DESCRIPTION OF FOREIGN CURRENCY EXCHANGE
TRANSACTIONS, SEE THE STATEMENT OF ADDITIONAL INFORMATION. FOR
MORE INFORMATION ABOUT FUTURES CONTRACTS AND OPTIONS, SEE
"FINANCIAL FUTURES AND OPTIONS."
RISK FACTORS. Foreign investments involve certain risks that are
not present in domestic securities. Because the Fund intends to
purchase securities for the International Sector denominated in
foreign currencies, a change in the value of any such currency
against the U.S. dollar will result in a change in the U.S.
dollar value of the Fund's assets and the Fund's income available
for distribution. In addition, although a portion of the Fund's
investment income may be received or realized in such currencies,
the Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been earned and
translated into U.S. dollars but before payment, the Fund could
be required to liquidate portfolio securities to make such
distributions. Cross-hedging transactions by the Fund involve
the risk of imperfect correlation between changes in the values
of the currencies to which such transactions relate and changes
in the value of the currency of other asset or liability which is
the subject of the hedge.
The values of foreign investments and the investment income
derived from them may also be affected favorably or unfavorably
by currency exchange rates and exchange control regulations.
Although the Fund will invest only in securities denominated in
foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no
assurance that currency controls will not be imposed
subsequently. In addition, the values of foreign fixed-income
investments will fluctuate in response to changes in U.S. and
foreign interest rates.
There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing, and financial
reporting standards and practices comparable to those in the
United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable
U.S. issuers. Foreign brokerage commissions, custodial expenses,
and other fees are also generally higher than for securities
traded in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the
settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability, and diplomatic developments which could affect the
value of the Fund's investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located
in those foreign countries. Special tax considerations apply to
foreign securities.
Income received by the Fund from sources within foreign countries
may be reduced by withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. Any such taxes
paid by the Fund will reduce its net income available for
distribution to shareholders.
DEFENSIVE STRATEGIES
AT TIMES, PUTNAM MANAGEMENT MAY JUDGE THAT CONDITIONS IN THE
SECURITIES MARKETS MAKE PURSUING THE FUND'S BASIC INVESTMENT
STRATEGY INCONSISTENT WITH THE BEST INTERESTS OF ITS
SHAREHOLDERS. At such times, Putnam Management may temporarily
use alternative strategies, primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing
these "defensive" strategies, depending on the circumstances, the
Fund may temporarily reduce or suspend its option writing
activities, shift its portfolio emphasis to higher-rated
securities in the High Yield Sector, hedge currency risks in the
International Sector, or generally reduce the average maturity of
its holdings in any or all of the Sectors. Under unusual market
conditions, the Fund could invest up to 100% of its assets in
short-term U.S. Government securities when the risks of investing
in the other Sectors are perceived to outweigh the possible
benefits of sector diversification. The Fund may also increase
the portion of its assets invested in cash or money market
instruments for such defensive purposes or for liquidity
purposes. It is impossible to predict when, or for how long, the
Fund will use these alternative strategies.
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY BUY AND SELL FUTURES CONTRACTS ON U.S. GOVERNMENT
SECURITIES, FOREIGN FIXED-INCOME SECURITIES AND ON FOREIGN
CURRENCIES FOR HEDGING PURPOSES. A futures contract is a
contract to buy or sell a certain amount of a particular U.S.
Government security, foreign fixed-income security or foreign
currency at an agreed price on a specified future date.
Depending on the change in the value of the security or currency
when the Fund enters into and terminates a futures contract, the
Fund realizes a gain or loss. The Fund may purchase and sell
futures contracts on foreign securities, to the extent permitted
by applicable law, as a substitute for direct investment in
foreign securities. The Fund may purchase and sell options on
futures contracts in addition to or as an alternative to
purchasing and selling futures contracts or, to the extent
permitted by applicable law, to earn additional income.
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES. The successful use of futures and related options will
usually depend on Putnam Management's ability to forecast
interest rate and market movements correctly. The use of options
and futures strategies also involves the risk of imperfect
correlation between movements in the prices of options and
futures contracts and movements in the values of the underlying
securities or currencies or in the values of the securities or
currencies that are the subject of a hedge. The successful use
of futures and options also depends on the availability of a
liquid secondary market to enable a Fund to close its positions
on a timely basis. There can be no assurance that such a market
will exist at a particular time. The Fund's ability to terminate
option positions established in the over-the-counter market may
be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund.
Because the markets for options and futures on foreign fixed-
income securities and foreign currencies are relatively new and
still developing and are subject to certain regulatory
constraints, the Fund's ability to engage in such transactions
may be limited. Certain provisions of the Internal Revenue Code
may also limit the Fund's ability to engage in options and
futures transactions.
A MORE DETAILED DESCRIPTION OF OPTIONS AND FUTURES STRATEGIES,
INCLUDING THE RISKS ASSOCIATED WITH THEM, IS INCLUDED IN THE
STATEMENT OF ADDITIONAL INFORMATION.
INVESTMENTS IN PREMIUM SECURITIES
The Fund may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities
are typically purchased at prices greater than the principal
amounts payable on maturity. The Fund does not amortize the
premium paid for such securities in calculating its net
investment income. As a result, the purchase of such securities
provides the Fund a higher level of investment income
distributable to shareholders on a current basis than if the Fund
had purchased securities bearing current market rates of
interest. Because the value of premium securities tends to
approach the principal amount as they approach maturity (or call
price in the case of securities approaching their first call
date), the purchase of such securities may increase the Fund's
risk of capital loss if such securities are held to maturity (or
first call date).
During a period of declining interest rates, many of the Fund's
portfolio investments will likely bear coupon rates which are
higher than the current market rates, regardless of whether such
securities were originally purchased at a premium. Such
securities would generally carry premium market values which
would be reflected in the net asset value of the Fund's shares.
As a result, an investor who purchases shares of the Fund during
such periods would initially receive higher taxable monthly
distributions (derived from the higher coupon rates payable on
the Fund's investments) than might be available from alternative
investments bearing current market interest rates, but may face
an increased risk of capital loss as these higher coupon
securities approach maturity (or first call date). In evaluating
the potential performance of an investment in the Fund, investors
may find it useful to compare the Fund's current dividend rate
with the Fund's "yield," which is computed on a yield-to-maturity
basis in accordance with SEC regulations and which reflects
amortization of market premiums. See "How performance is shown."
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH INVOLVES CERTAIN SPECIAL
RISKS. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE
DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THESE RISKS.
OPTIONS. The Fund may seek to increase its current return by
writing covered call and put options on U.S. Government
securities, foreign fixed-income securities and foreign
currencies. The Fund receives a premium from writing a call or
put option, which increases the Fund's return if the option
expires unexercised or is closed out at a net profit. When the
Fund writes a call option, it gives up the opportunity to profit
from any increase in the price of a security or currency above
the exercise price of the option; when it writes a put option,
the Fund takes the risk that it will be required to purchase a
security or currency from the option holder at a price above the
current market price of the security or currency. The Fund may
terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written.
The Fund may also buy and sell put and call options for hedging
purposes. The Fund may also from time to time buy and sell
combinations of put and call options on the same underlying
security or currency to earn additional income. Because the
markets for options on foreign fixed-income securities and
foreign currencies are relatively new and still developing and
are subject to certain regulatory constraints, the Fund's ability
to engage in such transactions may be limited. The aggregate
value of the securities and foreign currencies underlying the
options may not exceed 25% of the Fund's assets. The Fund's use
of these strategies may be limited by applicable law.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The Fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must
be fully collateralized at all times. The Fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk to the Fund if the other party
should default on its obligation and the Fund is delayed or
prevented from recovering the collateral or completing the
transaction.
PORTFOLIO TURNOVER
The length of time the Fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the Fund is known as "portfolio turnover."
As a result of the Fund's investment policies, under certain
market conditions the Fund's portfolio turnover rate may be
higher than that of other mutual funds. Portfolio turnover
generally involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable capital gains.
Portfolio turnover rates for the life of the Fund are shown in
the section "Financial highlights ."
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM: acquiring more than 10% of the voting securities of any one
issuer or more than 10% of any one class of securities of any one
issuer* and investing more than: (a) 5% of its total assets
(taken at current value) in securities of any one issuer (other
than securities of the U.S. government or its agencies or
instrumentalities or, with respect to 25% of the Fund's total
assets, securities issued by or backed by the credit of, any
foreign government, its agencies, or instrumentalities);* (b) 5%
of its net assets in securities (other than obligations of the
U.S. government or its agencies or instrumentalities) of issuers
that, together with any predecessors, controlling persons,
general partners and guarantors, have been in operation less than
three years; (c) 15% of its net assets in securities restricted
as to resale (excluding securities that have been determined by
the Fund's Trustees (or the person designated by them to make
such determinations) to be readily marketable);* (d) 25% of its
total assets in any one industry (securities of the U.S.
government, its agencies or instrumentalities, or of any foreign
government, its agencies or instrumentalities, securities of
supranational entities, and securities backed by the credit of a
governmental entity are not considered to represent industries);*
or (e) 15% of its net assets in any combination of securities
that are not readily marketable, in securities restricted as to
resale (excluding securities determined by the Fund's Trustees
(or the person designated by them to make such determinations) to
be readily marketable), and in repurchase agreements maturing in
more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD AND TOTAL RETURN DATA MAY FROM TIME TO TIME BE INCLUDED IN
ADVERTISEMENTS ABOUT THE FUND. "Yield" is calculated by
dividing the annualized net investment income per share
during a recent 30-day period by the maximum public offering
price per share on the last day of that period. For this
purpose, net investment income is calculated in accordance with
SEC regulations and may differ from the Fund's net investment
income as determined for financial reporting purposes. SEC
regulations require that net investment income be calculated on a
"yield-to-maturity" basis, which has the effect of amortizing any
premiums or discounts in the current market value of fixed-income
securities. The Fund's current dividend rate is based on the
Fund's net investment income as determined for financial
reporting purposes, which does not reflect any such amortization.
See "How objective is pursued -- Investments in premium
securities." The Fund's yield reflects the deduction of the
maximum initial sales charge . "Total return" for the
one- and five-year periods and for the life of the Fund
through the most recent calendar quarter represents the average
annual compounded rate of return on an investment of $1,000 in
the Fund at the maximum public offering price . Total
return may also be presented for other periods or based on
investment at reduced sales charge levels or net asset value.
Any quotation of total return or yield not reflecting the maximum
initial sales charge or contingent deferred sales charge would be
reduced if such sales charges were used. Quotations of yield or
total return for any period when an expense limitation was in
effect will be greater than if the limitation had not been in
effect. The Fund's performance may be compared to various
indices. See the Statement of Additional Information.
Because shares sold through eligible defined contribution plans
are sold without a sales charge, quotations of yield and total
return reflecting the deduction of a sales charge will be lower
than the actual yield and total return on shares purchased
through such plans.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objective and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND ARE RESPONSIBLE FOR GENERALLY OVERSEEING
THE CONDUCT OF THE FUND'S BUSINESS. Subject to such policies as
the Trustees may determine, Putnam Management furnishes a
continuing investment program for the Fund and makes investment
decisions on its behalf. Subject to the control of the Trustees,
Putnam Management also manages the Fund's other affairs and
business. Jennifer Evans Leichter, Senior Vice President of
Putnam Management and Vice President of the Fund, has had primary
responsibility for the day-to-day management of the Fund's
portfolio, since September, 1989. Ms. Leichter has been employed
by Putnam Management for the past five years.
The Fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its Distribution Plans (which are in turn allocated to the
relevant class of shares). The Fund also 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 total reimbursement is determined
annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of shares of the Fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers.
ORGANIZATION AND HISTORY
Putnam Diversified Income Trust is a Massachusetts business trust
organized on August 11, 1988. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Fund is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Fund may, without shareholder
approval, be divided into two or more series of shares
representing separate investment portfolios. Any such series of
shares may be further divided, without shareholder approval, into
two or more classes of shares having such preferences and special
or relative rights and privileges as the Trustees determine. The
Fund's shares are currently divided into three classes, two of
which are currently being offered. Only the Fund's Class A
shares are offered by this Prospectus. Class B shares are sold
at net asset value, but are subject to a contingent deferred
sales charge upon redemption and bear a higher 12b-1 fee than
Class A shares. Because Class A shares generally bear lower
expenses than Class B shares, the investment return of Class A
shares will be higher than that of Class B shares. Each
share has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except
when required by law or as determined by the Trustees. Shares
are freely transferable, are entitled to dividends as declared by
the Trustees, and, if the Fund were liquidated, would receive the
net assets of the Fund. The Fund may suspend the sale of shares
at any time and may refuse any order to purchase shares.
Although the Fund is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees, or to take other actions as
provided in the Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The Fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
THE FUND'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, M.I.T.; JAMESON ADKINS BAXTER, President, Baxter
Associates, Inc.; HANS H. ESTIN, Vice Chairman, North American
Management; JOHN A. HILL, Principal and Managing Director, First
Reserve Corporation; ELIZABETH T. KENNAN, President, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S. PERKINS,
Director of various corporations, including AT&T, K mart
Corporation and Time Warner Inc.; GEORGE PUTNAM, III,*
President, New Generation Research, Inc.; A.J.C. SMITH,*
Chairman, Chief Executive Officer and Director, Marsh & McLennan
Companies, Inc.; and W. NICHOLAS THORNDIKE, Director of various
corporations and charitable organizations, including Providence
Journal Co. Also, Trustee and President, Massachusetts General
Hospital and Trustee of Eastern Utilities Associates. The Fund's
Trustees are also Trustees of the other Putnam funds. Those
marked with an asterisk (*) are "interested persons" of the Fund,
Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
HOW TO BUY SHARES
ALL ORDERS TO PURCHASE SHARES MUST BE MADE THROUGH YOUR
EMPLOYER'S DEFINED CONTRIBUTION PLAN. FOR MORE INFORMATION ABOUT
HOW TO PURCHASE SHARES OF THE FUND THROUGH YOUR EMPLOYER'S PLAN
OR LIMITATIONS ON THE AMOUNT THAT MAY BE PURCHASED, PLEASE
CONSULT YOUR EMPLOYER. Shares are sold to eligible defined
contribution plans at the net asset value per share next
determined after receipt of an order by Putnam Mutual Funds.
Orders must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to
receive that day's net asset value. In order to be eligible to
purchase shares at net asset value, defined contribution plans
must initially invest at least $1 million or be sponsored by
companies with more than 750 employees. Eligible plans may make
additional investments of any amount at any time. To eliminate
the need for safekeeping, the Fund will not issue certificates
for your shares.
On sales at net asset value to a participant-directed qualified
retirement plan initially investing less than $20 million in
Putnam funds and other investments managed by Putnam Management
or its affiliates (including a plan sponsored by an employer with
more than 750 employees), Putnam Mutual Funds pays commissions on
cumulative purchases during the life of the account at the rate
of 1.00% of the amount under $3 million and 0.50% thereafter. On
sales at net asset value to all other participant-directed
qualified retirement plans, Putnam Mutual Funds pays commissions
on the initial investment and on subsequent net quarterly sales
at the rate of 0.15%. Putnam Mutual Funds may, at its
expense, provide additional promotional incentives or payments to
dealers that sell shares of the Putnam funds. In some instances,
these incentives or payments may be offered only to certain
dealers who have sold or may sell significant amounts of shares.
DISTRIBUTION PLAN
The purpose of the Plan is to permit the Fund to
compensate Putnam Mutual Funds for services provided and expenses
incurred by it in promoting the sale of shares of the
Fund, reducing redemptions, or maintaining or improving services
provided to shareholders by Putnam Mutual Funds or dealers. The
Plan provides for payments by the Fund to Putnam Mutual
Funds at the annual rate of up to 0.35% of the Fund's average net
assets attributable to Class A shares, subject to the authority
of the Fund's Trustees to reduce the amount of payments or to
suspend the Plan for such periods as they may determine.
Subject to these limitations, the amount of such payments and the
specific purposes for which they are made shall be determined by
the Trustees of the Fund. At present, the Trustees have approved
payments under the Plan at the annual rate of 0.25% of
the Fund's average net assets attributable to Class A shares for
the purpose of compensating Putnam Mutual Funds for services
provided and expenses incurred by it as principal underwriter of
the Fund's shares, including payments made by it to
dealers under the Service Agreements referred to below. Should
the Trustees decide in the future to approve payments in excess
of this amount, shareholders will be notified and this Prospectus
will be revised.
Putnam Mutual Funds makes quarterly payments to qualifying
dealers based on the average net asset value of Class A shares
which are attributable to shareholders for whom the dealers are
designated as the dealer of record, in order to compensate
such dealers (including, for this purpose, certain
financial institutions) for services provided in connection with
sales of Class A shares and the maintenance of shareholder
accounts . This calculation excludes until one year after
purchase shares purchased at net asset value after March 31, 1994
by shareholders investing $1 million or more and by participant-
directed qualified retirement plans sponsored by employers with
more than 750 employees ("NAV Shares"), except for shares owned
by certain investors investing $1 million or more that have made
arrangements with Putnam Mutual Funds and whose dealer of record
waived the sales commission. Except as stated below, Putnam
Mutual Funds makes such payments at the annual rate of 0.25% of
such average net asset value (including shares acquired through
reinvestment of distributions). For participant-directed
qualified retirement plans initially investing less than $20
million in Putnam funds and other investments managed by Putnam
Management or its affiliates, Putnam Mutual Funds' payments to
qualifying dealers on NAV Shares are 100% of the rate stated
above if average plan assets in Putnam funds (excluding money
market funds) during the quarter are less than $20 million, 60%
of the stated rate if average plan assets are at least $20
million but less than $30 million, and 40% of the stated rate if
average plan assets are $30 million or more. For all other
participant-directed qualified retirement plans purchasing NAV
Shares, Putnam Mutual Funds makes quarterly payments to
qualifying dealers at the annual rate of 0.10% of
the average net asset value of such shares.
Putnam Mutual Funds may suspend or modify these
payments at any time, and payments are subject to the
continuation of the Fund's Distribution Plan described
above, the terms of Service Agreements between dealers and Putnam
Mutual Funds, and any applicable limits imposed by the National
Association of Securities Dealers, Inc.
HOW TO SELL SHARES
SUBJECT TO ANY RESTRICTIONS IMPOSED BY YOUR EMPLOYER'S PLAN,
YOU CAN SELL YOUR SHARES THROUGH THE PLAN TO THE FUND ANY DAY
THE NEW YORK STOCK EXCHANGE IS OPEN . For more information
about how to sell shares of the Fund through your employer's
plan, including any charges that may be imposed by the plan,
please consult your employer.
Your plan administrator must send a signed letter of
instruction to Putnam Investor Services . The
price you will receive is the next net asset value calculated
after the Fund receives your request in proper form . All
requests must be received by the Fund prior to the close of
regular trading on the New York Stock Exchange in order to
receive that day's net asset value . If you sell shares
having a net asset value of $100,000 or more, the signatures of
registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer or certain other financial
institutions. See the Statement of Additional Information for
more information about where to obtain a signature guarantee.
THE FUND GENERALLY PROVIDES PAYMENT FOR YOUR SHARES THE
BUSINESS DAY AFTER THE REQUEST IS RECEIVED. Under unusual
circumstances, the Fund may suspend repurchases or postpone
payment for more than seven days, as permitted by federal
securities law. The Fund will only repurchase shares for which
it has received payment.
HOW TO EXCHANGE SHARES
Subject to any restrictions contained in your plan, you can
exchange your shares for shares of other Putnam funds available
through your plan at net asset value. Contact your plan
administrator or Putnam Investor Services on how to
exchange your shares or how to obtain prospectuses
of other Putnam funds in which you may invest . Shares of
certain Putnam funds are not available to residents of all
states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where the Trustees or Putnam Management
believes doing so would be in the best interests of the Fund, the
Fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the Statement of Additional
Information to find out more about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Portfolio securities for which market
quotations are readily available are stated at market value.
Short-term investments that will mature in 60 days or less are
stated at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value
following procedures approved by the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund will pay monthly distributions from net investment
income and any net realized short-term capital gain (including
gains from options and futures transactions). Any net realized
long-term capital gain will be distributed at least annually
after applying any available capital loss carryover. Net
investment income consists of interest accrued on portfolio
investments of the Fund, less accrued expenses.
The terms of your plan will govern how your plan may receive
distributions from the Fund. Generally, periodic distributions
from the Fund to your plan are reinvested in additional Fund
shares , although your plan may permit either Fund
distributions from net investment income to be received by
you in cash while reinvesting capital gains
distributions in additional shares , or all Fund distributions
to be received in cash. If another option is not selected ,
all distributions will be reinvested in additional Fund
shares .
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
taxes on income and gains it distributes . The Fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis. Generally, Fund
distributions are taxable as ordinary income,
except that any distributions of net long-term capital gains will
be taxed as such . However, distributions by the Fund to
employer-sponsored defined contribution plans that qualify for
tax-exempt treatment under federal income tax laws will not be
taxable. Special tax rules apply to investments through such
plans. You should consult your tax adviser to determine the
suitability of the Fund as an investment through such a plan and
the tax treatment of distributions (including distributions of
amounts attributable to an investment in the Fund) from such a
plan.
The foregoing is a summary of certain federal income tax
consequences of investing in the Fund. You should consult your
tax adviser to determine the precise effect of an investment in
the Fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the Fund and
of other Putnam funds. Putnam Defined Contribution Plans is a
division of Putnam Mutual Funds. Putnam Fiduciary Trust
Company is the Fund's custodian. Putnam Investor Services, a
division of Putnam Fiduciary Trust Company, is the Fund's
investor servicing and transfer agent.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are located at One Post Office Square, Boston,
Massachusetts, 02109 and are subsidiaries of Putnam
Investments, Inc., which is wholly-owned by Marsh & McLennan
Companies, Inc., a publicly owned holding company whose principal
businesses are international insurance and reinsurance brokerage,
employee benefit consulting and investment management.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. DESCRIBES CLASSIFICATIONS OF
BONDS AS FOLLOWS:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default, or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever earning any real investment standing.
STANDARD & POOR'S CORPORATION DESCRIBES CLASSIFICATIONS OF
CORPORATE BONDS AS FOLLOWS:
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA - Debt rated AA also qualifies as high quality debt
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances, they differ from the
AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Debt rated BBB is regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
weakened capacity to pay principal and interest for debt in this
category than for debt in the A category.
BB-B-CCC-CC-C - Debt rated BB, B, CCC, CC and C is regarded
on balance as predominately speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D - Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be
used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
<PAGE>
DIFFERENCES BETWEEN THE TYPESET DEFINED CONTRIBUTION AND CLASS Y
(PRINTED)
PROSPECTUS AND THE EDGAR FILING VERSION.
1. PAGINATION IS DIFFERENT IN PRINTED PROSPECTUS
2. SECTION HEADINGS AND SUBHEADINGS IN THE PRINTED PROSPECTUS
ARE PRINTED IN BOLDFACE TYPE
3. THE FIRST FEW DESCRIPTIVE LINES OF CERTAIN PARAGRAPHS, AND
CERTAIN OTHER EMPHASIZED PHRASES, ARE PRINTED IN BOLDFACE
TYPE
4. IN THE PRINTED PROSPECTUS, THE DASHES AT THE BEGINNING OF
CERTAIN SENTENCES ARE REPLACED BY A SOLID BOX
5. THE FIRST PAGE OF THE PRINTED PROSPECTUS CONTAINS A BOX
WITH AN ILLUSTRATION OF THE BALANCE SCALES, THE PUTNAM
LOGO
<PAGE>
