Putnam
Balanced
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The Trustees of Putnam Balanced Fund are pleased to present you with this
annual report for the year ended September 30, 1998. The fund remains
incubated, meaning that it is only open to Putnam employees and their
families who are Massachusetts residents. During the year, we were pleased
to welcome James Prusko as the manager of the fund's fixed-income portion.
Jim has been managing fixed-income funds at Putnam since 1995 and has more
than seven years of experience in fixed-income investing as well as a
previous background in engineering. David J. Santos continued to manage
the equity portion of the portfolio.
In an unusually volatile year for U.S. financial markets, your fund
provided solid relative performance, posting a return of 12.18% at net
asset value (5.70% at public offering price). As always, the balance of
stocks and bonds provided beneficial diversification. Several episodes of
volatility rocked U.S. stocks, but amid this turmoil, the fund's
assortment of bonds lent stability. For complete performance information,
please turn to the performance summary that begins on page 5 of this
report.
At the beginning of the fiscal period, bonds helped to offset swings in
the stock market caused by the Asian financial crisis. Between October
1997 and January 1998, U.S. stocks wavered as investors reacted to worries
that the loss of export markets in Asia could harm growth rates at home.
Amid the uncertainty, however, nervous global investors turned to bonds in
a classic flight to safety. Although Treasury bonds had the strongest
rally, the investment-grade corporate and mortgage-backed bonds that make
up the majority of your fund's fixed-income holdings also performed well.
The fund's equity strategy proved to be quite timely during a year of
recurring fears that Asia's recession could spread to other regions. As we
have discussed in previous reports, the equity portion of the portfolio
invests in large-capitalization growth companies from a diverse array of
industries. The quality these companies have historically shared is an
ability to maintain a high rate of earnings growth in both weak and strong
economic conditions. Most have popular products, extensive distribution
networks, and strong executive leadership. In the 1998 fiscal period,
large companies with above-average growth of earnings posted some of the
greatest gains in the market, and this has generally been the case since
1995.
Nevertheless, every stock is subject to the volatility of the overall
market, and as the fiscal year drew to a close, even growth stocks
succumbed to another bout of volatility. The most recent turbulence was
sparked by the financial crisis in Russia and a subsequent loss of
confidence in Latin America. It might seem strange that these
international factors could affect U.S. stocks to such a degree, but many
large U.S. companies have extensive overseas operations. Furthermore,
global investor sentiment underwent a sudden change when Russia defaulted
on its debt payments to international lenders. Fearing a short-term loss
of liquidity in global markets, many investors began to sell stocks they
had favored all year.
Fortunately David had concentrated your fund's equity holdings in sectors
that proved able to weather the late summer squalls in relatively good
form. The fund had underweight positions in international financial
companies hit by trading losses in Russia and Latin America and had also
shied away from consumer products companies that fell on concerns of
slower consumer spending. Instead, the equity portfolio favored large
pharmaceuticals and telecommunications companies, which experienced
relatively smaller declines.
The fixed-income portion also served to anchor the fund in late summer,
though it also encountered some difficulties. High-yield corporate bonds
experienced the same setback as the stock market, since investors' sudden
risk aversion prompted them to sell bonds with lower credit qualities.
Fortunately the fund's fixed-income strategy habitually positions less
than 20% of income holdings in high-yield bonds. The more than 60% of the
fund's fixed-income portfolio that was invested in the government,
mortgage-backed, and investment-grade corporate sectors served to offset
the high-yield decline. In David's and Jim's opinions, the high-yield
holdings remain attractive because economic forecasts point to a
continuing expansion.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance
and finance 10.3%
Pharmaceuticals 10.0%
Retail 8.1%
Computer services
and software 7.4%
Business equipment
and services 6.3%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
At the very end of the fiscal year, bonds and the economy received a boost
when the Federal Reserve Board decided on September 29, 1998, to reduce
short-term interest rates. The Fed followed with an additional cut after
the fiscal period ended. The Fed's actions eased a temporary credit crunch
and sent a reassuring message for the months ahead. As the fund enters its
1999 fiscal year, its balance of stocks and bonds remains well positioned
should business and consumer spending slow or, as we consider more likely,
should the economy keep expanding at a moderate pace. In any climate, a
portfolio of well-established growth stocks and bonds together should
serve to counteract many potential investment risks.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
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 PERIODS ENDED 9/30/98
(inception date 1/3/95)
NAV POP
- -----------------------------------------------------------------------
1 year 12.18% 5.70%
- -----------------------------------------------------------------------
Life of fund 99.69 88.18
Annual average 20.31 18.42
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Lehman Bros.
S&P 500 Govt./Corp. Consumer
Index Bond Index Price Index
- -----------------------------------------------------------------------
1 year 9.05% 12.84% 1.36%
- -----------------------------------------------------------------------
Life of fund 139.15 47.24 9.15
Annual average 26.19 10.87 2.36
- -----------------------------------------------------------------------
Past performance is no assurance of future results. 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 redeemed may be worth more or less than their
original cost. POP assumes 5.75% maximum sales charge. Performance data
reflect an expense limitation currently or previously in effect. Without
the expense limitation the fund's total return would have been lower.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
- -----------------------------------------------------------------
Distributions (number) 1
- -----------------------------------------------------------------
Income $0.251
- -----------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------
Long-term 0.554
- -----------------------------------------------------------------
Short-term 0.447
- -----------------------------------------------------------------
Total $1.252
- -----------------------------------------------------------------
Share value: NAV POP
- -----------------------------------------------------------------
9/30/97 $11.90 $12.63
- -----------------------------------------------------------------
9/30/98 11.92 12.65
- -----------------------------------------------------------------
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
1/3/95
Fund's class A S&P Lehman Bros. Consumer Price
Date shares at POP 500 Index Gov't./Corp Index Index
1/3/95 9,424 10,000 10,000 10,000
3/31/95 10,166 10,974 10,498 10,114
9/30/95 11,707 12,977 11,393 10,234
3/31/96 12,598 14,496 11,645 10,401
9/30/96 13,465 15,615 11,906 10,542
3/31/97 13,369 17,371 12,164 10,688
9/30/97 16,775 21,932 13,049 10,768
3/31/98 19,007 25,709 13,671 10,835
9/30/98 $18,818 $23,915 $14,724 $10,915
Footnote reads:
Past performance is no assurance of future results.
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 5.75% maximum sales charge.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance.
Lehman Brothers Government/Corporate Bond Index* is an unmanaged list of
publicly issued U.S. Treasury obligations and corporate debt securities.
Consumer Price Index (CPI)* is a commonly used measure of inflation; it
does not represent an investment return.
*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
To the Trustees of Putnam Investment Funds and
Shareholders of Putnam Balanced Fund
(a series of Putnam Investment Funds)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Balanced Fund (the "fund") at September 30, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at September 30, 1998 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 9, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
COMMON STOCKS (56.0%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Biotechnology (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
500 Quintiles Transnational Corp. (NON) $ 21,875
Broadcasting (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
600 Tele-Communications, Inc. Class A (NON) 23,475
Business Equipment and Services (6.3%)
- --------------------------------------------------------------------------------------------------------------------------
500 BMC Software, Inc. (NON) 30,031
825 Cisco Systems, Inc. (NON) 50,995
600 Compaq Computer Corp. 18,975
300 Computer Sciences Corp. 16,350
400 EMC Corp. (NON) 22,875
1,000 FORE Systems, Inc. (NON) 16,625
700 MediaOne Group Inc. (NON) 31,106
700 PLATINUM Technology, Inc. (NON) 12,600
--------------
199,557
Computer Services and Software (6.9%)
- --------------------------------------------------------------------------------------------------------------------------
400 Compuware Corp. (NON) 23,550
400 Dell Computer Corp. (NON) 26,300
800 HBO & Co. 23,100
200 IBM Corp. 25,600
700 Microsoft Corp. (NON) 77,044
500 PeopleSoft, Inc. (NON) 16,313
450 VERITAS Software Corp. (NON) 24,863
--------------
216,770
Conglomerates (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
1,100 General Electric Co. 87,519
Consumer Non Durables (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
200 Clorox Co. 16,500
200 Colgate-Palmolive Co. 13,700
600 Philip Morris Cos., Inc. 27,638
400 Tommy Hilfiger Corp. (NON) 16,400
--------------
74,238
Consumer Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
400 Lowe's Cos., Inc. 12,725
Consumer Services (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
100 America Online, Inc. 11,125
400 Cablevision Systems Corp. Class A (NON) 17,275
300 Interpublic Group Cos. Inc. 16,181
900 The ServiceMaster Co. 19,688
--------------
64,269
Electronics and Electrical Equipment (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
600 Intel Corp. 51,450
Entertainment (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
200 Time Warner, Inc. 17,513
400 Viacom, Inc. Class B (NON) 23,200
--------------
40,713
Environmental Control (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
500 Waste Management, Inc. 24,031
Health Care (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
100 Abbott Laboratories 4,365
300 Cardinal Health, Inc. 30,975
700 HEALTHSOUTH Corp. (NON) 7,394
--------------
42,734
Insurance and Finance (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
300 American International Group, Inc. 23,100
300 Associates First Capital Corp. 19,575
400 Federal National Mortgage Association 25,700
500 Federal Home Loan Mortgage Corp. 24,719
200 Firstar Corp. 10,125
500 Southtrust Corp. 17,469
200 Star Banc Corp. 13,225
400 Travelers, Inc. 15,000
--------------
148,913
Medical Supplies and Devices (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
600 Centocor, Inc. (NON) 23,775
200 Medtronic, Inc. 11,575
500 Omnicare, Inc. 17,625
500 Tyco International Ltd. (NON) 27,625
--------------
80,600
Pharmaceuticals (10.0%)
- --------------------------------------------------------------------------------------------------------------------------
500 Bristol-Myers Squibb Co. 51,938
500 Lilly (Eli) & Co. 39,156
300 Merck & Co., Inc. 38,869
700 Pfizer, Inc. 74,156
400 Schering-Plough Corp. 41,425
900 Warner-Lambert Co. 67,950
--------------
313,494
Retail (7.9%)
- --------------------------------------------------------------------------------------------------------------------------
500 Costco Cos. Inc. (NON) 23,688
836 CVS Corp. 36,627
600 Dayton Hudson Corp. 21,450
700 Home Depot, Inc. (The) 27,650
600 Jones Apparel Group, Inc. (NON) 13,763
700 Office Depot, Inc. (NON) 15,706
300 Rite Aid Corp. 10,650
500 Safeway, Inc. (NON) 23,188
1,200 TJX Cos., Inc. (The) 21,375
600 Wal-Mart Stores, Inc. 32,775
500 Walgreen Co. 22,031
--------------
248,903
Telecommunications (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
600 Ascend Communications, Inc. (NON) 27,300
400 Lucent Technologies, Inc. 27,669
500 MCI WorldCom, Inc. (NON) 24,438
--------------
79,407
Transportation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
850 Southwest Airlines Co. 17,000
Utilities (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
200 Sprint Corp. 14,400
--------------
Total Common Stocks (cost $1,423,439) $ 1,762,073
CORPORATE BONDS AND NOTES (15.4%) (a)
PRINCIPAL AMOUNT VALUE
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
$ 15,000 Raytheon Co notes 6.45s, 2002 $ 15,603
Basic Industrial Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,000 Ball Corp. 144A sr. notes 7 3/4s, 2006 7,210
Broadcasting (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 News America Holdings, Inc. deb. 7 3/4s, 2045 5,283
5,000 News America Holdings, Inc. deb. 7.7s, 2025 5,347
--------------
10,630
Chemicals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,000 Arco Chemical Co. deb. 9.8s, 2020 2,990
Computer Services and Software (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
15,000 Dell Computer Corp. deb. 7.1s, 2028 15,629
Consumer Non Durables (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Philip Morris Companies Inc. notes 6.8s, 2003 5,282
Consumer Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
10,000 TCI Communications, Inc. sr. notes 8.65s, 2004 11,537
Energy-Related (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 CalEnergy, Inc. sr. notes 7.63s, 2007 5,172
3,000 Enron Corp. notes 6.95s, 2028 2,974
5,000 KN Capital Trust III company guaranty 7.63s, 2028 5,041
--------------
13,187
Entertainment (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 6,233
15,000 Time Warner Entertainment Co. sr. notes 8 3/8s, 2033 18,311
4,000 Viacom, Inc. sr. notes 7 3/4s, 2005 4,319
--------------
28,863
Health Care (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 5,172
5,000 Tenet Healthcare Corp. sr. notes 8s, 2005 5,075
--------------
10,247
Insurance and Finance (5.6%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 4,757
5,000 AFC Capital Trust company guaranty Ser. B, 8.207s, 2027 5,661
10,000 American General Institute 144A company guaranty
8 1/8s, 2046 11,288
5,000 Amvescap Corp. PLC sr. notes 6.6, 2005 (United Kingdom) 5,056
5,000 Den Danske Bank sub. notes 6.55s, 2003 (Denmark) 5,357
5,000 Executive Risk Capital Trust company guaranty
Ser. B, 8.675s, 2027 5,031
3,000 First Citizens Bank Capital Trust I company guaranty
8.05s, 2028 3,099
5,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 5,361
5,000 Firstar Capital Trust I company guaranty
Ser. B, 8.32s, 2026 5,594
15,000 Ford Motor Credit Corp. sr. notes 6s, 2003 15,449
5,000 Hartford Life, Inc. deb. 7.65s, 2027 5,420
5,000 Lehman Bros Holdings, Inc. notes 6 1/4s, 2003 4,704
5,000 Markel Capital Trust I company guaranty
Ser. B, 8.71s, 2046 5,054
5,000 Norwest Corp. med. term sr. notes
Ser. J, 6 3/4s, 2027 5,209
3,000 Orion Capital Corp. company guaranty 7.701s, 2028 3,155
15,000 Paine Webber Group, Inc. sr. med. term notes
6.52s, 2005 15,188
5,000 Peoples Bank-Bridgeport sub. notes 7.2s, 2006 4,964
5,000 Phoenix Home Life Mutual Insurance Co.
144A notes 6.95s, 2006 5,383
5,000 Provident Companies, Inc. bonds 7.405s, 2038 5,056
5,000 Salomon, Inc. sr. notes 7.3s, 2002 5,285
10,000 Salomon, Inc. sr. notes 6 3/4s, 2003 10,408
5,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 2,050
5,000 Southern Investments Service Co. sr. notes
6.8s, 2006 (United Kingdom) 5,266
5,000 Sparbanken Sverige AB (Swedbank) 144A sub.
7 1/2s, 2049 (Sweden) 5,038
5,000 St. Paul Bancorp sr. notes 7 1/8s, 2004 5,387
5,000 Tig Capital Trust I 144A bonds 8.597s, 2027 5,628
5,000 Trenwick Capital Trust I company guaranty 8.82s, 2037 5,609
5,000 Webster Capital Trust I 144A bonds 9.36s, 2027 5,300
5,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 5,188
--------------
175,945
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 2,866
Oil and Gas (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Coastal Corp. bonds 6.95s, 2028 4,835
3,000 Enron Corp. notes 6.4s, 2006 3,071
3,000 Express Pipeline Ltd. 144A sub. notes Ser. B,
7.39s, 2019 (Canada) 2,934
5,000 Gulf Canada Resources, Ltd. sr. notes
8.35s, 2006 (Canada) 5,228
10,000 Transamerican Energy sr. disc. Ser. B notes stepped-coupon,
zero % (13s, 6/15/99), 2002 (STP) 4,800
5,000 Union Pacific Resources Group Inc. notes 6 1/2s, 2005 5,099
--------------
25,967
Real Estate (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Chelsea GCA Realty, Inc. notes 7 1/4s, 2007 4,948
5,000 Equity Residential Properties notes 6.63s, 2005 (R) 4,992
5,000 First Industrial LP med. term notes 7s, 2006 5,028
5,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 5,398
--------------
20,366
Retail (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 5,617
Specialty Consumer Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Tyco International Ltd. company guaranty 6 3/8s, 2005 5,270
5,000 Tyco International Ltd. company guaranty 6 1/4s, 2003 5,177
--------------
10,447
Telecommunications (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 AirTouch Communications, Inc. notes 6.65s, 2008 5,399
5,000 AT&T Capital Corp. med. term notes 6.6s, 2005 5,203
5,000 Colt Telecommunications Group PLC sr. notes
8 7/8s, 2007 (United Kingdom) 3,146
5,000 Colt Telecommunications Group PLC bonds
7 5/8s, 2008 (United Kingdom) 2,936
5,000 LCI International, Inc. sr. notes 7 1/4s, 2007 5,110
15,000 MCI WorldCom, Inc. sr. notes 6.4s, 2005 15,828
--------------
37,622
Transportation (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Burlington Northern Santa Fe bonds 6 7/8s, 2027 5,218
5,000 Burlington Northern Santa Fe notes 6 3/8s, 2005 5,252
5,000 Continental Airlines, Inc. pass-through certificates
Ser. 981C, 6.541s, 2008 5,329
10,000 CSX Corp. deb. 7.95s, 2027 11,346
5,000 Norfolk Southern Corp. bonds 7.05s, 2037 5,512
--------------
32,657
Utilities (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 5,299
5,000 California Energy Corp. disc. notes 10 1/4s, 2004 5,274
5,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 5,249
5,000 Israel Electric Corp., Ltd. 144A sr. notes
7 1/4s, 2006 (Israel) 5,105
2,186 Midland Funding Corp. I deb. Ser. C-94, 10.33s, 2002 2,377
3,733 Northeast Utilities System notes Ser. B, 8.38s, 2005 3,895
10,000 Public Service of New Mexico Co. sr. notes
Ser. B, 7 1/2s, 2018 9,878
5,000 Texas New Mexico Power Utilities 1st mtge.
9 1/4s, 2000 5,351
5,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 5,448
5,000 Texas Utilities Electric Capital Trust V company guaranty
8.175s, 2037 5,152
--------------
53,028
--------------
Total Corporate Bonds and Notes (cost $475,995) $ 485,693
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (24.2%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$ 25,000 7s, Dwarf, TBA, October 15, 2013 $ 25,664
24,925 6 1/2s, July 1, 2028 25,345
10,000 5.94s, December 12, 2005 10,636
65,837 Government National Mortgage Association 7s,
with due dates from January 15, 2027 to
June 15, 2028 67,955
--------------
129,600
U.S. Treasury Obligations (20.1%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
87,000 6 1/8s, November 15, 2027 100,294
15,000 5 1/2s, August 15, 2028 16,214
15,000 5 1/4s, August 15, 2003 15,670
U.S. Treasury Notes
30,000 6 1/4s, June 30, 2002 31,927
5,000 5 5/8s, December 31, 1999 5,065
20,000 5 1/2s, January 31, 2003 20,897
38,000 5 1/2s, March 31, 2003 39,853
5,000 5 1/2s, February 29, 2000 5,070
10,000 5 1/2s, March 31, 2000 10,148
35,000 5 1/2s, May 31, 2000 35,590
345,000 5 3/8s, February 15, 2001 352,818
--------------
633,546
--------------
Total U.S. Government and Agency Obligations
(cost $737,582) $ 763,146
COLLATERALIZED MORTGAGE OBLIGATIONS (2.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 4,968 Chase Mortgage Finance Corp. Ser. 93-3,
Class B13, 7.461s, 2024 $ 4,354
25,000 GMAC Commercial Mortgage Securities Inc.
Ser. 98-C2, Class A2, 6.42s, 2008 26,175
5,622 Housing Securities Inc. Ser. 93-F, Class F9M2, 7s, 2023 5,526
Prudential Home Mortgage Securities 144A
4,850 Ser. 93-31, Class B2, 6s, 2000 4,196
2,660 Ser. 95-C, Class B1, 7.681s, 2001 2,657
22,748 Ryland Mortgage Securities Corp. Ser. 94-7C,
Class B1, 7.359s, 2025 23,459
--------------
Total Collateralized Mortgage Obligations
(cost $61,268) $ 66,367
FOREIGN GOVERNMENT BONDS AND NOTES (0.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 10,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 $ 6,738
15,000 Ontario (Province of) sr. unsub. 5 1/2s, 2008 15,254
--------------
Total Foreign Government Bonds and Notes
(cost $20,591) $ 21,992
SHORT-TERM INVESTMENTS (2.8%) (cost $89,013) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 89,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated September 30, 1998 with
Goldman Sachs & Co. due October 1, 1998
with respect to various U.S. Treasury
obligations -- maturity value of $89,013
for an effective yield of 5.45%. $ 89,013
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,807,888) (b) $ 3,188,284
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,147,441.
(b) The aggregate identified cost on a tax basis is $2,809,496, resulting in gross unrealized appreciation and
depreciation of $473,753 and $94,965, respectively, or net unrealized appreciation of $378,788.
(NON) Non-income-producing security.
(STP) 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.
(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).
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1998
Market Aggregate Face Delivery Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
Deutschemarks $51,668 $49,797 12/16/98 $(1,871)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1998
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- -------------------------------------------------------------------------------
Deutschemarks $40,023 $38,634 12/16/98 $1,389
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,807,888) (Note 1) $3,188,284
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 15,933
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 25
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 43,876
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,389
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 39
- -----------------------------------------------------------------------------------------------
Receivable from Manager (Note 2) 6,032
- -----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,246
- -----------------------------------------------------------------------------------------------
Total assets 3,258,824
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 78,728
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 467
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,799
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 10
- -----------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 6,425
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 1,871
- -----------------------------------------------------------------------------------------------
Other accrued expenses 22,083
- -----------------------------------------------------------------------------------------------
Total liabilities 111,383
- -----------------------------------------------------------------------------------------------
Net assets $3,147,441
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,376,242
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 37,442
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 353,843
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 379,914
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,147,441
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($3,147,441 divided by 264,044 shares) $11.92
- -----------------------------------------------------------------------------------------------
Offering price (100/94.25 of $11.92)* $12.65
- -----------------------------------------------------------------------------------------------
* 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, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $ 60,676
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $232) 13,277
- -----------------------------------------------------------------------------------------------
Total investment income 73,953
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 19,827
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,060
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,540
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- -----------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,160
- -----------------------------------------------------------------------------------------------
Reports to shareholders 6,819
- -----------------------------------------------------------------------------------------------
Registration fees 91
- -----------------------------------------------------------------------------------------------
Auditing 13,743
- -----------------------------------------------------------------------------------------------
Legal 4,252
- -----------------------------------------------------------------------------------------------
Postage 24
- -----------------------------------------------------------------------------------------------
Other 21
- -----------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (32,066)
- -----------------------------------------------------------------------------------------------
Total expenses 23,511
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (5,208)
- -----------------------------------------------------------------------------------------------
Net expenses 18,303
- -----------------------------------------------------------------------------------------------
Net investment income 55,650
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 369,365
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 63
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (7,630)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 1,558
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and TBA sale
commitments during the year (79,750)
- -----------------------------------------------------------------------------------------------
Net gain on investments 283,606
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $339,256
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 55,650 $ 56,290
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 361,798 232,611
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (78,192) 258,882
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 339,256 547,783
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (59,126) (55,800)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments (235,797) (258,025)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 334,405 289,201
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 378,738 523,159
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,768,703 2,245,544
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $37,442 and $45,223, respectively) $3,147,441 $2,768,703
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $11.90 $11.03 $10.56 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .22(c) .25 .29 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.05 2.16 1.18 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.27 2.41 1.47 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.27) (.35) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (1.00) (1.27) (.65) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.25) (1.54) (1.00) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.92 $11.90 $11.03 $10.56
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 12.18 24.58 15.01 24.24*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,147 $2,769 $2,246 $1,951
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(a)(c) .77 .71 .73 .54*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(a) 1.82 2.29 2.72 2.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.55 151.15 170.75 95.15*
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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, 1998, 1997, 1996 and 1995 reflect a
reduction of $0.13, $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).
</TABLE>
Notes to financial statements
September 30, 1998
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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 basis. 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. 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. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
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 ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
September 30, 1998, the fund had no borrowings against the 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 losses on wash
sale transactions, foreign currency gains and losses, organization costs,
foreign taxes, paydown gains and losses on mortgage-backed securities and
market discount. 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, 1998, the fund reclassified $4,305 to decrease undistributed
net investment income and $2,326 to decrease paid-in-capital, with an
increase to accumulated net realized gains of $6,631. 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 next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 039% 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, 1998, 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 subsidiary of Putnam Investments,
Inc. and payments under the Trust's distribution plan) would exceed an
annual rate of .70% of the fund's average net assets.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$5,208 under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $100 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan is
to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments, Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plan provides for payment by
the fund to Putnam Mutual Funds Corp. at an annual rate of up to 0.35% of
the fund's average net assets. Currently, no payments are being made on
the plan.
For the year ended September 30, 1998, Putnam Mutual Funds Corp., acting
as underwriter received no net commissions from the sale of shares of the
fund.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $2,665,489 and $2,884,719, respectively.
Purchases and sales of U.S. government obligations aggregated $1,532,929
and $1,197,739, 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 2,000 63
- ----------------------------------------------------------------------
Options expired (2,000) (63)
- ----------------------------------------------------------------------
Written options
outstanding at
end of year $- $-
- ----------------------------------------------------------------------
Note 4
Capital shares
At September 30, 1998 there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------
Shares sold 4,039 $ 48,660
- -----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 28,249 294,923
- -----------------------------------------------------------------------
32,288 343,583
Shares
repurchased (857) (9,178)
- -----------------------------------------------------------------------
Net increase 31,431 $334,405
- -----------------------------------------------------------------------
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 251,287 shares of the fund (95.2% of shares
outstanding) valued at $2,995,341.
Federal tax information
(Unaudited)
The fund has designated 16.40% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $345,947 as capital gain, for its taxable year ended
September 30, 1998.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
David J. Santos
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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.
47007 318 11/98
