Putnam
Balanced
Fund
ANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
The Trustees of Putnam Balanced Fund are pleased to present you with this
annual report of Putnam Balanced Fund for the year ended September 30, 1997.
As you know, this fund is still in its incubation period, which means it is
only open to Putnam employees and their families who are Massachusetts
residents.
In a year of remarkable performance for U.S. stocks and good results for
bonds, your fund was well positioned in both markets. The equity portion of
the portfolio, under the direction of Lead Manager David J. Santos, contained
some of the year's most prominent stocks: large growth-oriented companies with
substantial sales overseas, such as Coca-Cola and Microsoft. In addition to
this handful of superlative stocks, the fund also had large stakes in some of
the strongest sectors, such as technology, pharmaceuticals, and financials.
The bond portion was held back a bit by rising interest rates between
September 1996 and March 1997, but Comanager Kenneth J. Taubes decided to
reduce positions in rate-sensitive Treasury bonds in that period. During 1997,
he added corporate and asset-backed bonds, which have performed well thanks to
the healthy economy. For the 12 months ended September 30, 1997, your fund
posted a total return of 24.58% at net asset value.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and finance 10.0%
Retail 9.4%
Electronics and electrical equipment 8.4%
Pharmaceuticals 6.7%
Computer services and software 6.6%
Footnote reads:
*Based on net assets as of 9/30/97. Holdings will vary over time.
As the fund enters its new fiscal year, the fund managers are positioning it
somewhat defensively, favoring stocks with somewhat lower price risk and bonds
less sensitive to interest-rate changes. In a period of market volatility,
these moves demonstrate the flexibility of a combined portfolio of both stocks
and bonds to manage investment risk.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 15, 1997
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Balanced Fund is designed for investors seeking capital growth and current
income through a portfolio of core-growth stocks and fixed-income
securities.
TOTAL RETURN FOR PERIOD ENDED 9/30/97
(inception date 1/3/95)
NAV POP
- ------------------------------------------------------------------------------
1 year 24.58% 17.45%
- ------------------------------------------------------------------------------
Life of fund 78.01 67.75
Annual average 23.42 20.78
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIOD ENDED 9/30/97
S&P LB Consumer
500 Gov't/Corp. DJIA Price Index
- ------------------------------------------------------------------------------
1 year 40.43% 9.60% 37.59% 2.15%
- ------------------------------------------------------------------------------
12/31/94 - 9/30/97
Life of fund 119.19 30.49 120.01 7.68
Annual average 33.04 10.17 33.22 2.73
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns and principal
value will fluctuate so that an investor's shares when sold may be worth
more or less than their original cost. POP assumes 5.75% maximum sales
charge. The short-term results of a relatively new fund are not
necessarily indicative of its long-term prospects.
Performance data reflect an expense limitation currently or previously in
effect. Without the expense limitation, the fund's total return would have
been lower.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 1/3/95
Plot Points read:
Fund's class A Consumer
shares at POP Price Index
1/3/95 9423 10000
3/31/95 10166 10114
6/30/95 11020 10187
9/30/95 11707 10234
12/31/95 12256 10254
3/31/95 12598 10401
6/30/96 12940 10468
9/30/96 13465 10541
12/31/96 13941 10595
3/31/97 13687 10688
6/30/97 15605 10708
9/30/97 16775 10768
9/30/97 16775 10768
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/97
- ------------------------------------------------------------------------------
Distributions (number) 1
- ------------------------------------------------------------------------------
Income 0.274
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long term 0.739
- ------------------------------------------------------------------------------
Short term 0.528
- ------------------------------------------------------------------------------
Total 1.541
- ------------------------------------------------------------------------------
Share value: NAV POP
- ------------------------------------------------------------------------------
9/30/96 $11.03 $11.70
- ------------------------------------------------------------------------------
9/30/97 11.90 12.63
- ------------------------------------------------------------------------------
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
The Lehman Brothers Government/Corporate Bond Index is an unmanaged list
of publicly issued U.S. Treasury obligations and corporate debt
securities.
Standard & Poor's 500 Composite Stock Price Index is an unmanaged list of
common stocks that is frequently used as a general measure of stock market
performance.
Dow Jones Industrial Average is an unmanaged list of 30 common stocks
frequently used as a general measure of stock market performance.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended September 30, 1997
To the Trustees and Shareholders of
Putnam Balanced Fund
We have audited the accompanying statement of assets and liabilities of Putnam
Balanced Fund, including the portfolio of investments owned, as of September
30, 1997, and the related statement of operations for the year then ended and
the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of September 30, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Balanced Fund as of September 30, 1997, the results of its operations
for the year then ended and the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 7, 1997
Portfolio of investments owned
September 30, 1997
<TABLE>
<CAPTION>
COMMON STOCKS (68.7%) *
NUMBER OF SHARES VALUE
Banks (1.0%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
200 Citicorp $ 26,781
Biotechnology (0.9%)
- ------------------------------------------------------------------------------------------------------------
300 Quintiles Transnational Corp. + 25,275
Building and Construction (0.3%)
- ------------------------------------------------------------------------------------------------------------
200 Masco Corp. 9,163
Business Equipment and Services (5.5%)
- ------------------------------------------------------------------------------------------------------------
400 Adaptec, Inc. + 18,700
300 BMC Software, Inc. + 19,425
300 Cisco Systems, Inc. + 21,919
500 Compaq Computer Corp. + 37,375
400 EMC Corp. + 23,350
300 Herman Miller, Inc. 16,050
450 Paychex, Inc. 15,694
--------------
152,513
Computer Services and Software (6.6%)
- ------------------------------------------------------------------------------------------------------------
350 Computer Associates Intl., Inc. 25,134
300 Compuware Corp. + 18,150
500 Data General Corp. + 13,313
200 Electronics for Imaging, Inc. + 10,200
600 HBO & Co. 22,650
400 Microsoft Corp. + 52,925
400 Parametric Technology Corp. + 17,650
400 PeopleSoft, Inc. + 23,900
--------------
183,922
Conglomerates (3.4%)
- ------------------------------------------------------------------------------------------------------------
1,400 General Electric Co. 95,288
Consumer Non Durables (3.3%)
- ------------------------------------------------------------------------------------------------------------
300 Colgate-Palmolive Co. 20,906
200 Clorox Co. 14,825
800 Procter & Gamble Co. 55,250
--------------
90,981
Consumer Services (1.3%)
- ------------------------------------------------------------------------------------------------------------
300 Interpublic Group Cos. Inc. 15,394
300 Marriott International, Inc. 21,319
--------------
36,713
Education (0.6%)
- ------------------------------------------------------------------------------------------------------------
400 Apollo Group, Inc. Class A + 16,950
Electronics and Electrical Equipment (8.4%)
- ------------------------------------------------------------------------------------------------------------
300 Diebold, Inc. 14,213
900 Intel Corp. 83,081
300 KLA Tencor Corp. + 20,269
400 Motorola, Inc. 28,750
400 National Semiconductor Corp. + 16,400
400 Solectron Corp. + 17,800
400 Teradyne, Inc. + 21,525
1,100 Westinghouse Electric Corp. 29,769
--------------
231,807
Energy-Related (1.9%)
- ------------------------------------------------------------------------------------------------------------
500 AES Corp. + 21,875
600 Halliburton Co. 31,200
--------------
53,075
Environmental Control (0.6%)
- ------------------------------------------------------------------------------------------------------------
400 USA Waste Services, Inc. + 15,950
Food and Beverages (3.9%)
- ------------------------------------------------------------------------------------------------------------
500 Campbell Soup Co. 24,500
1,000 Coca-Cola Enterprises, Inc. 26,938
400 ConAgra, Inc. 26,400
800 PepsiCo, Inc. 29,900
--------------
107,738
Health Care (3.0%)
- ------------------------------------------------------------------------------------------------------------
300 Boston Scientific Corp. + 16,556
300 Cardinal Health, Inc. 21,300
900 HEALTHSOUTH Corp. + 24,019
300 Oxford Health Plans Inc. + 22,463
--------------
84,338
Hospital Management and Medical Services (0.7%)
- ------------------------------------------------------------------------------------------------------------
750 Quorum Health Group, Inc. + 18,328
Insurance and Finance (6.3%)
- ------------------------------------------------------------------------------------------------------------
500 American Express Co. 40,938
300 American International Group, Inc. 30,956
200 Franklin Resources, Inc. 18,625
525 MBNA Corp. 21,263
450 SunAmerica, Inc. 17,634
333 Travelers, Inc. 22,727
300 Washington Mutual, Inc. 20,925
--------------
173,068
Medical Supplies and Devices (1.3%)
- ------------------------------------------------------------------------------------------------------------
200 Guidant Corp. 11,200
800 Omnicare, Inc. 26,000
--------------
37,200
Oil and Gas (1.5%)
- ------------------------------------------------------------------------------------------------------------
400 Tosco Corp. 13,925
300 Western Atlas, Inc. + 26,400
--------------
40,325
Pharmaceuticals (6.7%)
- ------------------------------------------------------------------------------------------------------------
600 Bristol-Myers Squibb Co. 49,650
300 Lilly (Eli) & Co. 36,131
600 Merck & Co., Inc. 59,963
300 Warner-Lambert Co. 40,481
--------------
186,225
Publishing (0.4%)
- ------------------------------------------------------------------------------------------------------------
100 Gannett Co., Inc. 10,794
Retail (9.2%)
- ------------------------------------------------------------------------------------------------------------
500 Consolidated Stores Corp. + 20,938
600 Costco Companies, Inc. + 22,575
518 CVS Corp. 29,461
400 Dayton Hudson Corp. 23,975
300 Jones Apparel Group, Inc. + 16,200
200 Payless Shoesource, Inc. + 11,938
400 Rite Aid Corp. 22,175
400 Safeway, Inc.+ 21,750
400 Tiffany & Co. 17,000
700 TJX Cos., Inc. (The) 21,394
80 Tricon Global Restaurants, Inc. + 2,590
800 Wal-Mart Stores, Inc. 29,300
600 Walgreen Co. 15,375
--------------
254,671
Telecommunications (1.9%)
- ------------------------------------------------------------------------------------------------------------
400 Lucent Technologies, Inc. 32,550
400 Tellabs, Inc. + 20,600
--------------
53,150
--------------
Total Common Stocks (cost $1,461,107) $ 1,904,255
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.9%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (7.7%)
- ------------------------------------------------------------------------------------------------------------
$ 10,000 Federal National Mortgage Association 5.94s,
December 12, 2005 $ 9,697
65,650 Federal National Mortgage Association pass-through
certificates 6 1/2s, August 1, 2027 63,926
62,000 Government National Mortgage Association 8 1/2s,
TBA, October 16, 2027 64,867
Government National Mortgage Association
pass-through certificates
30,717 7 1/2s, January 15, 2024 31,406
24,721 7 1/8s, August 20, 2023 25,362
19,292 6s, Midget, January 15, 2008 18,858
--------------
214,116
U.S. Treasury Obligations (6.2%)
- ------------------------------------------------------------------------------------------------------------
10,000 U.S. Treasury Bonds 6 5/8s, February 15, 2027 10,239
U.S. Treasury Notes
95,000 6 3/8s, April 30, 1999 95,846
16,000 6 1/8s, August 15, 2007 16,008
20,000 6s, July 31, 2002 20,000
10,000 6s, June 30, 1999 10,033
20,000 5 7/8s, July 31, 1999 20,016
--------------
172,142
--------------
Total U.S. Government and Agency Obligations
(cost $385,552) $ 386,258
CORPORATE BONDS AND NOTES (11.8%) *
PRINCIPAL AMOUNT VALUE
Aerospace and Defense (0.2%)
- ------------------------------------------------------------------------------------------------------------
$ 5,000 Raytheon Co notes 6.45s, 2002 $ 4,995
Agriculture (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 Potash Corp. of Saskatchewan notes
7 1/8s, 2007 (Canada) 5,098
Banks (1.5%)
- ------------------------------------------------------------------------------------------------------------
5,000 Abbey National First Capital PLC sub. notes
7.35s, 2049 (United Kingdom) 5,114
5,000 Advanta National Bank sr. notes 7.02s, 2001 4,943
6,000 Banco Nacional de Comercio Exterior bank
guaranteed 8s, 2003 (Mexico) 5,910
5,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 5,253
JPY 2,000,000 World Bank 4.5s,2003 (Japan) 19,236
--------------
40,456
Broadcasting (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 News America Holdings, Inc. deb. 7.7s, 2025 4,906
Cable Television (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 Continental Cablevision, Inc. sr. deb. 9 1/2s, 2013 5,810
Entertainment (0.4%)
- ------------------------------------------------------------------------------------------------------------
5,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 5,708
5,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 5,365
--------------
11,073
Health Care (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 Tenet Healthcare Corp. sr. notes 8s, 2005 5,100
Insurance and Finance (3.7%)
- ------------------------------------------------------------------------------------------------------------
5,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 4,937
5,000 Conseco Inc. sr. notes 10 1/2s, 2004 5,968
5,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 5,161
5,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 5,172
5,000 Firstar Capital Trust I company guaranty Ser. B,
8.32s, 2026 5,263
5,000 Lehman Bros Holdings, Inc. med. term notes
6.4s, 1999 5,018
5,000 Markel Capital Trust I 8.71s, 2046 5,175
5,000 Peoples Bank- Bridgeport sub. notes 7.2s, 2006 5,055
5,000 Phoenix Home Life Mutual Insurance Co. 144A
notes 6.95s, 2006 5,005
9,592 Railcar Leasing LLC 144A sr. notes 6 3/4s, 2006 9,724
5,000 Rodamco N.V. notes 7 3/4s, 2015 (Netherlands) 5,316
5,000 Salomon, Inc. sr. notes 7.3s, 2002 5,138
5,000 Societe Generale 144A notes 7.85s, 2049 (France) 5,222
5,000 Southern Investments Service Co. sr. notes
6.8s, 2006 (United Kingdom) 4,982
5,000 Sparbanken Sverige AB (Swedbank) 144A sub.
7 1/2s, 2006 (Sweden) 5,149
5,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 5,043
5,000 Tig Capital Trust I 144A bonds 8.597s, 2027 5,231
5,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 5,245
5,000 Webster Capital Trust I 144A bonds 9.36s, 2027 5,427
--------------
103,231
Metals and Mining (0.5%)
- ------------------------------------------------------------------------------------------------------------
10,000 Noranda Inc. deb. 7s, 2005 (Canada) 10,049
4,000 PT Alatief Freeport sr. notes 9 3/4s, 2001
(Netherlands) 4,367
--------------
14,416
Oil and Gas (0.5%)
- ------------------------------------------------------------------------------------------------------------
5,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006
(Canada) 5,417
10,000 Transamerican Energy 144A sr. disc. notes
stepped-coupon zero % (13s 6/15/00), 2002 ++ 7,950
--------------
13,367
Paper and Forest Products (--%)
- ------------------------------------------------------------------------------------------------------------
1,000 Pindo Deli Finance Mauritius Ltd. 144A company guaranty
10 3/4s, 2007 (India) 1,020
Real Estate (0.4%)
- ------------------------------------------------------------------------------------------------------------
5,000 Health Care Property Investors, Inc. sr. notes
6 1/2s, 2006 (R) 4,854
5,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 5,192
--------------
10,046
Retail (0.2%)
- ------------------------------------------------------------------------------------------------------------
5,000 Federated Department Stores sr. notes 8 1/2s, 2003 5,426
Telecommunications (0.2%)
- ------------------------------------------------------------------------------------------------------------
7,000 Telekom Malaysia Berhad (New) 144A deb.
7 7/8s, 2025 (Malaysia) 7,159
Tobacco (0.4%)
- ------------------------------------------------------------------------------------------------------------
5,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 5,286
5,000 Sampoerna International Finance Co. 144A company
guaranty 8 3/8s, 2006 (Indonesia) 5,003
--------------
10,289
Transportation (0.5%)
- ------------------------------------------------------------------------------------------------------------
5,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 4,878
5,000 CSX Corp. 144A deb. 7.95s, 2027 5,394
5,000 Norfolk Southern Corp. bonds 7.05s, 2037 5,186
--------------
15,458
Utilities (2.5%)
- ------------------------------------------------------------------------------------------------------------
5,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 5,012
5,000 California Energy Corp. disc. notes 10 1/4s, 2005 5,427
10,000 Citizens Utilities Co. bonds 7.68s, 2034 11,261
5,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 5,130
5,000 Enersis S.A. notes 6.6s, 2026 (Chile) 4,974
10,000 Enersis S.A. notes 7.4s, 2016 (Chile) 10,047
5,000 Israel Electric Corp., Ltd. 144A sr. notes
7 1/4s, 2006 (Israel) 5,092
2,945 Midland Cogeneration Ventures LP deb. 10.33s, 2002 3,202
4,293 Northeast Utilities System notes Ser. B, 8.38s, 2005 4,350
5,000 Texas New-Mexico Power Utilities 1st mtge.
9 1/4s, 2000 5,308
5,000 Texas Utilities Electric Capital Trust V company
guaranty 8.175s, 2037 5,240
5,000 US West Capital Funding, Inc. company guaranty
6.95s, 2037 5,100
--------------
70,143
--------------
Total Corporate Bonds and Notes (cost $318,912) $ 327,993
FOREIGN GOVERNMENT BONDS AND NOTES (2.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
USD 16,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN
Libor plus 13/16s, 2020 + ## +++ $ 11,920
DEM 25,000 Germany (Federal Republic of) bonds
Ser. 97, 6 1/2s, 2027 14,842
DEM 5,000 Germany (Federal Republic of) bonds
Ser. 96, 6s, 2006 2,947
NZD 20,000 New Zealand (Government of) bonds
8s, 2004 13,692
USD 10,000 Quebec (Province of) deb. Ser. NN,
7 1/8s, 2024 9,834
ZAR 58,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 11,700
TRL 60,000 Turkey Treasury bill zero %, 1998 1,577
UKS 6,000 United Kingdom Treasury bonds 8s, 2021 11,389
--------------
Total Foreign Government Bonds and Notes
(cost $74,346) $ 77,901
COLLATERALIZED MORTGAGE OBLIGATIONS (1.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 5,788 Chase Mortgage Finance Corp. Ser. 93-3, Class B13,
7.452s, 2024 $ 4,647
5,762 Housing Securities Inc. Ser. 93-F, Class F9M2, 7s, 2023 5,580
4,858 Prudential Home Mortgage Securities Ser. 93-31,
Class B2, 6s, 2000 4,038
5,895 Prudential Home Mortgage Securities 144A
Ser. 95-C, Class B1, 7.432s, 2001 5,894
23,552 Ryland Mortgage Securities Corp. Ser. 94-7C,
Class B1, 7.359s, 2025 23,500
--------------
Total Collateralized Mortgage Obligations
(cost $41,062) $ 43,659
BRADY BONDS (0.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 1,970 Argentina (Republic of) deb. FRB 6.688s, 2005 $ 1,876
8,000 Bulgaria (Government of) deb. Ser. PDI, FRB,
6.688s, 2011 6,440
4,000 Philippines (Government of) Ser. B, FRB 6 1/4s, 2017 3,520
--------------
Total Brady Bonds (cost $11,068) $ 11,836
MUNICIPAL BONDS AND NOTES (0.2%) *(cost $5,000)
PRINCIPAL AMOUNT RATING VALUE
- ------------------------------------------------------------------------------------------------------------
$ 5,000 NJ Econ. Dev. Auth. MBIA Rev. Bonds, Ser. A,
7.425s, 2/15/29 Aaa $ 5,274
PURCHASED OPTIONS OUTSTANDING (--%) *(cost $457)
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
86,000 U.S. Treasury Bond, 6 1/8s, 2007 Nov. 97/101.08 $ 403
SHORT-TERM INVESTMENTS (3.1%) * (cost $86,014)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 86,000 Interest in $565,867,000 joint repurchase agreement
dated September 30, 1997 with UBS Securities due
October 1, 1997 with respect to various U.S. Treasury
obligations -- maturity value of $86,014 for an effective
yield of 6.05% $ 86,014
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,383,518) *** $ 2,843,593
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,768,703.
*** The aggregate identified cost on a tax basis is $2,383,524,
resulting in gross unrealized appreciation and depreciation of $494,204
and $34,135, respectively, or net unrealized appreciation of $460,069.
+ Non-income-producing security.
++ The interest rate and date shown parenthetically represent the
new interest rate to be paid and the date the fund will begin receiving
interest at this rate.
+++ A portion of the income will be received in additional securities.
## When-issued securities (Note 1).
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced
securities (Note 1).
The rate shown on Floating Rate Bonds (FRB) and Floating Rate
Notes. (FRN) are the current interest rates shown at September 30,1997,
which are subject to change based on the terms of the security.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1997
(aggregate face value $86,246)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 3,053 $ 3,155 12/17/97 (102)
Danish Krone 225 223 12/17/97 2
Deutschemarks 26,653 25,952 12/17/97 701
Indonesian Rupiah 5,037 5,577 2/23/98 (540)
Italian Lira 18,896 18,537 12/17/97 359
Japanese Yen 21,959 22,032 12/17/97 (73)
Philippines Peso 1,052 1,100 3/25/98 (48)
Polish Zolty 6,746 7,040 6/5/98 (294)
Venezuelan Bolivar 2,642 2,630 6/5/98 12
- ----------------------------------------------------------------------------------------
$ 17
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1997
(aggregate face value $140,879)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 2,907 $ 2,988 12/17/97 $ 81
British Pounds 10,296 10,108 12/17/97 (188)
British Pounds 800 786 6/5/98 (14)
Canadian Dollar 436 433 12/17/97 (3)
Deutschemarks 33,596 32,675 12/17/97 (921)
Deutschemarks 2,767 2,658 6/5/98 (109)
Italian Lira 18,564 18,163 12/17/97 (401)
Japanese Yen 41,568 41,432 12/17/97 (136)
New Zealand Dollar 17,481 17,344 12/17/97 (137)
South African Rand 6,171 5,991 12/17/97 (180)
Swiss Franc 8,350 8,301 12/17/97 (49)
- ----------------------------------------------------------------------------------------
$(2,057)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sale Commitments at September 30, 1997
(Proceeds receivable $63,365)
Principal Settlement Market
Agency Amount Date Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA, 6 1/2s, October, 2027 $63,517 October-97 $63,294
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30,1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,383,518) (Note 1) $2,843,593
- ---------------------------------------------------------------------------------------------------
Cash 184
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 13,471
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 25
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 116,937
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,200
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 969
- ---------------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 5,107
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 5,406
- ---------------------------------------------------------------------------------------------------
Total assets 2,986,892
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 140,120
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,233
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 10
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 6,425
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 3,240
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 381
- ---------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $63,365) (Note 1) 63,294
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 3,486
- ---------------------------------------------------------------------------------------------------
Total liabilities 218,189
- ---------------------------------------------------------------------------------------------------
Net assets $2,768,703
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,044,163
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 45,223
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 221,211
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 458,106
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,768,703
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($2,768,703 divided by 232,613 shares) $11.90
- ---------------------------------------------------------------------------------------------------
Offering price (100/94.25 of $11.90)* $12.63
- ---------------------------------------------------------------------------------------------------
*On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales
the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30,1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest $ 53,153
- --------------------------------------------------------------------------------------------------
Dividends 14,587
- --------------------------------------------------------------------------------------------------
Total investment income 67,740
Expenses:
Compensation of Manager (Note 2) 16,009
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,656
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,861
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 190
- --------------------------------------------------------------------------------------------------
Reports to shareholders 5,377
- --------------------------------------------------------------------------------------------------
Registration fees 99
- --------------------------------------------------------------------------------------------------
Auditing 10,345
- --------------------------------------------------------------------------------------------------
Legal 5,375
- --------------------------------------------------------------------------------------------------
Postage 26
- --------------------------------------------------------------------------------------------------
Other 4
- --------------------------------------------------------------------------------------------------
Fees waived and expenses reimbursed by Manager (Note 2) (27,552)
- --------------------------------------------------------------------------------------------------
Total expenses 17,430
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (5,980)
- --------------------------------------------------------------------------------------------------
Net expenses 11,450
- --------------------------------------------------------------------------------------------------
Net investment income 56,290
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 231,967
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (547)
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 160
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 1,031
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (2,053)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
TBA sale commitments during the year 260,935
- --------------------------------------------------------------------------------------------------
Net gain on investments 491,493
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 547,783
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 56,290 $ 56,769
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 232,611 272,666
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and assets and liabilities in
foreign currencies 258,882 (37,540)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 547,783 291,895
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (55,800) (64,485)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (258,025) (119,022)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 289,201 186,093
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 523,159 294,481
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 2,245,544 1,951,063
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $45,223 and $42,733, respectively) $2,768,703 $2,245,544
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Jan. 3, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $11.03 $10.56 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .25 .29 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 2.16 1.18 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 2.41 1.47 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.35) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.27) (.65) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.54) (1.00) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.90 $11.03 $10.56
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 24.58 15.01 24.24*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,769 $2,246 $1,951
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(a)(c) .71 .73 .54*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(a) 2.29 2.72 2.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 151.15 170.75 95.15*
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0494 $.0544
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Reflects an expense limitation during the period ( Note 2). As a result of such limitation, expenses
of the fund for the periods ended September 30, 1997, 1996 and 1995 reflect a reduction
of $0.12, $0.15, and $0.23 per share, respectively.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets includes amounts paid through expense offset
arrangements (Note 2).
(d) Average commission rate paid on security trades is presented for fiscal periods beginning on or
after September 1, 1995.
</TABLE>
Notes to financial statements
September 30, 1997
Note 1
Significant accounting policies
Putnam Balanced Fund (the "fund") is one of a series of Putnam Investment
Funds (the "trust") which is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The objective of the fund is to seek capital growth and current income.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter --the last reported bid price. Market
quotations are not considered to be readily available for long term corporate
bonds and notes; such investments are stated at fair market value on the basis
of valuations furnished by a pricing service, approved by the Trustees, which
determines valuations for normal, institutional-size trading units of such
securities using methods based on market transactions for comparable
securities and various relationships between securities that are generally
recognized by institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which approximates
market value, and other investments are stated at fair market value following
procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date. Discounts on stepped-coupon bonds are accreted according to the
yield-to-maturity method.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date; interest income is accrued based
on the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, other assets and liabilities are recorded in the books and records
of the fund after translation to U.S. dollars based on the exchange rates on
that day. The cost of each security is determined using historical exchange
rates. Income and withholding taxes are translated at prevailing exchange
rates when accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the foreign
exchange rate on investments from fluctuations arising from changes in the
market prices of the securities. Such gains and losses are included with the
net realized and unrealized gain or loss on investments. Net realized gains
and losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign currencies
and the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in 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 a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using current forward currency
exchange rates supplied by a quotation service. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract
is "marked to market" daily and the change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The fund could be exposed to risk if the value of the currency changes
unfavorably, if the counterparties to the contracts are unable to meet the
terms of their contracts or if the fund is unable to enter into a closing
position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended September 30, 1997, the
fund had no borrowings against this line of credit.
K) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
L) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include temporary
and permanent differences of unrealized and realized gains and losses on
forward foreign currency contracts, market discount, organizational expenses,
and paydown gains and losses on mortgage backed securities. Reclassifications
are made to the fund's capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers) under income tax
regulations. For the year ended September 30, 1997, the fund reclassified
$2,000 to increase undistributed net investment income and $160 to increase
paid-in-capital, with a decrease to accumulated net realized gain on
investments of $2,160. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
M) Expenses of the trust Expenses directly charged or attributable to any fund
will be paid from the assets of that fund. Generally, expenses of the trust
will be allocated among and charged to the assets of each fund on a basis that
the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
N) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $6,425. These expenses are being amortized on projected net
asset levels over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.65% of the first $500 million of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the $5 billion, 0.425% of the next $5 billion, 0.405% of the
next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 1997, to the extent that
expenses of the fund (exclusive of brokerage commissions, interest, taxes,
deferred organizational and extraordinary expense, credits from Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. and payments under the Trust's distribution plan) would
exceed an annual rate of 0.70% of the fund's average net assets.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1997, fund expenses were reduced by $5,980
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of the assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the fund receive an annual Trustees fee of $108 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plan is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc., for services provided and expenses incurred by it in
distributing shares of the fund. The Plan provides for payment by the fund to
Putnam Mutual Funds Corp. at an annual rate of up to 0.35% of the fund's
average net assets. Currently, no payments are being made on the plan.
For the year ended September 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received no net commissions from the sale of shares of the fund.
Note 3
Purchases and sales of securities
During the year ended September 30, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $2,489,660 and $2,378,894, respectively. Purchases and sales of
U.S. government obligations aggregated $1,132,988 and $1,179,388,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------
Written options
outstanding at
beginning of year $-- $--
- ------------------------------------------------------------
Options opened 16,000 246
- ------------------------------------------------------------
Options expired -- --
- ------------------------------------------------------------
Options closed (16,000) (246)
- ------------------------------------------------------------
Written options
outstanding at
end of year $-- $--
- ------------------------------------------------------------
Note 4
Capital shares
At September 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
September 30, 1997
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 122 1,342
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 31,412 312,859
- ------------------------------------------------------------
31,534 314,201
Shares
repurchased (2,556) (25,000)
- ------------------------------------------------------------
Net increase 28,978 289,201
- ------------------------------------------------------------
Putnam Management owned 224,379 shares of the fund (96.5% of shares
outstanding) valued at $2,670,110.
Year ended
September 30, 1996
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 1,591 16,290
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 18,629 183,507
- ------------------------------------------------------------
20,220 199,797
Shares
repurchased (1,321) (13,704)
- ------------------------------------------------------------
Net increase 18,899 186,093
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 8.81% of the distributions from net investment income
as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $266,500 (or if different, the amount necessary to offset net
capital gain earned by the fund) as capital gain dividends for its taxable
year ended September 30, 1997.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
John J. Morgan, Jr.
Vice President
David J. Santos
Vice President and Fund Manager
Kenneth J. Taubes
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Balanced Fund. It
may also be used as sales literature when preceded or accompanied by the
current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
36843-318 11/97
