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REAL ESTATE SECURITIES FUND

Objective: The Fund seeks to generate a total return.

Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.

Shareholder Fees (fees paid directly from your investment): None

Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)

				Institutional
For the year ended October 31, 2011				Class
Management Fees				0.83%
Other Expenses				0.02%
Total Annual Fund Operating Expenses				0.85%

Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other
mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 year	3 years	5 years	10 years
Institutional Class	$87	$271	$471	$1,049

Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its
portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when
Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses
or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover
rate was 29.3% of the average value of its portfolio.

Principal Investment Strategies
Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of companies
principally engaged in the real estate industry. For this Fund's investment policies, a real estate company has at least
50% of its assets, income or profits derived from products or services related to the real estate industry. Real estate
companies include real estate investment trusts ("REITs") and companies with substantial real estate holdings such
as paper, lumber, hotel and entertainment companies as well as those whose products and services relate to the real
estate industry include building supply manufacturers, mortgage lenders and mortgage servicing companies. The
Fund will invest in equity securities of small, medium, and large capitalization companies.

REITs are pooled investment vehicles that invest in income producing real estate, real estate related loans, or other
types of real estate interests. REITs are corporations or business trusts that are permitted to eliminate corporate level
federal income taxes by meeting certain requirements of the Internal Revenue Code.

The Fund will concentrate its investments (invest more than 25% of its net assets) in securities in the real estate
industry.

The Fund is considered non-diversified, which means it can invest a higher percentage of assets in securities of
individual issuers than a diversified fund. As a result, changes in the value of a single investment could cause greater
fluctuations in the Fund's share price than would occur in a more diversified fund.




4

Principal Risks

The Fund may be an appropriate investment for investors who seek a total return, want to invest in companies

engaged in the real estate industry and can accept the potential for volatile fluctuations in the value of investments.

The value of your investment in the Fund changes with the value of the Fund's investments. Many factors affect that

value, and it is possible to lose money by investing in the Fund. An investment in the Fund is not a deposit of a bank

and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

The principal risks of investing in the Fund, in alphabetical order, are:

Equity Securities Risk. Equity securities (common, convertible preferred stocks and other securities whose values

are tied to the price of stocks, such as rights, warrants and convertible debt securities) could decline in value if the

issuer's financial condition declines or in response to overall market and economic conditions. A fund's principal

market segment(s), such as large cap, mid cap or small cap stocks, or growth or value stocks, may underperform

other market segments or the equity markets as a whole. Investments in smaller companies and mid-size companies

may involve greater risk and price volatility than investments in larger, more mature companies.

Industry Concentration Risk. A fund that concentrates investments in a particular industry or group of industries

(e.g., energy, real estate, technology, financial services) has greater exposure than other funds to market, economic

and other factors affecting that industry.

Non-Diversification Risk. A non-diversified fund may invest a high percentage of its assets in the securities of a

small number of issuers and is more likely than diversified funds to be significantly affected by a specific security’s

poor performance.

Real Estate Investment Trusts (“REITs”) Risk. A REIT could fail to qualify for tax-free pass-through of income

under the Internal Revenue Code, and fund shareholders will indirectly bear their proportionate share of the

expenses of REITs in which the fund invests.

Real Estate Securities Risk. Real estate securities are subject to the risks associated with direct ownership of real

estate, including declines in value, adverse economic conditions, increases in expenses, regulatory changes and

environmental problems.

Risk of Being an Underlying Fund. An underlying fund of a fund of funds may experience relatively large

redemptions or investments as the fund of funds periodically reallocates or rebalances its assets. These transactions

may cause the underlying fund to sell portfolio securities to meet such redemptions, or to invest cash from such

investments, at times it would not otherwise do so, and may as a result increase transaction costs and adversely

affect underlying fund performance.

Performance

The following information provides an indication of the risks of investing in the Fund. The bar chart shows the

investment returns of the Fund’s Institutional Class shares for each full calendar year of operations for 10 years (or, if

shorter, the life of the Fund). The table shows, for Institutional Class shares of the Fund and for the last one, five, and

ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare to

the returns of one or more broad-based market indices. Past performance (before and after taxes) is not necessarily

an indication of how the Fund will perform in the future. You may get updated performance information online at

www.principal.com or by calling 1-800-222-5852.

Institutional Class shares were first sold on March 1, 2001. The returns for the periods prior to that date are based on

the performance of the R-3 Class shares adjusted to reflect the fees and expenses of Institutional Class Shares. The

adjustments result in performance for such periods that is no higher than the historical performance of the R-3 Class

shares. R-3 Class shares were first sold on December 6, 2000.


Highest return for a quarter during the period of the bar chart above:	Q3 ‘09	33.10%
Lowest return for a quarter during the period of the bar chart above:	Q4 ‘08	-33.84%


Average Annual Total Returns
For the periods ended December 31, 2011	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	9.25%	-0.51%	11.90%
Institutional Class Return After Taxes on Distributions	8.91%	-1.99%	10.33%
Institutional Class Return After Taxes on Distribution and Sale of Fund	6.01%	-0.96%	9.98%
Shares
MSCI US REIT Index (reflects no deduction for fees, expenses, or taxes)	8.69%	-1.51%	10.16%


After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not
reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may
differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.

Management

Investment Advisor: Principal Management Corporation

Sub-Advisor(s) and Portfolio Manager(s):
Principal Real Estate Investors, LLC
·	Matt Richmond (since 2010), Portfolio Manager
·	Kelly D. Rush (since 2000), Portfolio Manager

Purchase and Sale of Fund Shares
There are no restrictions on amounts to be invested in Institutional Class shares of the Fund for an eligible
purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock
Exchange is open for regular trading) through your Financial Professional; by sending a written request to Principal
Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight
mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information
The Fund’s distributions are generally taxable to you as ordinary income, capital gains, or a combination of the two,
unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement
account.

Payments to Broker-Dealers and Other Financial Intermediaries.

If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank, insurance

company, investment adviser, etc.), the Fund and its related companies may pay the intermediary for the sale of

Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer

or other intermediary and your salesperson to recommend the Fund over another investment, or to recommend one

share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary’s website

for more information.

ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS

The Fund’s investment objective is described in the summary section for the Fund. The summary section also

describes the Fund’s principal investment strategies, including the types of securities in which the Fund invests, and

the principal risks of investing in the Fund. The principal investment strategies are not the only investment strategies

available to the Fund, but they are the ones the Fund primarily uses to achieve its investment objective.

The Board of Directors may change a Fund's objective or the investment strategies without a shareholder vote if it

determines such a change is in the best interests of the Fund. If there is a material change to the Fund's investment

objective or investment strategies, you should consider whether the Fund remains an appropriate investment for you.

There is no guarantee that a Fund will meet its objective.

The investment strategies identified in this section provide specific information about the Fund, but there are some

general principles Principal Management Corporation (“Principal”) and/or the sub-advisor apply in making investment

decisions. When making decisions about whether to buy or sell equity securities, Principal and/or the sub-advisor

may consider, among other things, a company’s strength in fundamentals, its potential for earnings growth over time,

its ability to navigate certain macroeconomic environments, and the current price of its securities relative to their

perceived worth and relative to others in its industry. When making decisions about whether to buy or sell fixed-

income investments, Principal and/or the sub-advisor may consider, among other things, the strength of certain

sectors of the fixed-income market relative to others, interest rates, the macroeconomic backdrop, the balance

between supply and demand for certain asset classes, other general market conditions, and the credit quality of

individual issuers.

The Fund is designed to be a portion of an investor's portfolio. No Fund is intended to be a complete investment

program. Investors should consider the risks of the Fund before making an investment and be prepared to maintain

the investment during periods of adverse market conditions. It is possible to lose money by investing in the Fund.

The following table lists the Fund and identifies whether the strategies and risks discussed in this section (listed in

alphabetical order) are principal or non-principal to the Fund. The Fund is subject to Risk of Being an Underlying

Fund to the extent that a fund of funds invests in the Fund. The Statement of Additional Information ("SAI") contains

additional information about investment strategies and their related risks.


INVESTMENT STRATEGIES	REAL ESTATE
AND RISKS	SECURITIES
Asset-Backed Securities & Mortgage-	Non-Principal
Backed Securities
Convertible Securities	Non-Principal
Derivatives	Non-Principal
Equity Securities	Principal
Exchange Traded Funds (ETFs)	Non-Principal
Fixed Income Securities	Non-Principal
Foreign Securities	Non-Principal
Hedging	Non-Principal
High Yield Securities	Non-Principal
Industry Concentration	Principal
Initial Public Offerings ("IPOs")	Non-Principal
Leverage	Non-Principal
Liquidity Risk⁽¹⁾	Non-Principal
Management Risk⁽¹⁾	Non-Principal
Market Volatility and Issuer Risk⁽¹⁾	Non-Principal
Portfolio Turnover	Non-Principal
Preferred Securities	Non-Principal
Real Estate Investment Trusts	Principal
Real Estate Securities	Principal
Repurchase Agreements	Non-Principal
Small and Medium Capitalization	Principal
Companies
Temporary Defensive Measures	Non-Principal
Underlying Funds	Principal


⁽¹⁾	These risks are not deemed principal for purposes of this table because they apply to almost all funds; however, in certain circumstances, they
	could significantly affect the net asset value, yield, and total return.

Asset-Backed Securities and Mortgage-Backed Securities

Asset-backed securities (“ABS”) are fixed income instruments secured by and payable from assets such as

installment sales or loan contract (such as auto, home equity, or student loans) receivables, leases, credit card

receivables, and other receivables. Mortgage-backed securities (“MBS”) represent interests in underlying pools of

mortgages. Some can be commercial mortgage-backed securities, which are secured by commercial or multi-family

properties (“CMBS”). Certain asset-backed securities present a heightened level of risk because, in the event of

default, the liquidation value of the underlying assets may be inadequate to pay any unpaid principal or interest. The

value of mortgage-backed and asset-backed securities may be affected by changes in credit quality or value of the

mortgage loans or other assets that support the securities. In addition, for mortgage-backed securities, when market

conditions result in an increase in the default rates on the underlying mortgages and the foreclosure values of the

underlying real estate are below the outstanding amount of the underlying mortgages, collection of the full amount of

accrued interest and principal on these investments may be doubtful. If interest rates fall and the loans underlying

these securities are prepaid faster than expected, the fund may have to reinvest the prepaid principal in lower

yielding securities, thus reducing the fund’s income. Conversely, if interest rates increase and the loans underlying

the securities are prepaid more slowly than expected, the expected duration of the securities may be extended. This

reduces the potential for the fund to invest the principal in higher yielding securities.

Convertible Securities

Convertible securities are usually fixed-income securities that a fund has the right to exchange for equity securities at

a specified conversion price. Convertible securities could also include corporate bonds, notes or preferred stocks of

U.S. or foreign issuers. The option allows the fund to realize additional returns if the market price of the equity

securities exceeds the conversion price. For example, the fund may hold fixed-income securities that are convertible

into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common

stock reached $12, the fund could realize an additional $2 per share by converting its fixed-income securities.

Convertible securities have lower yields than comparable fixed-income securities. In addition, at the time a

convertible security is issued the conversion price exceeds the market value of the underlying equity securities. Thus,

convertible securities may provide lower returns than non-convertible fixed-income securities or equity securities

depending upon changes in the price of the underlying equity securities. However, convertible securities permit the

fund to realize some of the potential appreciation of the underlying equity securities with less risk of losing its initial

investment.

The fund treats convertible securities as both fixed-income and equity securities for purposes of investment policies

and limitations because of their unique characteristics. Funds that invest in convertible securities may invest in

convertible securities that are below investment grade. Many convertible securities are relatively illiquid.

Derivatives

A fund may invest in certain derivative strategies to earn income, manage or adjust the risk profile of the fund,

replace more direct investments, or obtain exposure to certain markets. Generally, a derivative is a financial

arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. Certain

derivative securities are described more accurately as index/structured securities. Index/structured securities are

derivative securities whose value or performance is linked to other equity securities (such as depositary receipts),

currencies, interest rates, indices, or other financial indicators (reference indices).

There are many different types of derivatives and many different ways to use them. Futures, forward contracts, and

options are commonly used for traditional hedging purposes to attempt to protect a fund from exposure to changing

interest rates, securities prices, asset values, or currency exchange rates and as a low-cost method of gaining

exposure to a particular market without investing directly in those securities or assets. A fund may enter into put or

call options, futures contracts, options on futures contracts, over-the-counter swap contracts (e.g., interest rate

swaps, total return swaps and credit default swaps), currency futures contracts and options, options on currencies,

and forward currency contracts for both hedging and non-hedging purposes. A fund also may use foreign currency

options and foreign currency forward contracts to increase exposure to a foreign currency or to shift exposure to

foreign currency fluctuations from one country to another. A forward currency contract involves a privately negotiated

obligation to purchase or sell a specific currency at a future date at a price set in the contract. A fund will not hedge

currency exposure to an extent greater than the approximate aggregate market value of the securities held or to be

purchased by the fund (denominated or generally quoted or currently convertible into the currency). A fund may enter

into forward commitment agreements (not as a principal investment strategy), which call for the fund to purchase or

sell a security on a future date at a fixed price. A fund may also enter into contracts to sell its investments either on

demand or at a specific interval.

Generally, a fund may not invest in a derivative security unless the reference index or the instrument to which it

relates is an eligible investment for the fund or the reference currency relates to an eligible investment for the fund.

The return on a derivative security may increase or decrease, depending upon changes in the reference index or

instrument to which it relates. If a fund's Sub-Advisor hedges market conditions incorrectly or employs a strategy that

does not correlate well with the fund's investment, these techniques could result in a loss. These techniques may

increase the volatility of a fund and may involve a small investment of cash relative to the magnitude of the risk

assumed.


The risks associated with derivative investments include:
·	the risk that the underlying security, interest rate, market index, or other financial asset will not move in the
	direction Principal Management Corporation (“Principal”) and/or Sub-Advisor anticipated;
·	the possibility that there may be no liquid secondary market which may make it difficult or impossible to close out
	a position when desired;
·	the risk that adverse price movements in an instrument can result in a loss substantially greater than a fund's
	initial investment;
·	the possibility that the counterparty may fail to perform its obligations; and
·	the inability to close out certain hedged positions to avoid adverse tax consequences.

Swap agreements involve the risk that the party with whom the fund has entered into the swap will default on its
obligation to pay the fund and the risk that the fund will not be able to meet its obligations to pay the other party to the
agreement.

Credit default swap agreements involve special risks because they may be difficult to value, are highly susceptible to
liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an
actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of
financial difficulty). Credit default swaps can increase credit risk because the fund has exposure to both the issuer of
the referenced obligation and the counterparty to the credit default swap.

Forward and futures contracts are subject to special risk considerations. The primary risks associated with the use of
these contracts are (a) the imperfect correlation between the change in market value of the instruments held by the
fund and the price of the forward or futures contract; (b) possible lack of a liquid secondary market for a forward or
futures contract and the resulting inability to close a forward or futures contract when desired; (c) losses caused by
unanticipated market movements, which are potentially unlimited; (d) the sub-advisor’s inability to predict correctly
the direction of securities prices, interest rates, currency exchange rates, asset values, and other economic factors;
(e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the fund has
insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements, and the
fund may have to sell securities at a time when it may be disadvantageous to do so.

For currency contracts, there is also a risk of government action through exchange controls that would restrict the
ability of the fund to deliver or receive currency.

Some of the risks associated with options include imperfect correlation, counterparty risk, and an insufficient liquid
secondary market for particular options.

Equity Securities
Equity securities include common stocks, convertible securities, depositary receipts, rights (a right is an offering of
common stock to investors who currently own shares which entitle them to buy subsequent issues at a discount from
the offering price), and warrants (a warrant grants its owner the right to purchase securities from the issuer at a
specified price, normally higher than the current market price). Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. The value of a company's stock may fall as a result of factors directly
relating to that company, such as decisions made by its management or lower demand for the company's products or
services. A stock's value may also fall because of factors affecting not just the company, but also companies in the
same industry or in a number of different industries, such as increases in production costs. The value of a company's
stock may also be affected by changes in financial markets that are relatively unrelated to the company or its
industry, such as changes in interest rates or currency exchange rates. In addition, a company's stock generally pays
dividends only after the company invests in its own business and makes required payments to holders of its bonds
and other debt. For this reason, the value of a company's stock will usually react more strongly than its bonds and
other debt to actual or perceived changes in the company's financial condition or prospects. Some funds focus their
investments on certain market capitalization ranges. Market capitalization is defined as total current market value of a
company's outstanding equity securities. The market capitalization of companies in the fund’s portfolios and their
related indexes will change over time and, the fund will not automatically sell a security just because it falls outside of
the market capitalization range of its index(es). Stocks of smaller companies may be more vulnerable to adverse
developments than those of larger companies.


Exchange Traded Funds ("ETFs")
Generally, ETFs invest in a portfolio of securities, but they may also invest in other assets, such as precious metals,
commodities, securities indices, government bonds, or currencies. Often ETFs are a type of index or actively
managed fund bought and sold on a securities exchange. An ETF trades like common stock. Shares in an index ETF
represent an interest in a fixed portfolio of securities designed to track a particular market index. A fund could
purchase shares issued by an ETF to gain exposure to a portion of the U.S. or a foreign market while awaiting
purchase of underlying securities or for other reasons. The risks of owning an ETF generally reflect the risks of
owning the underlying securities or other assets they are designed to track, although ETFs have management fees
that increase their costs. Fund shareholders indirectly bear their proportionate share of the expenses of the ETFs in
which the fund invests.

Fixed-Income Securities
Fixed-income securities include bonds and other debt instruments that are used by issuers to borrow money from
investors (some examples include investment grade corporate bonds, convertible securities, mortgage-backed
securities, U.S. government securities and asset-backed securities). The issuer generally pays the investor a fixed,
variable, or floating rate of interest. The amount borrowed must be repaid at maturity. Some debt securities, such as
zero coupon bonds, do not pay current interest, but are sold at a discount from their face values.
·	Interest Rate Changes: Fixed-income securities are sensitive to changes in interest rates. In general, fixed-
	income security prices rise when interest rates fall and fall when interest rates rise. Longer term bonds and zero
	coupon bonds are generally more sensitive to interest rate changes. If interest rates fall, issuers of callable bonds
	may call (repay) securities with high interest rates before their maturity dates; this is known as call risk. In this
	case, a fund would likely reinvest the proceeds from these securities at lower interest rates, resulting in a decline
	in the fund's income.
·	Credit Risk: Fixed-income security prices are also affected by the credit quality of the issuer. Investment grade
	debt securities are medium and high quality securities. Some bonds, such as lower grade or "junk" bonds, may
	have speculative characteristics and may be particularly sensitive to economic conditions and the financial
	condition of the issuers. Credit risk refers to the possibility that the issuer of the security will not be able to make
	principal and interest payments when due. To the extent that the mortgages underlying mortgage-backed
	securities are "sub-prime mortgages" (mortgages granted to borrowers whose credit histories would not support
	conventional mortgages), the risk of default is higher.

Foreign Securities
Principal defines foreign securities as those issued by:
·	companies with their principal place of business or principal office outside the U.S. or
·	companies for which the principal securities trading market is outside the U.S.

Depending on the fund, the fund may invest in securities of developed markets, developing (also called "emerging")
markets, or both. Usually, the term "emerging market country" means any country which is considered to be an
emerging country by the international financial community (including the International Bank for Reconstruction and
Development (also known as the World Bank) and MSCI Emerging Markets Index). These countries generally
include every nation in the world except the United States, Canada, Japan, Australia, New Zealand, and most
nations located in Western Europe.

Foreign companies may not be subject to the same uniform accounting, auditing, and financial reporting practices as
are required of U.S. companies. In addition, there may be less publicly available information about a foreign company
than about a U.S. company. Securities of many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Commissions on foreign securities exchanges may be generally higher than those on
U.S. exchanges.

Foreign markets also have different clearance and settlement procedures than those in U.S. markets. In certain
markets there have been times when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct these transactions. Delays in settlement could result in temporary periods
when a portion of fund assets is not invested and earning no return. If a fund is unable to make intended security
purchases due to settlement problems, the fund may miss attractive investment opportunities. In addition, a fund may
incur a loss as a result of a decline in the value of its portfolio if it is unable to sell a security.

With respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments that could affect a fund's investments in those countries. In addition, a
fund may also suffer losses due to nationalization, expropriation, or differing accounting practices and treatments.


Investments in foreign securities are subject to laws of the foreign country that may limit the amount and types of
foreign investments. Changes of governments or of economic or monetary policies, in the U.S. or abroad, changes in
dealings between nations, currency convertibility or exchange rates could result in investment losses for a fund.
Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial
relative to the actual market values and may be unfavorable to fund investors. To protect against future uncertainties
in foreign currency exchange rates, the funds are authorized to enter into certain foreign currency exchange
transactions.

Foreign securities are often traded with less frequency and volume, and therefore may have greater price volatility,
than is the case with many U.S. securities. Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S. Though the fund intends to acquire the
securities of foreign issuers where there are public trading markets, economic or political turmoil in a country in which
a fund has a significant portion of its assets or deterioration of the relationship between the U.S. and a foreign
country may reduce the liquidity of a fund's portfolio. The fund may have difficulty meeting a large number of
redemption requests. Furthermore, there may be difficulties in obtaining or enforcing judgments against foreign
issuers.

A fund may choose to invest in a foreign company by purchasing depositary receipts. Depositary receipts are
certificates of ownership of shares in a foreign-based issuer held by a bank or other financial institution. They are
alternatives to purchasing the underlying security but are subject to the foreign securities risks to which they relate.

Investments in companies of developing (also called "emerging") countries are subject to higher risks than
investments in companies in more developed countries. These risks include:
·	increased social, political, and economic instability;
·	a smaller market for these securities and low or nonexistent volume of trading that results in a lack of liquidity
	and in greater price volatility;
·	lack of publicly available information, including reports of payments of dividends or interest on outstanding
	securities;
·	foreign government policies that may restrict opportunities, including restrictions on investment in issuers or
	industries deemed sensitive to national interests;
·	relatively new capital market structure or market-oriented economy;
·	the possibility that recent favorable economic developments may be slowed or reversed by unanticipated political
	or social events in these countries;
·	restrictions that may make it difficult or impossible for the fund to vote proxies, exercise shareholder rights,
	pursue legal remedies, and obtain judgments in foreign courts; and
·	possible losses through the holding of securities in domestic and foreign custodial banks and depositories.

In addition, many developing countries have experienced substantial and, in some periods, extremely high rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of those countries.

Repatriation of investment income, capital, and proceeds of sales by foreign investors may require governmental
registration and/or approval in some developing countries. A fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for repatriation.

Further, the economies of developing countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with
which they trade.

Hedging
The success of a fund’s hedging strategy will be subject to the Sub-Adviser’s ability to correctly assess the degree of
correlation between the performance of the instruments used in the hedging strategy and the performance of the
investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or
time passes, the success of a fund’s hedging strategy will also be subject to the Sub-Adviser’s ability to continually
recalculate, readjust, and execute hedges in an efficient and timely manner. For a variety of reasons, the Sub-
Adviser may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings
being hedged. Such imperfect correlation may prevent a fund from achieving the intended hedge or expose a fund to
risk of loss. In addition, it is not possible to hedge fully or perfectly against any risk, and hedging entails its own costs.

High Yield Securities

Debt securities rated at the time of purchase BB+ or lower by Standard & Poor's Ratings Services or Ba1 or lower by

Moody's or, if not rated, determined to be of equivalent quality by Principal or the Sub-Advisor are sometimes

referred to as high yield or "junk bonds" and are considered speculative; such securities could be in default at time of

purchase. Each of the Principal LifeTime Funds and Strategic Asset Management Portfolios may invest in underlying

funds that may invest in such securities.

Investment in high yield bonds involves special risks in addition to the risks associated with investment in highly rated

debt securities. High yield bonds may be regarded as predominantly speculative with respect to the issuer's

continuing ability to meet principal and interest payments. Moreover, such securities may, under certain

circumstances, be less liquid than higher rated debt securities.

Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher

quality debt securities. The ability of a fund to achieve its investment objective may, to the extent of its investment in

high yield bonds, be more dependent on such credit analysis than would be the case if the fund were investing in

higher quality bonds.

High yield bonds may be more susceptible to real or perceived adverse economic and competitive industry

conditions than higher-grade bonds. The prices of high yield bonds have been found to be less sensitive to interest

rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual

corporate developments. If the issuer of high yield bonds defaults, a fund may incur additional expenses to seek

recovery.

The secondary market on which high yield bonds are traded may be less liquid than the market for higher-grade

bonds. Less liquidity in the secondary trading market could adversely affect the price at which a fund could sell a high

yield bond and could adversely affect and cause large fluctuations in the daily price of the fund's shares. Adverse

publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the value and

liquidity of high yield bonds, especially in a thinly traded market.

The use of credit ratings for evaluating high yield bonds also involves certain risks. For example, credit ratings

evaluate the safety of principal and interest payments, not the market value risk of high yield bonds. Also, credit

rating agencies may fail to change credit ratings in a timely manner to reflect subsequent events. If a credit rating

agency changes the rating of a portfolio security held by a fund, the fund may retain the security if Principal or Sub-

Advisor thinks it is in the best interest of shareholders.

Industry Concentration

A fund that concentrates its investments (invests more than 25% of its net assets) in a particular industry (or group of

industries) is more exposed to the overall condition of the particular industry than a fund that invests in a wider

variety of industries. A particular industry could be affected by economic, business, supply-and-demand, political, or

regulatory factors. Companies within the same industry could react similarly to such factors. As a result, a fund’s

concentration in a particular industry would increase the possibility that the fund’s performance will be affected by

such factors.

Initial Public Offerings ("IPOs")

An IPO is a company's first offering of stock to the public. IPO risk is that the market value of IPO shares will fluctuate

considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of

shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high

transaction costs. IPO shares are subject to market risk and liquidity risk. In addition, the market for IPO shares can

be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in

some IPOs may make it more difficult for a fund to buy or sell significant amounts of shares without an unfavorable

impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares

by sales of additional shares and by concentration of control in existing management and principal shareholders.

When a fund's asset base is small, a significant portion of the fund's performance could be attributable to

investments in IPOs because such investments would have a magnified impact on the fund. As the fund's assets

grow, the effect of the fund's investments in IPOs on the fund's performance probably will decline, which could

reduce the fund's performance. Because of the price volatility of IPO shares, a fund may choose to hold IPO shares

for a very short period of time. This may increase the turnover of the fund's portfolio and lead to increased expenses

to the fund, such as commissions and transaction costs. By selling IPO shares, the fund may realize taxable gains it

will subsequently distribute to shareholders.


Leverage
If a fund makes investments in futures contracts, forward contracts, swaps and other derivative instruments, these
instruments provide the economic effect of financial leverage by creating additional investment exposure, as well as
the potential for greater loss. If a fund uses leverage through activities such as borrowing, entering into short sales,
purchasing securities on margin or on a “when-issued” basis or purchasing derivative instruments in an effort to
increase its returns, the fund has the risk of magnified capital losses that occur when losses affect an asset base,
enlarged by borrowings or the creation of liabilities, that exceeds the net assets of the fund. The net asset value of a
fund employing leverage will be more volatile and sensitive to market movements. Leverage may involve the creation
of a liability that requires the fund to pay interest. Leveraging may cause a fund to liquidate portfolio positions to
satisfy its obligations or to meet segregation requirements when it may not be advantageous to do so. To the extent
that a fund is not able to close out a leveraged position because of market illiquidity, a fund’s liquidity may be
impaired to the extent that it has a substantial portion of liquid assets segregated or earmarked to cover obligations.

Liquidity Risk
A fund is exposed to liquidity risk when trading volume, lack of a market maker, or legal restrictions impair the fund's
ability to sell particular securities or close derivative positions at an advantageous price. Funds with principal
investment strategies that involve securities of companies with smaller market capitalizations, foreign securities,
derivatives, or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk.

Management Risk
If a Sub-Advisor's investment strategies do not perform as expected, the fund could underperform other funds with
similar investment objectives or lose money.
·	Active Management: The performance of a fund that is actively managed will reflect in part the ability of Principal
	and/or Sub-Advisor(s) to make investment decisions that are suited to achieving the fund's investment objective.
	Funds that are actively managed are prepared to invest in securities, sectors, or industries differently from the
	benchmark.
·	Passive Management: Index funds use a passive, or indexing, investment approach. Index funds do not attempt
	to manage market volatility, use defensive strategies or reduce the effect of any long-term periods of poor stock
	or bond performance. Index funds attempt to replicate their relevant target index by investing primarily in the
	securities held by the index in approximately the same proportion of the weightings in the index. However,
	because of the difficulty of executing some relatively small securities trades, such funds may not always be
	invested in the less heavily weighted securities held by the index. An index fund's ability to match the
	performance of their relevant index may be affected by many factors, such as fund expenses, the timing of cash
	flows into and out of the fund, changes in securities markets, and changes in the composition of the index. Some
	index funds may invest in index futures and options on a daily basis to gain exposure to the Index in an effort to
	minimize tracking error relative to the benchmark.

Market Volatility and Issuer Risk
The value of a fund's portfolio securities may go down in response to overall stock or bond market movements.
Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and
down in value more than bonds. If the fund's investments are concentrated in certain sectors, its performance could
be worse than the overall market. The value of an individual security or particular type of security can be more
volatile than the market as a whole and can perform differently from the value of the market as a whole. The value of
a security may decline for reasons directly related to the issuer, such as management performance, financial
leverage and reduced demand for the issuer’s goods or services. It is possible to lose money when investing in a
fund.

Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount of trading that occurs in a fund's
portfolio during the year. For example, a 100% turnover rate means that on average every security in the portfolio
has been replaced once during the year. Funds that engage in active trading may have high portfolio turnover rates.
Funds with high turnover rates (more than 100%) often have higher transaction costs (which are paid by the fund)
and may lower the fund's performance. Please consider all the factors when you compare the turnover rates of
different funds. You should also be aware that the "total return" line in the Financial Highlights section reflects
portfolio turnover costs.

Preferred Securities

Preferred securities generally pay fixed rate dividends and/or interest (though some are adjustable rate) and typically

have "preference" over common stock in payment priority and the liquidation of a company's assets - preference

means that a company must pay on its preferred securities before paying on its common stock, and the claims of

preferred securities holders are typically ahead of common stockholders' claims on assets in a corporate liquidation.

Holders of preferred securities usually have no right to vote for corporate directors or on other matters. The market

value of preferred securities is sensitive to changes in interest rates as they are typically fixed income securities - the

fixed-income payments are expected to be the primary source of long-term investment return. In certain

circumstances, an issuer of preferred securities may redeem the securities prior to their stated maturity date. For

instance, for certain types of preferred securities, a redemption may be triggered by a change in federal income tax

or securities laws. As with call provisions, a redemption by the issuer may reduce the return of the security held by

the fund. Preferred securities share many investment characteristics with bonds; therefore, the risks and potential

rewards of investing in a fund that invests in preferred securities are more similar to those associated with a bond

fund than a stock fund.

Real Estate Investment Trusts

Real estate investment trust securities ("REITs") involve certain unique risks in addition to those risks associated with

investing in the real estate industry in general (such as possible declines in the value of real estate, lack of availability

of mortgage funds, or extended vacancies of property). REITs are characterized as: equity REITs, which primarily

own property and generate revenue from rental income; mortgage REITs, which invest in real estate mortgages; and

hybrid REITs, which combine the characteristics of both equity and mortgage REITs. Equity REITs may be affected

by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by

the quality of any credit extended. REITs are dependent upon management skills, are not diversified, and are subject

to heavy cash flow dependency, risks of default by borrowers, and self-liquidation. As an investor in a REIT, the fund

will be subject to the REIT’s expenses, including management fees, and will remain subject to the fund's advisory

fees with respect to the assets so invested. REITs are also subject to the possibilities of failing to qualify for the

special tax treatment accorded REITs under the Internal Revenue Code, and failing to maintain their exemptions

from registration under the 1940 Act.

Investment in REITs involves risks similar to those associated with investing in small capitalization companies. REITs

may have limited financial resources, may trade less frequently and in a limited volume, and may be subject to more

abrupt or erratic price movements than larger company securities.

Real Estate Securities

Investing in securities of companies in the real estate industry, subjects a fund to the special risks associated with the

real estate market and the real estate industry in general. Generally, companies in the real estate industry are

considered to be those that have principal activity involving the development, ownership, construction, management

or sale of real estate; have significant real estate holdings, such as hospitality companies, healthcare facilities,

supermarkets and mining, lumber and paper companies; and/or provide products or services related to the real

estate industry, such as financial institutions that make and/or service mortgage loans and manufacturers or

distributors of building supplies. Securities of companies in the real estate industry are sensitive to factors such as

loss to casualty or condemnation, changes in real estate values, property taxes, interest rates, cash flow of

underlying real estate assets, occupancy rates, government regulations affecting zoning, land use and rents, and the

management skill and creditworthiness of the issuer. Companies in the real estate industry may also be subject to

liabilities under environmental and hazardous waste laws.

Repurchase Agreements

Repurchase agreements typically involve the purchase of debt securities from a financial institution such as a bank,

savings and loan association, or broker-dealer. A repurchase agreement provides that the fund sells back to the

seller and that the seller repurchases the underlying securities at a specified price on a specific date. Repurchase

agreements may be viewed as loans by a fund collateralized by the underlying securities. This arrangement results in

a fixed rate of return that is not subject to market fluctuation while the fund holds the security. In the event of a default

or bankruptcy by a selling financial institution, the affected fund bears a risk of loss. To minimize such risks, the fund

enters into repurchase agreements only with parties a Sub-Advisor deems creditworthy (those that are large, well-

capitalized and well-established financial institutions). In addition, the value of the securities collateralizing the

repurchase agreement is, and during the entire term of the repurchase agreement remains, at least equal to the

repurchase price, including accrued interest.


Small and Medium Capitalization Companies
The Fund may invest in securities of companies with small- or mid-sized market capitalizations. Market capitalization
is defined as total current market value of a company's outstanding common stock. Investments in companies with
smaller market capitalizations may involve greater risks and price volatility (wide, rapid fluctuations) than investments
in larger, more mature companies. Small companies may be less significant within their industries and may be at a
competitive disadvantage relative to their larger competitors. While smaller companies may be subject to these
additional risks, they may also realize more substantial growth than larger or more established companies.

Smaller companies may be less mature than larger companies. At this earlier stage of development, the companies
may have limited product lines, reduced market liquidity for their shares, limited financial resources, or less depth in
management than larger or more established companies. Unseasoned issuers are companies with a record of less
than three years continuous operation, including the operation of predecessors and parents. Unseasoned issuers by
their nature have only a limited operating history that can be used for evaluating the company's growth prospects. As
a result, these securities may place a greater emphasis on current or planned product lines and the reputation and
experience of the company's management and less emphasis on fundamental valuation factors than would be the
case for more mature growth companies.

Temporary Defensive Measures
From time to time, as part of its investment strategy, the fund may invest without limit in cash and cash equivalents
for temporary defensive purposes in response to adverse market, economic, or political conditions. To the extent that
the fund is in a defensive position, it may lose the benefit of upswings and limit its ability to meet its investment
objective. For this purpose, cash equivalents include: bank notes, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper, and commercial paper master notes which are floating rate debt
instruments without a fixed maturity. In addition, the fund may purchase U.S. government securities, preferred
stocks, and debt securities, whether or not convertible into or carrying rights for common stock.

There is no limit on the extent to which a fund may take temporary defensive measures. In taking such measures, the
fund may fail to achieve its investment objective.

Underlying Funds
An underlying fund to a fund of funds may experience relatively large redemptions or purchases as the fund of funds
periodically reallocates or rebalances its assets. These transactions may accelerate the realization of taxable income
if sales of portfolio securities result in gains and could increase transaction costs. In addition, when a fund of funds
reallocates or redeems significant assets away from an underlying fund, the loss of assets to the underlying fund
could result in increased expense ratios for that fund.

Principal is the advisor to the Principal LifeTime Funds, SAM Portfolios, PVC Diversified Balanced Account, PVC
Diversified Growth Account, and each of the underlying funds. Principal Global Investors, LLC ("PGI") is Sub-Advisor
to the Principal LifeTime Funds and Edge Asset Management, Inc. ("Edge") is the Sub-Advisor to the SAM Portfolios.
Either PGI or Edge also serves as Sub-Advisor to some or all of the underlying funds. Principal, PGI, and Edge are
committed to minimizing the potential impact of underlying fund risk on underlying funds to the extent consistent with
pursuing the investment objectives of the fund of funds which it manages. Each may face conflicts of interest in
fulfilling its responsibilities to all such funds.

As of October 31, 2011, PFI SAM Portfolios, PFI Principal LifeTime Funds, PVC SAM Portfolios, PVC Principal
LifeTime Accounts, PVC Diversified Balanced Account, and PVC Diversified Growth Account own the following
percentages of the Fund listed below:
	Total Percentage
	of Outstanding
Fund	Shares Owned
Real Estate Securities Fund	36.57%


PORTFOLIO HOLDINGS INFORMATION

A description of the Fund's policies and procedures with respect to disclosure of the Fund's portfolio securities is
available in the Fund's Statement of Additional Information.

MANAGEMENT OF THE FUNDS

The Manager

Principal Management Corporation (“Principal”) serves as the manager for the Fund. Through the Management

Agreement with the Fund, Principal provides investment advisory services and certain corporate administrative

services for the Fund.

Principal is an indirect subsidiary of Principal Financial Group, Inc. and has managed mutual funds since 1969.

Principal’s address is Principal Financial Group, Des Moines, Iowa 50392.

The Sub-Advisors

Principal has signed a contract with a Sub-Advisor. Under the sub-advisory agreement, the Sub-Advisor agrees to

assume the obligations of Principal to provide investment advisory services to the portion of the assets for a specific

Fund allocated to it by Principal. For these services, Principal pays the Sub-Advisor a fee.

Principal or the Sub-Advisor provides the Directors of the Fund with a recommended investment program. The

program must be consistent with the Fund's investment objective and policies. Within the scope of the approved

investment program, the Sub-Advisor advises the Fund on its investment policy and determines which securities are

bought or sold, and in what amounts.

The Sub-Advisor may enter into co-employee agreements, investment service agreements, dual employee

agreements, or other similar agreements with advisers with which they are affiliated. Through the agreements, the

Sub-Advisor’s portfolio manager usually is accorded access to the portfolio management processes, systems, staff,

proprietary quantitative model, portfolio construction disciplines, experienced portfolio management, and quantitative

research staff of the affiliated investment advisory firm. Likewise, through the agreements, the portfolio manager

usually has access to the trading staff and trade execution capabilities along with the order management system,

pre- and post-trade compliance system, portfolio accounting system and portfolio accounting system and

performance attribution and risk management system of the affiliated investment advisory firm.

The Fund summary identified the portfolio managers and the fund they manage. Additional information about the

portfolio managers follows. The SAI provides additional information about each portfolio manager’s compensation,

other accounts managed by the portfolio manager, and the portfolio manager’s ownership of securities in the Fund.

Sub-Advisor: Principal Real Estate Investors, LLC (“Principal - REI”), 801 Grand Avenue, Des Moines, IA

50392, an indirect wholly owned subsidiary of Principal Life, an affiliate of Principal, and a member of

the Principal Financial Group, was founded in 2000.

Principal-REI is the sub-advisor for the Real Estate Securities Fund.

The day-to-day portfolio management is shared by multiple portfolio managers. The portfolio managers operate as a

team, sharing authority and responsibility for research and the day-to-day management of the portfolio with no

limitation on the authority of one portfolio manager in relation to another.

Matt Richmond has been with Principal – REI since 2000. He earned a bachelor’s degree in Finance from University

of Nebraska and an M.B.A. from the University of Iowa.

Kelly Rush has been with the real estate investment area for the firm since 1987. He earned a B.A. in Finance and

an M.B.A. in Business Administration from the University of Iowa. Mr. Rush has earned the right to use the Chartered

Financial Analyst designation.


Fees Paid to Principal
The Fund pays Principal a fee for its services, which includes the fee Principal pays to the Sub-Advisor. The fee the
Real Estate Securities fund paid (as a percentage of the average daily net assets) for the fiscal year ended
October 31, 2011 was 0.83%.

A discussion regarding the basis for the Board of Directors approval of the management agreement with Principal
and the sub-advisory agreements with the Sub-Advisor is available in the semi-annual report to shareholders for the
period ended April 30, 2011 and in the annual report to shareholders for the fiscal year ended October 31, 2011.

Manager of Managers
The Fund operates as a Manager of Managers. Under an order received from the SEC, the Fund and Principal, may
enter into and materially amend agreements with Sub-Advisors, other than those affiliated with Principal, without
obtaining shareholder approval. For any Fund that is relying on that order, Principal may, without obtaining
shareholder approval:
·	hire one or more Sub-Advisors;
·	change Sub-Advisors; and
·	reallocate management fees between itself and Sub-Advisors.

Principal has ultimate responsibility for the investment performance of each Fund that utilizes a Sub-Advisor due to
its responsibility to oversee Sub-Advisors and recommend their hiring, termination, and replacement. No Fund will
rely on the order until it receives approval from its shareholders or, in the case of a new Fund, the Fund’s sole initial
shareholder before the Fund is available to the other purchasers, and the Fund states in its prospectus that it intends
to rely on the order.

The shareholders of the fund have approved the Fund’s reliance on the order; however, the Real Estate Securities
Fund does not currently intend to rely on the order.

PRICING OF FUND SHARES

The Fund’s shares are bought and sold at the current share price. The share price of each class of each Fund is
calculated each day the New York Stock Exchange (“NYSE”) is open (share prices are not calculated on the days on
which the NYSE is closed for trading, generally New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/
Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas).
The share price is determined as of the close of business of the NYSE (normally 3:00 p.m. Central Time). When an
order to buy or sell shares is received, the share price used to fill the order is the next price we calculate after we
receive the order at our transaction processing center in Canton, Massachusetts. To process your purchase order on
the day we receive it, we must receive the order (with complete information):
·	on a day that the NYSE is open and
·	prior to the close of trading on the NYSE (normally 3 p.m. Central Time).
Orders received after the close of the NYSE or on days that the NYSE is not open will be processed on the next day
that the NYSE is open for normal trading.

If we receive an application or purchase request for a new mutual fund account or subsequent purchase into an
existing account that is accompanied by a check and the application or purchase request does not contain complete
information, we may hold the application (and check) for up to two business days while we attempt to obtain the
necessary information. If we receive the necessary information within two business days, we will process the order
using the next share price calculated. If we do not receive the information within two business days, the application
and check will be returned to you.

For this fund, the share price is calculated by:
·	taking the current market value of the total assets of the Fund
·	subtracting liabilities of the Fund
·	dividing the remainder proportionately into the classes of the Fund
·	subtracting the liability of each class
·	dividing the remainder by the total number of shares outstanding for that class.


Notes:
·	If market quotations are not readily available for a security owned by a Fund, its fair value is determined using a
	policy adopted by the Directors. Fair valuation pricing is subjective and creates the possibility that the fair value
	determined for a security may differ materially from the value that could be realized upon the sale of the security.

·	A Fund’s securities may be traded on foreign securities markets that generally complete trading at various times
	during the day prior to the close of the NYSE. Generally, the values of foreign securities used in computing a
	Fund’s NAV are the market quotations as of the close of the foreign market. Foreign securities and currencies
	are also converted to U.S. dollars using the exchange rate in effect at the close of the NYSE. Events affecting the
	value of foreign securities occur when the foreign market is closed and the NYSE is open. The Fund has adopted
	policies and procedures to “fair value” some or all securities held by a Fund if significant events occur after the
	close of the market on which the foreign securities are traded but before the Fund’s NAV is calculated.

	Significant events can be specific to a single security or can include events that affect a particular foreign market
	or markets. A significant event can also include a general market movement in the U.S. securities markets. If
	Principal believes that the market value of any or all of the foreign securities is materially affected by such an
	event, the securities will be valued, and the Fund’s NAV will be calculated, using the policy adopted by the Fund.
	These fair valuation procedures are intended to discourage shareholders from investing in the Fund for the
	purpose of engaging in market timing or arbitrage transactions.

	The trading of foreign securities generally or in a particular country or countries may not take place on all days
	the NYSE is open, or may trade on days the NYSE is closed. Thus, the value of the foreign securities held by the
	Fund may change on days when shareholders are unable to purchase or redeem shares.

·	Certain securities issued by companies in emerging market countries may have more than one quoted valuation
	at any point in time. These may be referred to as local price and premium price. The premium price is often a
	negotiated price that may not consistently represent a price at which a specific transaction can be effected. The
	Fund has a policy to value such securities at a price at which the Sub-Advisor expects the securities may be
	sold.

PURCHASE OF FUND SHARES

Principal Funds, Inc. offers funds in multiple share classes: A, B, C, J, Institutional, R-1, R-2, R-3, R-4, R-5, and P.
Funds available in multiple share classes have the same investments, but differing expenses. Institutional Class
shares are available in this prospectus.

Only eligible purchasers may buy Institutional Class shares of the Funds. At the present time, eligible purchasers
include but are not limited to:
·	retirement and pension plans to which Principal Life Insurance Company (“Principal Life”) provides
	recordkeeping services;
·	separate accounts of Principal Life;
·	Principal Life or any of its subsidiaries or affiliates;
·	any fund distributed by Principal Funds Distributor, Inc. if the fund seeks to achieve its investment objective by
	investing primarily in shares of mutual funds;
·	clients of Principal Global Investors, LLC.;
·	sponsors, recordkeepers, or administrators of wrap account or mutual fund asset allocation programs or
	participants in those programs (that trade in an omnibus relationship);
·	certain pension plans;
·	certain retirement account investment vehicles administered by foreign or domestic pension plans;
·	an investor who buys shares through an omnibus account with certain intermediaries, such as a broker-dealer,
	bank, or other financial institution, pursuant to a written agreement; and
·	certain institutional clients that have been approved by Principal Life for purposes of providing plan
	recordkeeping.

Principal Management Corporation reserves the right to broaden or limit the designation of eligible purchasers. Not
all of the Funds are offered in every state. Please check with your financial advisor or our home office for state
availability.

Shares may be purchased from Principal Funds Distributor, Inc. (“the Distributor”). The Distributor is an affiliate of

Principal Life Insurance Company and with it are subsidiaries of Principal Financial Group, Inc. and members of the

Principal Financial Group. There are no sales charges on Institutional Class shares of the Fund. There are no

restrictions on amounts to be invested in Institutional Class shares of the Fund.

Shareholder accounts for the Fund are maintained under an open account system. Under this system, an account is

opened and maintained for each investor (generally an omnibus account or an institutional investor). Each

investment is confirmed by sending the investor a statement of account showing the current purchase or sale and the

total number of shares owned. The statement of account is treated by the Fund as evidence of ownership of Fund

shares. Share certificates are not issued.

The Fund may reject or cancel any purchase orders for any reason. For example, the Fund does not intend to permit

market timing because short-term or other excessive trading into and out of the Funds may harm performance by

disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any

purchase orders from market timers or investors that, in Principal’s opinion, may be disruptive to the Fund. For these

purposes, Principal may consider an investor’s trading history in the Fund or other Funds sponsored by Principal Life

and accounts under common ownership or control.

Payments are to be made via personal or financial institution check (for example, a bank or cashier's check). We

reserve the right to refuse any payment that we feel presents a fraud or money laundering risk. Examples of the

types of payments we will not accept are cash, money orders, travelers' checks, credit card checks, and foreign

checks.

Principal may recommend to the Board, and the Board may elect, to close certain funds to new and existing

investors.

Note: No salesperson, dealer or other person is authorized to give information or make representations about a

Fund other than those contained in this Prospectus. Information or representations not contained in this

prospectus may not be relied upon as having been provided or made by Principal Funds, a Fund, Principal,

any Sub-Advisor, or PFD.

REDEMPTION OF FUND SHARES

You may redeem shares of the Fund upon request. There is no charge for the redemption. Shares are redeemed at

the NAV per share next computed after the request is received by the Fund in proper and complete form.

The Fund generally sends payment for shares sold the business day after the sell order is received. Under unusual

circumstances, the Fund may suspend redemptions, or postpone payment for more than seven days, as permitted by

federal securities law.

Distributions in Kind. Payment for shares of the Fund tendered for redemption is ordinarily made by check.

However, the Fund may determine that it would be detrimental to the remaining shareholders of a Fund to make

payment of a redemption order wholly or partly in cash. Under certain circumstances, therefore, the Fund may pay

the redemption proceeds in whole or in part by a distribution “in kind” of securities from the Fund’s portfolio in lieu of

cash. If a Fund pays the redemption proceeds in kind, the redeeming shareholder might incur brokerage or other

costs in selling the securities for cash. The Fund will value securities used to pay redemptions in kind using the same

method the Fund uses to value its portfolio securities as described in this prospectus.

Redemption fees. The Fund board of directors has determined that it is not necessary to impose a fee upon the

redemption of fund shares, because the Fund has adopted transfer restrictions as described in “Exchange of

Fund Shares.”


EXCHANGE OF FUND SHARES

An exchange between Funds is a redemption of shares of one Fund and a concurrent purchase of shares in another
Fund with the redemption proceeds. A shareholder, including a beneficial owner of shares held in nominee name or a
participant in a participant-directed employee benefit plan, may exchange Fund shares under certain circumstances.
In addition to any restrictions an intermediary or an employee benefit plan imposes, Fund shares may be exchanged,
without charge, for shares of any other Fund of the Principal Funds, provided that:
·	the shareholder has not exchanged shares of the Fund within 30 days preceding the exchange, unless the
	shareholder is exchanging into the Money Market Fund,
·	the share class of such other Fund is available through the plan, and
·	the share class of such other Fund is available in the shareholder’s state of residence.

All exchanges completed on the same day are considered a single exchange for purposes of this exchange
limitation. In addition, the Fund will reject an order to purchase shares of any Fund, except shares of the Money
Market Fund, if the shareholder redeemed shares from that Fund within the preceding 30-day period. The 30-day
exchange or purchase restriction does not apply to exchanges or purchases made on a scheduled basis such as
scheduled periodic portfolio rebalancing transactions.

If Fund shares are purchased through an intermediary that is unable or unwilling to impose the 30-day exchange
restriction described above, Fund management may waive this restriction in lieu of the exchange limitation that the
intermediary is able to impose if, in management’s judgment, such limitation is reasonably likely to prevent excessive
trading in Fund shares. In order to prevent excessive exchanges, and under other circumstances where the
Fund Board of Directors or the Manager believes it is in the best interests of the Fund, the Fund reserves the right to
revise or terminate this exchange privilege, limit the amount or further limit the number of exchanges, reject any
exchange or close an account.

DIVIDENDS AND DISTRIBUTIONS

Dividends are based on estimates of income, expenses, and shareholder activity for the Fund. Actual income,
expenses, and shareholder activity may differ from estimates; consequently, differences, if any, will be included in the
calculation of subsequent dividends. The Fund pays its net investment income to record date shareholders; this
record date is the business day prior to the payment date. The payment schedule is as follows:
·	the Real Estate Securities Fund pays its net investment income quarterly in March, June, September, and
	December.
For more details on the payment schedule go to www.principal.com

Net realized capital gains, if any, are distributed annually in December. Payments are made to shareholders of
record on the business day prior to the payable date. Capital gains may be taxable at different rates, depending on
the length of time that the Fund holds its assets.

Dividend and capital gains distributions will be reinvested, without a sales charge, in shares of the Fund from which
the distribution is paid.

Generally, for federal income tax purposes, Fund distributions are taxable as ordinary income, except that any
distributions of long-term capital gains will be taxed as such regardless of how long Fund shares have been held.
Special tax rules apply to Fund distributions to retirement plans. A tax advisor should be consulted to determine the
suitability of the Fund as an investment by such a plan and the tax treatment of distributions by the Fund. A tax
advisor can also provide information on the potential impact of possible foreign, state, and local taxes. A Fund’s
investments in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield on those
securities would be decreased.

To the extent that distributions the Funds pay are derived from a source other than net income (such as a return of
capital), a notice will be included in your quarterly statement pursuant to Section 19(a) of the Investment Company
Act of 1940, as amended, and Rule 19a-1 disclosing the source of such distributions. Furthermore, such notices shall
be posted monthly on our web site at www.principalfunds.com. You may request a copy of all such notices, free of
charge, by telephoning 1-800-222-5852. The amounts and sources of distributions included in such notices are
estimates only and you should not rely upon them for purposes of reporting income taxes. The Fund will send
shareholders a Form 1099-DIV for the calendar year that will tell shareholders how to report these distributions for
federal income tax purposes.


FREQUENT PURCHASES AND REDEMPTIONS

The Fund is not designed for frequent trading or market timing activity. The Fund does not knowingly accommodate
frequent purchases and redemptions of fund shares by investors. If you intend to trade frequently and/or use market
timing investment strategies, you should not purchase this Fund.

We consider frequent trading and market timing activities to be abusive trading practices because they:
·	Disrupt the management of the Fund by
	·	forcing the Fund to hold short-term (liquid) assets rather than investing for long-term growth, which results in
		lost investment opportunities for the Fund and
	·	causing unplanned portfolio turnover;
·	Hurt the portfolio performance of the Fund; and
·	Increase expenses of the Fund due to
	·	increased broker-dealer commissions and
	·	increased recordkeeping and related costs.

Certain Funds may be at greater risk for abusive trading practices. For example, those Funds that invest in foreign
securities may appeal to investors attempting to take advantage of time-zone arbitrage. If we are not able to identify
such abusive trading practices, the Fund and their shareholders may be harmed.

We have adopted policies and procedures to help us identify and prevent abusive trading practices. In addition, the
Fund monitors shareholder trading activity to identify and take action against abuses. While our policies and
procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we
will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our
policies and procedures in a fair and uniform manner. If we are not able to identify such abusive trading practices, the
abuses described above may harm the Fund.

If we, or a Fund, deem abusive trading practices to be occurring, we will take action that may include, but is not
limited to:
·	Rejecting exchange instructions from the shareholder or other person authorized by the shareholder to direct
	exchanges;
·	Restricting submission of exchange requests by, for example, allowing exchange requests to be submitted by
	1st class U.S. mail only and disallowing requests made by facsimile, overnight courier, telephone or via the
	internet;
·	Limiting the number of exchanges during a year;
·	Requiring a holding period of a minimum of 30 days before permitting exchanges among the Funds where there
	is evidence of at least one round-trip exchange (exchange or redemption of shares that were purchased within
	30 days of the exchange/redemption); and
·	Taking such other action as directed by the Fund.

The Fund has reserved the right to accept or reject, without prior written notice, any exchange requests. In some
instances, an exchange may be completed prior to a determination of abusive trading. In those instances, we will
reverse the exchange. We will give you notice in writing in this instance.

TAX CONSIDERATIONS

Shareholders are responsible for federal income tax (and any other taxes, including state and local income taxes, if
applicable) on dividends and capital gains distributions whether such dividends or distributions are paid in cash or
reinvested in additional shares. Special tax rules apply to distributions from IRAs and other retirement accounts. You
should consult a tax advisor to determine the suitability of the Fund as an investment by such a plan and the tax
treatment of Fund distributions.

Generally, dividends paid by the Fund from interest, dividends, or net short-term capital gains will be taxed as
ordinary income. Distributions properly designated by the Fund as deriving from net gains on securities held for more
than one year are taxable as such (generally at a 15% tax rate), regardless of how long you have held your shares.
For taxable years beginning before January 1, 2013, distributions of investment income properly designated by the
Fund as derived from “qualified dividend income” will be taxed at the rates applicable to long-term capital gains.


Investments by a Fund in foreign securities may be subject to foreign withholding taxes. In that case, the Fund’s yield
on those securities would be decreased. Shareholders of the Fund that invest in foreign securities may be entitled to
claim a credit or deduction with respect to foreign taxes. In addition, the Fund’s investments in foreign securities or
foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or
amount of the Fund’s distributions.

Early in each calendar year, the Fund will notify you of the amount and tax status of distributions paid to you for the
preceding year.

A dividend or distribution made shortly after the purchase of shares of a Fund by a shareholder, although in effect a
return of capital to that shareholder, would be taxable to that shareholder as described above, subject to a holding
period requirement for dividends designated as qualified dividend income.

Because of tax law requirements, you must provide the Fund with an accurate and certified taxpayer identification
number (for individuals, generally a Social Security number) to avoid “back-up” withholding, which is currently
imposed at a rate of 28%.

Any gain resulting from the redemption or exchange of your shares will generally also be subject to tax. For shares
acquired after January 1, 2012, you will need to select a cost basis method to be used to calculate your reported
gains and losses prior to or at the time of any redemption or exchange. If you do not select a method, the Fund’s
default method of average cost will be applied to the transactions. The cost basis method used on your account
could significantly affect your taxes due and should be carefully considered. You should consult your tax advisor for
more information on your own tax situation, including possible foreign, state, and local taxes.

Investments by a Fund in certain debt instruments or derivatives may cause the Fund to recognize taxable income in
excess of the cash generated by such instruments. As a result, the Fund could be required at times to liquidate other
investments in order to satisfy its distribution requirements under the Internal Revenue Code. The Fund’s use of
derivatives will also affect the amount, timing, and character of the Fund’s distributions.

The information contained in this prospectus is not a complete description of the federal, state, local, or foreign tax
consequences of investing in the Fund. You should consult your tax advisor before investing in the Fund.

THE COSTS OF INVESTING

Fees and Expenses of the Funds
Institutional Class fund shares are sold without a front-end sales charge and do not have a contingent deferred sales
charge. There is no sales charge on shares of the Fund purchased with reinvested dividends or other distributions.

Ongoing Fees
Ongoing Fees reduce the value of each share. Because they are ongoing, they increase the cost of investing in the
Fund.

The Fund pays ongoing fees to the Manager and others who provide services to the Fund. These fees include:
·	Management Fee – Through the Management Agreement with the Fund, Principal has agreed to provide
	investment advisory services and corporate administrative services to the Fund.
·	Other Expenses – A portion of expenses that are allocated to all classes of the Fund. An example includes a
	Transfer Agent Fee (Principal Shareholder Services, Inc. (“PSS”) has entered into a Transfer Agency Agreement
	with the Fund under which PSS provides transfer agent services to the Institutional Class shares of the Fund.
	These services are currently provided at cost.). Institutional Class shares of the Fund also pay expenses of
	registering and qualifying shares for sale, the cost of producing and distributing reports and prospectuses to
	Institutional Class shareholders, the cost of shareholder meetings held solely for Institutional Class shares, and
	other operating expenses of the Fund.

INTERMEDIARY COMPENSATION

Shares of the Fund are sold primarily through intermediaries, such as brokers, dealers, investment advisors, banks,
trust companies, pension plan consultants, retirement plan administrators and insurance companies.

Principal or its affiliates enter into agreements with some intermediaries pursuant to which the intermediaries receive
payments for providing services relating to Fund shares. Examples of such services are administrative, networking,
recordkeeping, sub-transfer agency and shareholder services. In some situations the Fund will reimburse Principal or
its affiliates for making such payments; in others the Fund may make such payments directly to intermediaries.


In addition, Principal or its affiliates may pay, without reimbursement from the Fund, compensation from their own
resources to certain intermediaries that support the distribution of shares of the Fund or provide services to Fund
shareholders.

Such payments may vary, but generally do not exceed: (a) 0.10% of the current year's sales of Fund shares by that
intermediary or (b) 0.10% of the average net asset value of Fund shares held by clients of such intermediary. The
amounts paid to intermediaries vary by share class and by fund.

Additionally, in some cases the Distributor and its affiliates will provide payments or reimbursements in connection
with the costs of conferences, educational seminars, training and marketing efforts related to the Funds. Such
activities may be sponsored by intermediaries or the Distributor. The costs associated with such activities may
include travel, lodging, entertainment, and meals. In some cases the Distributor will also provide payment or
reimbursement for expenses associated with transactions ("ticket") charges and general marketing expenses.

For more information, see the Statement of Additional Information (SAI).

The payments described in this prospectus may create a conflict of interest by influencing your Financial Professional
or your intermediary to recommend the Fund over another investment, or to recommend one share class of the Fund
over another share class. Ask your Financial Professional or visit your intermediary's website for more information
about the total amounts paid to them by Principal and its affiliates, and by sponsors of other mutual funds your
Financial Professional may recommend to you.

Your intermediary may charge you additional fees other than those disclosed in this prospectus. Ask your Financial
Professional about any fees and commissions they charge.

FUND ACCOUNT INFORMATION

Orders Placed by Intermediaries
Principal Funds may have an agreement with your intermediary, such as a broker-dealer, third party administrator, or
trust company, that permits the intermediary to accept orders on behalf of the Fund until 3 p.m. Central Time. The
agreement may include authorization for your intermediary to designate other intermediaries (“sub-designees”) to
accept orders on behalf of the Fund on the same terms that apply to the intermediary. In such cases, if your
intermediary or a sub-designee receives your order in correct form by 3 p.m. Central Time, transmits it to the Fund,
and pays for it in accordance with the agreement, the Fund will price the order at the next net asset value per share it
computes after your intermediary or sub-designee received your order.

Note: The time at which the Fund prices orders and the time until which the Fund or your intermediary or sub-
	designee will accept orders may change in the case of an emergency or if the NYSE closes at a time other
	than 3 p.m. Central Time.
Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the signature(s) must be guaranteed by a
commercial bank, trust company, credit union, savings and loan, national securities exchange member, or brokerage
firm. A signature guaranteed by a notary public or savings bank is not acceptable. Signature guarantees are
required:
·	if you sell more than $500,000 from any one Fund;
·	if a sales proceeds check is payable to other than the account shareholder(s);
·	to change ownership of an account;
·	to add telephone transaction services and/or wire privileges to an existing account if there is not a common
	owner between the bank account and mutual fund account;
·	to change bank account information designated under an existing telephone withdrawal plan if there is not a
	common owner between the bank account and mutual fund account;
·	to exchange or transfer among accounts with different ownership; and
·	to have a sales proceeds check mailed to an address other than the address on the account or to the address on
	the account if it has been changed within the preceding 15 days.

Reservation of Rights
Principal Funds reserves the right to amend or terminate the special plans described in this prospectus.
Shareholders will be notified of any such action to the extent required by law.

Financial Statements

Shareholders will receive annual financial statements for the Funds, audited by the Funds’ independent registered

public accounting firm. Shareholders will also receive a semiannual financial statement that is unaudited.

FINANCIAL HIGHLIGHTS

The following financial highlights tables are intended to help you understand the Fund’s financial performance for the

periods shown. Certain information reflects results for a single Fund share. The total returns in each table represent

the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment

of all distributions). This information has been audited by Ernst & Young LLP, Independent Registered Public

Accounting Firm, whose report, along with each Fund’s financial statements, is included in Principal Funds, Inc.

Annual Report to Shareholders for the fiscal year ended October 31, 2011 which is available upon request, and

incorporated by reference into the SAI.

To request a free copy of the latest annual or semiannual report for the Fund, you may telephone 1-800-222-5852.

ADDITIONAL INFORMATION

Additional information about the Fund (including the Fund’s policy regarding the disclosure of portfolio securities) is

available in the Statement of Additional Information dated February 29, 2012, which is incorporated by reference into

this prospectus. Additional information about the Funds’ investments is available in the Fund’s annual and

semiannual reports to shareholders. In the Fund’s annual report, you will find a discussion of the market conditions

and investment strategies that significantly affected the Funds’ performance during the last fiscal year. The

Statement of Additional Information and the Fund’s annual and semiannual reports can be obtained free of charge by

writing Principal Funds, P.O. Box 8024, Boston, MA 02266-8024. In addition, the Fund makes its Statement of

Additional Information and annual and semiannual reports available, free of charge, on our website

www.principal.com. To request this and other information about the Fund and to make shareholder inquiries,

telephone 1-800-222-5852.

Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the

Securities and Exchange Commission’s Public Reference Room in Washington, D.C. Information on the operation of

the Public Reference Room may be obtained by calling the Commission at 1-202-551-8090. Reports and other

information about the Fund are available on the EDGAR Database on the Commission’s internet site at http://

www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request

at the following e-mail address: publicinfo@sec.gov, or by writing the Commission’s Public Reference Section, 100 F

Street, N.E., Washington, D.C. 20549-1520.

The U.S. government does not insure or guarantee an investment in any of the Funds.

Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution, nor are

shares of the Funds federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or

any other agency.

Principal Funds, Inc. SEC File 811-07572


PRINCIPAL FUNDS, INC. (“PFI”)

Institutional Class Shares

The date of this Prospectus is February 29, 2012.
Ticker Symbol
Fund Name	Institutional
Real Estate Securities	PIREX




The Securities and Exchange Commission has not approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.


TABLE OF CONTENTS


Fund Summary
Real Estate Securities Fund	4
Additional Information about Investment Strategies and Risks	7
Portfolio Holdings Information	16
Management of the Funds	17
Pricing of Fund Shares	18
Purchase of Fund Shares	19
Redemption of Fund Shares	20
Exchange of Fund Shares	21
Dividends and Distributions	21
Frequent Purchases and Redemptions	22
Tax Considerations	22
The Costs of Investing	23
Intermediary Compensation	23
Fund Account Information	24
Financial Highlights	25
Additional Information	28




3


	Net Asset Value, Beginning of Period	Net Investment Income (Loss)(a)	Net Realized and Unrealized Gain (Loss) on Investments	Total From Investment Operations	Dividends from Net Investment Income	Distributions from Realized Gains	Total Dividends and Distributions	Net Asset Value, End of Period



REAL ESTATE SECURITIES FUND
Institutional shares
2011	15 .84	0.14	1 .65	1 .79	(0 .22)	–	(0 .22)	17 .41
2010	11 .62	0.30	4 .23	4 .53	(0 .31)	–	(0 .31)	15 .84
2009	11 .83	0.31	(0.20)	0 .11	(0 .32)	–	(0 .32)	11 .62
2008	24 .96	0.33	(7.37)	(7.04)	(0 .36)	(5.73)	(6 .09)	11 .83
2007	27 .56	0.26	(0.55)	(0.29)	(0 .24)	(2.07)	(2 .31)	24 .96


Total Return	Net Assets, End of Period (in thousands)	Ratio of Expenses to Average Net Assets	Ratio of Net Investment Income to Average Net Assets	Portfolio Turnover Rate





11 .39	1,252,657	0 .85	0 .81	29 .3
39 .37	1,303,556	0 .85	2 .14	52 .2
1 .74	1,137,929	0 .85	3 .22	57 .3
(35 .71)	894,685	0 .84	2 .05	47 .2
(1 .48)	1,110,332	0 .83	1 .04	77 .8 (b)

(a)	Calculated based on average shares outstanding during the period.
(b)	Portfolio turnover rate excludes portfolio realignment from the acquisition of WM REIT Fund.