PUTNAM DIVERSIFIED INCOME TRUST
ONE POST OFFICE SQUARE, BOSTON, MA 02109
CLASS Y SHARES
INVESTMENT STRATEGY: INCOME
PROSPECTUS - DECEMBER 1, 1994 , AS
REVISED DECEMBER 1, 1995
This Prospectus explains concisely what you should know before
investing in Class Y shares of Putnam Diversified Income
Trust (the "Fund") . Please read it carefully and keep it
for future reference. You can find more detailed information
about the Fund in the December 1, 1994 Statement of Additional
Information, as amended from time to time. For a free copy of
the Statement or for other information, including a Prospectus
regarding any other class of Fund shares , 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.
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. INVESTORS 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
Objective........................................... 3
How objective is pursued............................. 3
How performance is shown............................. 16
How the Fund is managed.............................. 17
Organization and history............................. 18
ABOUT YOUR INVESTMENT
How to buy shares.................................... 20
How to sell
shares.................................. 20
How to exchange shares............................... 21
How the Fund values its shares....................... 21
How distributions are made; tax information.......... 21
ABOUT PUTNAM INVESTMENTS, INC. .......................
22
APPENDIX
Fixed-income security ratings........................ 23
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes estimated
expenses attributable to Class Y shares . The Example
shows the cumulative expenses attributable to a hypothetical
$1,000 investment in Class Y shares of the Fund over
specified periods.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.57%
Other Expenses 0.19%
Total Fund Operating Expenses 0.76%
The table is provided to help you understand the expenses of
investing in the Fund and your share of the operating expenses
which Class Y expects to incur during its first fiscal year.
Management fees and "Other expenses" are based on the operating
expenses for the Fund's Class A shares.
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
$8 $24 $42 $94
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.
See "Organization and history" for information about any other
class of shares offered by the Fund.
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.
<PAGE>
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 INVESTMENT MANAGEMENT, INC. ("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. "U.S. Government
Securities" are 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, mortgage participation
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), 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 ("Fannie Mae") 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 at least 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 collateralized mortgage
obligations ("CMOs") and certain stripped mortgage-backed
securities. Some of these debt securities may be issued by
private U.S. issuers. CMOs and other mortgage-backed securities
represent a participation in, or are secured by, mortgage loans.
Stripped mortgage-backed securities are usually structured with
two classes that receive different distributions on a pool of
mortgage loans. The Fund may invest in both the interest-only or
"IO" class and the principal-only or "PO" class. See "Risk
factors" below.
Mortgage-backed securities include securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Ginnie Mae, Fannie Mae or the Federal
Home Loan Mortgage Corporation ("Freddie Mac"); 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.
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
("S&P"), 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.
RISK FACTORS. U.S. Government Securities are considered among
the safest of fixed income investments, but their values, like
those of other debt securities, will fluctuate with changes in
interest rates. Changes in the value of portfolio securities
will not affect interest income from those securities but will be
reflected in the Fund's net asset value. A decrease in interest
rates will generally result in an increase in the value of such
securities. Conversely, during periods of rising interest rates,
the value of such securities will 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 longer maturities. Because of
their added safety, the yields available from U.S. Government
Securities are generally lower than the yields available from
comparable securities of private issuers.
Whereas certain U.S. Government Securities such as U.S. Treasury
obligations and Ginnie Mae certificates are backed by the full
faith and credit of the U.S. government, other securities in
which the Fund may invest are subject to varying degrees of risk
of default depending upon, among other factors, the
creditworthiness of the issuer and, in the case of mortgage-
backed and asset-backed securities, the ability of the mortgagor
or other 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 certain 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 may significantly shorten the effective
maturities of the securities, especially during periods of
declining interest rates. Conversely, during periods of rising
interest rates, a reduction in prepayments may increase the
effective maturities of these securities.
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.
CMOs are issued with a number of classes or series which have
different maturities and which may represent interests in the
interest or principal on the underlying collateral or in a
combination thereof. CMOs of different classes are generally
retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMOs that
is first to mature generally will be retired prior to its
maturity. Thus, the early retirement of a particular class or
series of CMOs held by the Fund would have the same effect as the
prepayment of mortgages underlying other mortgage-backed
securities.
The yield to maturity on an IO class of stripped mortgage-backed
securities is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the underlying assets, and a
rapid rate of principal payments may have a material adverse
effect on the Fund's yield to maturity to the extent it invests
in IOs. If the underlying assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. Conversely,
POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than
anticipated. The secondary market for stripped mortgage-backed
securities may be more volatile and less liquid than that for
other mortgage-backed securities, potentially limiting the Fund's
ability to buy or sell these securities at any particular time.
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
S&P. 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 S&P 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 S&P 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.
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. THE VALUES OF 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. The magnitude
of these fluctuations generally has been smaller for
intermediate-term securities than for securities with longer
maturities. While the volatility associated with intermediate-
term securities may be lower than that for longer-term
securities, the yields on such securities are also generally
lower. 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 Fund will not
necessarily dispose of a security when its rating is reduced
below its rating at the time of purchase, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
Fund's investment objective.
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 held 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 S&P
does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in
the security.
The table below shows the percentages of the Fund's net assets
invested during fiscal 1994 in securities assigned to the various
rating categories by Moody's and S&P and in unrated securities
determined by Putnam Management to be of comparable quality:
RATED SECURITIES, UNRATED SECURITIES OF
AS PERCENTAGE OF COMPARABLE QUALITY, AS
RATING FUND'S ASSETS PERCENTAGE OF FUND'S ASSETS
"AAA"/"Aaa" 49.44% ---
"AA"/"Aa" 3.48% ---
"A"/"A" 0.15% 0.05%
"BBB"/"Baa" 0.60% 0.05%
"BB"/"Ba" 8.98% 1.10
"B"/"B" 24.57% 7.48%
"CCC"/"Caa" 3.56% 0.44%
"CC"/"Ca" 0.04% ---
"C"/"C" --- ---
"D" 0.05% 0.01%
Total 90.87% 9.13%
======= ======
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 seeks to minimize the risks of investing in lower-
rated securities through careful investment analysis. When the
Fund invests in securities in the lower rating categories, the
achievement of the Fund's goals is more dependent on Putnam
Management's ability than would be the case if the Fund were
investing in securities in the higher rating categories. 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.
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.
The Fund may 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.
The Fund may invest in participations and assignments of fixed
and floating rate loans made by financial institutions to
governmental or corporate borrowers. In addition to the more
general investment considerations applicable to fixed income
investments, participations and assignments involve risk that an
institution's insolvency could delay or prevent the flow of
payments on the underlying loan to the Fund. The Fund may have
limited rights to enforce the terms of the underlying loan, and
the liquidity of loan participations and assignments may be
limited. See the Statement of Additional Information.
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 S&P 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.
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, and other fees are
also generally higher than 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.
The risks described above are typically increased to the extent
that the Fund invests in securities traded in under-developed and
developing nations, which are sometimes referred to as "emerging
markets."
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 shift its portfolio emphasis to higher-rated securities
in the High Yield Sector, hedge currency risks in the
International Sector, generally reduce the average maturity of
its holdings in any or all of the Sectors, or invest in any other
securities which Putnam Management considers consistent with such
defensive strategies. 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.
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 fiscal 1994 and 1993 were 201.53%
and 243.73%, respectively.
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 futures
and options strategies also involves the risk of imperfect
correlation between movements in the prices of futures and
options and movements in the prices 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 the 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 futures and 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. Certain provisions of the Internal Revenue Code
and certain regulatory requirements may limit the Fund's ability
to engage in futures and options transactions.
A MORE DETAILED DESCRIPTION OF FUTURES AND OPTIONS 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.
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 investment policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental investment 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
THE FUND'S INVESTMENT PERFORMANCE MAY FROM TIME TO TIME BE
INCLUDED IN ADVERTISEMENTS ABOUT CLASS Y SHARES. "Yield"
for each class of shares 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 purposes of calculating yield ,
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-, five- and ten-year periods and for
the life of the Class Y shares through the most recent
calendar quarter represents the average annual compounded rate of
return on an investment of $1,000 in the Fund . Total
return may also be presented for other periods .
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.
Quotations of investment performance 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, quotation of
investment performance reflecting the deduction of a sales charge
will be lower than the actual investment performance on shares
purchased through such plans.
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. D. William Kohli, Jennifer Evans Leichter and Michael
Martino, each a Senior Vice President of Putnam Management and
Vice President of the Fund, and Neil Powers and Mark J.
Siegel, each a Vice President of Putnam Management and Vice
President of the Fund, have had primary responsibility for
the day-to-day management of the Fund's portfolio, since 1989 in
the case of Ms. Leichter, and since 1994 in the cases of Messrs.
Kohli, Martino, Powers and Siegel . Mr. Kohli has
been employed by Putnam Management since September, 1994. Prior
to September, 1994, Mr. Kohli was Executive Vice President and
Co-Director of Global Bond Management and, from 1988 to 1993, he
was Senior Portfolio Manager at Franklin Advisors/Templeton
Investment Counsel. Ms. Leichter has been employed by Putnam
Management since 1987. Mr. Martino has been employed by Putnam
Management since March, 1994. Prior to March, 1994, Mr. Martino
was employed by Back Bay Advisors as Executive Vice President and
Chief Investment Officer from 1992 to 1994, Senior Vice President
and Senior Portfolio Manager from 1990 to 1992, and Senior
Portfolio Manager from 1988 to 1990. Mr. Powers has been
employed by Putnam Management since 1986. Mr. Siegel has been
employed by Putnam Management since June, 1993. Prior to June,
1993, Mr. Siegel was Vice President of Salomon Brothers
International Ltd.
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 not currently divided into series. The Fund's
shares are currently divided into four classes - Class
A , Class B, Class M and Class Y.
Only the fund's Class Y shares are offered by this
prospectus. The Fund also offers Class A, Class B and
Class M shares through participating dealers pursuant to a
separate prospectus. Class A , Class B and Class M
shares bear the same expenses as Class Y shares and, in
addition, are subject to 12b-1 fees. Class A shares and Class M
shares are subject to a front-end sales charge and Class B shares
are subject to a contingent deferred sales charge. Due to 12b-1
fees and sales charges, the investment performance of Class A,
Class B and Class M shares will be lower than the investment
performance of Class Y shares .
Each share has one vote, with fractional shares voting
proportionally. Shares of each class will vote together as a
single class except when otherwise 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
Agreement and 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, Massachusetts Institute of Technology ; JAMESON
ADKINS BAXTER, President, Baxter Associates, Inc.; HANS H. ESTIN,
Vice Chairman, North American Management Corp.; JOHN A. HILL,
Principal and Managing Director, First Reserve Corporation;
ELIZABETH T. KENNAN, President Emeritus and Professor ,
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, Kmart Corporation and Time Warner Inc.; GEORGE
PUTNAM, III,* President, New Generation Research, Inc. ; ELI
SHAPIRO, Alfred P. Sloan Professor of Management, Emeritus,
Alfred P. Sloan School of Management, Massachusetts Institute of
Technology ; 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 Data General Corporation, Bradley
Real Estate, Inc. and Providence Journal Co. Also, Trustee
of Massachusetts General Hospital and Eastern Utilities
Associates. The Fund's Trustees are also Trustees of the other
Putnam funds. Those marked with an asterisk (*) are or may be
deemed to be "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. Class Y shares are
available to defined contribution plans whose investment
in Putnam funds and other assets managed by Putnam Management or
its affiliates, combined with such investments by the plan's
sponsor and the sponsor's other employee benefit plans, equals at
least $250 million. Defined contribution plans that elect to buy
Class Y shares upon attaining eligibility will receive Class Y
shares in place of any Class A shares then owned. Class Y shares
are also available to defined contribution plans whose sponsor
confirms a good faith expectation that investments in Putnam-
managed assets by the sponsor and its employee benefit plans will
attain $250 million (using the higher of purchase price or
current market value) within one year of the initial purchase of
Class Y shares, and agrees that Class Y shares may be redeemed
and Class A shares purchased if that level is not attained .
To eliminate the need for safekeeping, the fund will not
issue certificates for your shares. Putnam Mutual Funds
will from time to time , at its expense, provide additional
promotional incentives or payments to dealers that sell shares of
the Putnam funds. These incentives or payments may include
payments for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives
and their guests to locations within and outside the United
States for meetings or seminars of a business nature. In
some instances, these incentives or payments may be offered only
to certain dealers who have sold or may sell significant amounts
of shares. Certain dealers may not sell all classes of
shares.
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 with
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 REDEEMED SHARES THE
BUSINESS DAY AFTER THE REQUEST IS RECEIVED. Under unusual
circumstances, the Fund may suspend redemptions, or postpone
payment for more than seven days, as permitted by federal
securities law. The Fund will only redeem 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.
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 Putnam Management or the Trustees
believe 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 distributes net investment income and any net realized
short-term capital gain (including gains from options and futures
transactions) at least monthly. Distributions from any net
realized long-term capital gains are made at least annually after
applying any available capital loss carryover.
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 you to receive Fund
distributions from net investment income in cash while
reinvesting capital gains distributions in additional shares or
to receive all Fund distributions 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
FIXED-INCOME SECURITY 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- edged. " 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 DESCRIBES CLASSIFICATIONS OF CORPORATE
BONDS AS FOLLOWS:
AAA - Debt rated AAA has the highest rating assigned by Standard
& Poor's. Capacity to pay principal and interest.
AA - Debt rated AA also qualifies as high quality debt
obligations. Capacity to pay interest and repay principal 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, it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal 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. 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 - Bonds rated D are 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.
