-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+2MdQgvQ1QLqNBHR5HZFuvwP3IeZ7BxwIJkaUgjygyzKb/CYfuQ7Vjg95ox1+ug tJSGPA+nySdCk0R803sNkA== 0000869392-98-000064.txt : 19980202 0000869392-98-000064.hdr.sgml : 19980202 ACCESSION NUMBER: 0000869392-98-000064 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19980130 EFFECTIVENESS DATE: 19980130 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM ASSET ALLOCATION FUNDS CENTRAL INDEX KEY: 0000914209 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046746615 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-51017 FILM NUMBER: 98517322 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921000 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM LIFE STAGES ASSET ALLOCATION TRUST DATE OF NAME CHANGE: 19931027 485BPOS 1 As filed with the Securities and Exchange Commission on January 30, 1998 Registration No. 33-51017 811-7121 - ----------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM N-1A ---- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X / ---- ---- Pre-Effective Amendment No. / / ---- ---- Post-Effective Amendment No. 5 / X / and ---- ---- REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X / ACT OF 1940 ---- ---- Amendment No. 6 / X / (Check appropriate box or boxes) ---- --------------- PUTNAM ASSET ALLOCATION FUNDS (Exact name of registrant as specified in charter) One Post Office Square, Boston, Massachusetts 02109 (Address of principal executive offices) Registrant's Telephone Number, including Area Code (617) 292-1000 It is proposed that this filing will become effective (check appropriate box) ---- / / immediately upon filing pursuant to paragraph (b) - ---- ---- / X / on January 30, 1998 pursuant to paragraph (b) - ---- ---- / / 60 days after filing pursuant to paragraph (a)(1) - ---- ---- / / on (date) pursuant to paragraph (a)(1) - ---- ---- / / 75 days after filing pursuant to paragraph (a)(2) - ---- ---- / / on (date) pursuant to paragraph (a)(2) of Rule 485. - ---- If appropriate, check the following box: ---- / / this post-effective amendment designates a new - ---- effective date for a previously filed post-effective amendment. -------------- JOHN R. VERANI, Vice President PUTNAM ASSET ALLOCATION FUNDS One Post Office Square Boston, Massachusetts 02109 (Name and address of agent for service) --------------- Copy to: JOHN W. GERSTMAYR, Esquire ROPES & GRAY One International Place Boston, Massachusetts 02110 ---------------------- PUTNAM ASSET ALLOCATION FUNDS CROSS REFERENCE SHEET (as required by Rule 481(a)) Part A N-1A Item No. Location 1. Cover Page . . . . . . . . . . . . . . Cover page 2. Synopsis . . . . . . . . . . . . . . . Expenses summary 3. Condensed Financial Information. . . . Financial highlights; How performance is shown 4. General Description of Registrant. . . Objectives; How the funds pursue their objectives; Organization and history 5. Management of the Fund . . . . . . . . Expenses summary; How the funds are managed; About Putnam Investments, Inc. 5A. Management's Discussion of Fund. . . . (Contained in the Performance annual report of the Registrant) 6. Capital Stock and Other Securities . . Cover page; Organization and history; How a fund makes distributions to shareholders; tax information 7. Purchase of Securities Being Offered . How to buy shares; Distribution plans; How to sell shares; How to exchange shares; How a fund values its shares 8. Redemption or Repurchase . . . . . . . How to buy shares; How to sell shares; How to exchange shares; Organization and history 9. Pending Legal Proceedings. . . . . . . Not applicable Part B N-1A Item No. Location 10. Cover Page . . . . . . . . . . . . . . Cover page 11. Table of Contents. . . . . . . . . . . Cover page 12. General Information and History. . . . Organization and history (Part A) 13. Investment Objectives and Policies . . How the funds pursue their objectives (Part A); Investment restrictions; Miscellaneous investment practices 14. Management of the Registrant . . . . . Management (Trustees; Trustee fees; Officers); Additional officers 15. Control Persons and Principal. . . . . Management (Trustees; Holders of Securities Officers); Charges and expenses (Share ownership) 16. Investment Advisory and Other. . . . . Organization and Services history (Part A); Management (Trustees; Officers; The management contract; Principal underwriter; Investor servicing agent and custodian); Charges and expenses; Distribution plans; Independent accountants and financial statements 17. Brokerage Allocation . . . . . . . . . Management(Portfolio transactions); Charges and expenses 18. Capital Stock and Other Securities . . Organization and history (Part A); How a fund makes distributions to shareholders; tax information (Part A); Suspension of redemptions 19. Purchase, Redemption, and Pricing. . . How to buy shares of Securities Being Offered (Part A); How to sell shares (Part A); How to exchange shares (Part A); How to buy shares; Determination of net asset value; Suspension of redemptions 20. Tax Status . . . . . . . . . . . . . . How a fund makes distributions to shareholders; tax information (Part A); Taxes 21. Underwriters . . . . . . . . . . . . . Management (Principal underwriter); Charges and expenses 22. Calculation of Performance Data. . . . How performance is shown (Part A); Investment performance; Standard performance measures 23. Financial Statements . . . . . . . . . Independent accountants and financial statements Part C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of the Registration Statement. PROSPECTUS January 30, 1998 Putnam Asset Allocation Funds Putnam Asset Allocation: Growth Portfolio Putnam Asset Allocation: Balanced Portfolio Putnam Asset Allocation: Conservative Portfolio Class A, B, C and M shares This prospectus explains concisely what you should know before investing in Putnam Asset Allocation Funds (the "Trust"), a series investment company offering three separate portfolios: Putnam Asset Allocation: Growth Portfolio, Putnam Asset Allocation: Balanced Portfolio and Putnam Asset Allocation: Conservative Portfolio (the "funds"). Please read it carefully and keep it for future reference. You can find more detailed information in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or other information, call Putnam Investor Services at 1-800-225-1581. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. BOSTON * LONDON * TOKYO ABOUT THE FUNDS Expenses summary ................................................................. This section describes the sales charges, management fees, and annual operating expenses that apply to various classes of a fund's shares. Use it to help you estimate the impact of transaction costs and recurring expenses on your investment over time. Financial highlights ................................................................. Study these tables to see, among other things, how a fund performed each year for the past 10 years or since it began investment operations if it has been in operation for less than 10 years. Objectives ................................................................. Read this section to make sure a fund's objective is consistent with your own. How the funds pursue their objectives ................................................................. This section explains in detail how a fund seeks its investment objective. How performance is shown ................................................................. This section describes and defines the measures used to assess fund performance. All data are based on past investment results and do not predict future performance. How the funds are managed ................................................................. Consult this section for information about a fund's management, allocation of its expenses, and how it purchases and sells securities . Organization and history ................................................................. In this section, you will learn when a fund was introduced, how it is organized, how it may offer shares, and who its Trustees are. ABOUT YOUR INVESTMENT Alternative sales arrangements ................................................................. Read this section for descriptions of the classes of shares this prospectus offers and for points you should consider when making your choice. How to buy shares ................................................................. This section describes the ways you may purchase shares and tells you the minimum amounts required to open various types of accounts. It explains how sales charges are determined and how you may become eligible for reduced sales charges . Distribution plans ................................................................. This section tells you what distribution fees are charged against each class of shares. How to sell shares ................................................................. In this section you can learn how to sell fund shares, either directly to a fund or through an investment dealer. How to exchange shares ................................................................. Find out in this section how you may exchange fund shares for shares of other Putnam funds. The section also explains how exchanges can be made without sales charges and the conditions under which sales charges may be required. How a fund values its shares ................................................................. This section explains how a fund determines the value of its shares. How each fund makes distributions to shareholders; tax information ................................................................. This section describes the various options you have in choosing how to receive fund dividends. It also discusses the tax status of the payments and counsels you to seek specific advice about your own situation. ABOUT PUTNAM INVESTMENTS, INC. ................................................................. Read this section to learn more about the companies that provide marketing, investment management, and shareholder account services to Putnam funds and their shareholders. APPENDIX Securities ratings About the funds EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes your maximum transaction costs from investing in a fund and expenses based on the most recent fiscal year. The examples show the cumulative expenses attributable to a hypothetical $1,000 investment over specified periods. Class A Class B Class C Class M shares shares shares shares Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 5.75% NONE* NONE* 3.50%* 5.0% in the Deferred sales charge first year, 1.0% in (as a percentage of the declining to 1.0% the first lower of original in the sixth year, year and purchase price or and eliminated eliminated redemption proceeds) NONE** thereafter thereafter NONE Annual fund operating expenses (as a percentage of average net assets) Total fund Management 12b-1 Other operating fees fees expenses expenses - ---------- ----- ------------------- Growth Portfolio Class A 0.66% 0.25% 0.48%1.39% Class B 0.66% 1.00% 0.48%2.14% Class C 0.66% 1.00% 0.48%2.14% Class M 0.66% 0.75% 0.48%1.89% Balanced Portfolio Class A 0.64% 0.25% 0.38%1.27% Class B 0.64% 1.00% 0.38%2.02% Class C 0.64% 1.00% 0.38%2.02% Class M 0.64% 0.75% 0.38%1.77% Conservative Portfolio Class A 0.70% 0.25% 0.43%1.38% Class B 0.70% 1.00% 0.43%2.13% Class C 0.70% 1.00% 0.43%2.13% Class M 0.70% 0.75% 0.43%1.88% The table is provided to help you understand the expenses of investing and your share of fund operating expenses. The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Examples Your investment of $1,000 would incur the following expenses, assuming 5% annual return and, except as indicated, redemption at the end of each period: 1 3 5 10 year years years years Growth Portfolio Class A $71 $99 $129 $215 Class B $72 $97 $135 $228 *** Class B (no redemption) $22 $67 $115 $228 *** Class C $32 $67 $115 $247 Class C (no redemption) $22 $67 $115 $247 Class M $54 $92 $134 $248 Balanced Portfolio Class A $70 $95 $123 $202 Class B $71 $93 $129 $216 *** Class B (no redemption) $21 $63 $109 $216 *** Class C $31 $63 $109 $235 Class C (no redemption) $21 $63 $109 $235 Class M $52 $89 $128 $236 Conservative Portfolio Class A $71 $99 $129 $214 Class B $72 $97 $134 $227 *** Class B (no redemption) $22 $67 $114 $227 *** Class C $32 $67 $114 $246 Class C (no redemption) $22 $67 $114 $246 Class M $53 $92 $133 $247 The examples do not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the examples to assume a 5% annual return, but actual annual return varies. * The higher 12b-1 fees borne by class B, class C and class M shares may cause long-term shareholders to pay more than the economic equivalent of the maximum permitted front-end sales charge on class A shares. ** A deferred sales charge of up to 1.00% is assessed on certain redemptions of class A shares that were purchased without an initial sales charge. See "How to buy shares - Class A shares." *** Reflects conversion of class B shares to class A shares (which pay lower ongoing expenses) approximately eight years after purchase. See "Alternative sales arrangements." FINANCIAL HIGHLIGHTS The following tables present per share financial information for class A, B, C and M shares. This information has been derived from the Trust's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request. FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio
For the period CLASS A February 8, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $11.41 $10.06 $8.43 $8.50 Investment Operations: Net investment income(d) .17 .18 .18(a) .10(a) Net realized and unrealized gain (loss) on investments 2.69 1.63 1.53 (.17) Total from investment operations 2.86 1.81 1.71 (.07) Less Distributions: From net investment income (.16) (.19) (.08) From net realized gain on investments (.47) (.27) Total distributions (.63) (.46) (.08) Net asset value, end of period $13.64 $11.41 $10.06 $8.43 Total investment return at 26.25 18.75 20.45 (.82)* net asset value (%)(b) Net assets, end of period $486,107 $210,531 $122,228 $43,669 (in thousands) Ratio of expenses to average net assets (%)(c) 1.39 1.45 1.49(a) .78(a)* Ratio of net investment income to average net assets (%) 1.42 1.72 1.98(a) 1.31(a)* Portfolio turnover (%) 99.96 100.93 88.36 39.90* Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio
For the period CLASS B February 16, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $11.29 $9.97 $8.39 $8.50 Investment Operations: Net investment income(d) .08 .10 .11(a) .06(a) Net realized and unrealized gain (loss) on investments 2.67 1.64 1.52 (.17) Total from investment operations 2.75 1.74 1.63 (.11) Less Distributions: From net investment income (.10) (.15) (.05) From net realized gain on investments (.47) (.27) Total distributions (.57) (.42) (.05) Net asset value, end of period $13.47 $11.29 $9.97 $8.39 Total investment return at net asset value (%)(b) 25.33 18.04 19.57 (1.29)* Net assets, end of period (in thousands) $357,501 $199,871 $116,263 $50,664 Ratio of expenses to average net assets (%)(c) 2.14 2.21 2.23(a) 1.21(a)* Ratio of net investment income to average net assets (%) .68 .95 1.22(a) .80(a)* Portfolio turnover (%) 99.96 100.93 88.36 39.90* Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio For the period CLASS C September 1, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $11.24 $9.93 $8.39 $8.46 Investment Operations: Net investment income(d) .08 .10 .11(a) .01(a) Net realized and unrealized gain (loss) on investments 2.65 1.63 1.51 (.08) Total from investment operations 2.73 1.73 1.62 (.07) Less Distributions: From net investment income (.12) (.15) (.08) From net realized gain on investments (.47) (.27) Total distributions (.59) (.42) (.08) Net asset value, end of period $13.38 $11.24 $9.93 $8.39 Total investment return at net asset value (%)(b) 25.31 18.01 19.46 (.83)* Net assets, end of period (in thousands) $68,749 $27,556 $7,985 $385 Ratio of expenses to average net assets (%)(c) 2.14 2.23 2.23(a) .15(a)* Ratio of net investment income to average net assets (%) .67 .94 1.24(a) .14(a)* Portfolio turnover (%) 99.96 100.93 88.36 39.90* Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.01 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio For the period CLASS M February 3, 1995+ Year ended September 30 to September 30 1997 1996 1995 Net asset value, beginning of period $11.32 $10.01 $8.39 Investment Operations: Net investment income(d) .11 .12 .08(a) Net realized and unrealized gain (loss) on investments 2.67 1.64 1.54 Total from investment operations 2.78 1.76 1.62 Less Distributions: From net investment income (.14) (.18) From net realized gain on investments (.47) (.27) Total distributions (.61) (.45) Net asset value, end of period $13.49 $11.32 $10.01 Total investment return at net asset value (%)(b) 25.63 18.21 19.31* Net assets, end of period (in thousands) $34,381 $12,369 $3,160 Ratio of expenses to average net assets (%)(c) 1.89 1.95 1.45(a)* Ratio of net investment income to average net assets (%) .92 1.16 .79(a)* Portfolio turnover (%) 99.96 100.93 88.36 Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Balanced Portfolio For the period CLASS A February 7, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $10.71 $9.67 $8.33 $8.50 Investment Operations: Net investment income(d) .28 .29 .27(a) .16(a) Net realized and unrealized gain (loss) on investments 2.13 1.32 1.27 (.28) Total from investment operations 2.41 1.61 1.54 (.12) Less Distributions: From net investment income (.31) (.28) (.20) (.05) From net realized gain on investments (.53) (.29) Total distributions (.84) (.57) (.20) (.05) Net asset value, end of period $12.28 $10.71 $9.67 $8.33 Total investment return at net asset value (%)(b) 23.82 17.41 18.73 (1.47)* Net assets, end of period $680,720 $327,326 $152,317 $54,483 (in thousands) Ratio of expenses to average net assets (%)(c) 1.27 1.33 1.32(a) .83(a)* Ratio of net investment income to average net assets (%) 2.44 2.83 2.95(a) 2.13(a)* Portfolio turnover (%) 136.75 122.12 106.03 52.62* Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Balanced Portfolio For the period CLASS B February 11, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $10.67 $9.64 $8.31 $8.50 Investment Operations: Net investment income(d) .19 .21 .20(a) .11(a) Net realized and unrealized gain (loss) on investments 2.13 1.32 1.26 (.27) Total from investment operations 2.32 1.53 1.46 (.16) Less Distributions: From net investment income (.23) (.21) (.13) (.03) From net realized gain on investments (.53) (.29) Total distributions (.76) (.50) (.13) (.03) Net asset value, end of period $12.23 $10.67 $9.64 $8.31 Total investment return at net asset value (%)(b) 22.95 16.54 17.83 (1.89)* Net assets, end of period $442,463 $264,830 $159,230 $81,093 (in thousands) Ratio of expenses to average net assets (%)(c) 2.02 2.08 2.07(a) 1.23(a)* Ratio of net investment income to average net assets (%) 1.70 2.08 2.26(a) 1.41(a)* Portfolio turnover (%) 136.75 122.12 106.03 52.62* Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.03 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Balanced Portfolio For the period CLASS C September 1, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $10.64 $9.62 $8.31 $8.41 Investment Operations: Net investment income(d) .19 .22 .20(a) .01(a) Net realized and unrealized gain (loss) on investments 2.11 1.30 1.27 (.08) Total from investment operations 2.30 1.52 1.47 (.07) Less Distributions: From net investment income (.23) (.21) (.16) (.03) From net realized gain on investments (.53) (.29) Total distributions (.76) (.50) (.16) (.03) Net asset value, end of period $12.18 $10.64 $9.62 $8.31 Total investment return at net asset value (%)(b) 22.86 16.47 17.89 (.84)* Net assets, end of period $70,847 $29,724 $11,921 $441 (in thousands) Ratio of expenses to average net assets (%)(c) 2.02 2.09 2.09(a) .16(a)* Ratio of net investment income to average net assets (%) 1.70 2.18 2.22(a) .11(a)* Portfolio turnover (%) 136.75 122.12 106.03 52.62* Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.01 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Balanced Portfolio For the period CLASS M February 6, 1995+ Year ended September 30 to September 30 1997 1996 1995 Net asset value, beginning of period $10.71 $9.66 $8.34 Investment Operations: Net investment income(d) .22 .24 .14(a) Net realized and unrealized gain (loss) on investments 2.13 1.34 1.31 Total from investment operations 2.35 1.58 1.45 Less Distributions: From net investment income (.26) (.24) (.13) From net realized gain on investments (.53) (.29) Total distributions (.79) (.53) (.13) Net asset value, end of period $12.27 $10.71 $9.66 Total investment return at net asset value (%)(b) 23.19 17.05 17.46* Net assets, end of period $44,121 $14,967 $3,509 (in thousands) Ratio of expenses to average net assets (%)(c) 1.77 1.84 1.38(a)* Ratio of net investment income to average net assets (%) 1.93 2.42 1.56(a)* Portfolio turnover (%) 136.75 122.12 106.03 Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS A February 7, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $9.69 $9.19 $8.23 $8.50 Investment Operations: Net investment income .38(d) .36 .33(a) .18(a)(d) Net realized and unrealized gain (loss) on investments 1.22 .68 .90 (.39) Total from investment operations 1.60 1.04 1.23 (.21) Less Distributions: From net investment income (.35) (.36) (.27) (.06) From net realized gain on investments (.33) (.18) Total distributions (.68) (.54) (.27) (.06) Net asset value, end of period $10.61 $9.69 $9.19 $8.23 Total investment return at net asset value (%)(b) 17.26 11.73 15.27 (2.47)* Net assets, end of period $295,239 $106,933 $57,341 $25,782 (in thousands) Ratio of expenses to average net assets (%)(c) 1.38 1.47 1.22(a) .75(a)* Ratio of net investment income to average net assets (%) 3.74 4.08 4.48(a) 2.41(a)* Portfolio turnover (%) 219.44 183.67 159.80 59.27* Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of $0.03 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for periods ended on or after September 30, 1995 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS B February 18, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $9.66 $9.16 $8.22 $8.50 Investment Operations: Net investment income .30(d) .29 .30(a) .15(a)(d) Net realized and unrealized gain (loss) on investments 1.22 .68 .85 (.39) Total from investment operations 1.52 .97 1.15 (.24) Less Distributions: From net investment income (.28) (.29) (.21) (.04) From net realized gain on investments (.33) (.18) Total distributions (.61) (.47) (.21) (.04) Net asset value, end of period $10.57 $9.66 $9.16 $8.22 Total investment return at net asset value (%)(b) 16.36 10.96 14.22 (2.79)* Net assets, end of period (in thousands) $138,457 $94,954 $65,783 $38,711 Ratio of expenses to average net assets (%)(c) 2.13 2.22 1.98(a) 1.21(a)* Ratio of net investment income to average net assets (%) 2.97 3.33 3.81(a) 1.92(a)* Portfolio turnover (%) 219.44 183.67 159.80 59.27* Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.04 per share. Expenses for the year ended September 30, 1995 reflect a reduction of $0.03 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for periods ended on or after September 30, 1995 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS C September 1, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $9.64 $9.15 $8.22 $8.33 Investment Operations: Net investment income .29(d) .30 .29(a) .03(a)(d) Net realized and unrealized gain (loss) on investments 1.24 .66 .87 (.10) Total from investment operations 1.53 .96 1.16 (.07) Less Distributions: From net investment income (.28) (.29) (.23) (.04) From net realized gain on investments (.33) .18 Total distributions (.61) (.47) (.23) (.04) Net asset value, end of period $10.56 $9.64 $9.15 $8.22 Total investment return at net asset value (%)(b) 16.52 10.86 14.41 (.80)* Net assets, end of period (in thousands) $29,032 $16,326 $7,198 $273 Ratio of expenses to average net assets (%)(c) 2.13 2.22 1.89(a) .16(a)* Ratio of net investment income to average net assets (%) 2.96 3.30 3.92(a) .48(a)* Portfolio turnover (%) 219.44 183.67 159.80 59.27* Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of none per share. Expenses for the year ended September 30, 1995 reflect a reduction of $0.03 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for periods ended on or after September 30, 1995 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS M February 7, 1995+ Year ended September 30 to September 30 1997 1996 1995 Net asset value, beginning of period $9.67 $9.18 $8.21 Investment Operations: Net investment income .32(d) .33 .21(a) Net realized and unrealized gain (loss) on investments 1.24 .66 .92 Total from investment operations 1.56 .99 1.13 Less Distributions: From net investment income (.31) (.32) (.16) From net realized gain on investments (.33) (.18) Total distributions (.64) (.50) (.16) Net asset value, end of period $10.59 $9.67 $9.18 Total investment return at net asset value (%)(b) 16.80 11.17 13.92* Net assets, end of period (in thousands) $12,689 $4,622 $1,366 Ratio of expenses to average net assets (%)(c) 1.88 1.96 1.10(a)* Ratio of net investment income to average net assets (%) 3.19 3.60 2.73(a)* Portfolio turnover (%) 219.44 183.67 159.80 Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. Expenses for the year ended September 30, 1995 reflect a reduction of $0.02 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for periods ended on or after September 30, 1995 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVES Putnam Asset Allocation: Growth Portfolio seeks capital appreciation. Putnam Asset Allocation: Balanced Portfolio seeks total return. Putnam Asset Allocation: Conservative Portfolio seeks total return consistent with preservation of capital. Each fund is represented by a separate series of shares of beneficial interest and pursues its investment objective through its separate investment policies. None of the funds is intended to be a complete investment program, and there is no assurance that any fund will achieve its objective. HOW THE FUNDS PURSUE THEIR OBJECTIVES Basic investment strategy Each fund has a different strategic allocation that indicates the typical percentage allocation of its investments between equity securities and fixed income securities (including money market instruments), although Putnam Investment Management, Inc., the funds' investment manager ("Putnam Management"), may adjust these allocations within the ranges described below. The funds' different strategic allocations generally correlate to different levels of investment risk. The strategic allocation and the range of active allocation are shown below: Growth Balanced Conservative Portfolio Portfolio Portfolio ----------------- ----------------- ----------------- Strategic Strategic Strategic Allocation Range Allocation Range Allocation Range ----------------- ----------------- ----------------- EQUITY CLASS 80% 65-95% 65% 50-75% 35% 25-45% FIXED INCOME CLASS 20% 5-35% 35% 25-50% 65% 55-75% The percentage limitations are applied at the time of purchase. Each fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of each fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits each fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of each fund's equity and fixed income investments may consist of foreign securities, which involve certain special risks. See "Foreign investments," below. EQUITY CLASS Each fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalizations of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion) and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for a fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of each fund's equity investments. However, each fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. FIXED INCOME CLASS Each fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect a fund's net asset value. Each fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's) and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by a fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, a fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. No fund will purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. In addition, the Conservative Portfolio and the Balanced Portfolio will not purchase any fixed-income security rated, by all of the agencies rating the security, below BBB and Baa, or any unrated security determined by Putnam Management to be of comparable quality, if, as a result, more than 10% of the Conservative Portfolio's or 35% of the Balanced Portfolio's total assets would be invested in securities of that quality. Securities rated BBB or Baa, while considered investment-grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows (for each fund) the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S and P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality.
Growth Portfolio Balanced Portfolio Conservative Portfolio ------------------------- -------------------------- - ------------------------ Unrated Unrated Unrated Rated securities Rated securities Rated securities securities, of comparable securities, of comparable securities, of comparable as percentage quality, as as percentage quality, as as percentage quality, as of net percentage of of net percentage of of net percentage of Rating assets net assets assets net assets assets net assets - ----------------------------------------------------------------- - ------------------------------ "AAA" 7.26% 14.88% 34.71% "AA" 0.02 0.04 0.09 "A" 0.48 0.97 3.79 "BBB" 0.88 1.75 5.42 "BB" 1.12 0.01% 2.10 0.02% 2.28 0.01 "B" 2.57 0.30 4.51 0.70 4.27 0.62 "CCC" 0.22 0.01 0.43 0.02 0.44 0.02 "CC" 0.02 0.02 0.03 ------ ------ ------ ------ - ------- ------ Total: 12.57% 0.32% 24.70% 0.74% 51.03%0.65% - ----------------------------------------------------------------- - ------------------------------------------------------
Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When a fund invests in securities in the lower rating categories, the achievement of that fund's goals is more dependent on Putnam Management's investment analysis than would be the case if that fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. A fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting a fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which a fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing a fund's net asset value. In order to enforce its rights in the event of a default of these securities, a fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect a fund's net asset value. Certain securities held by a fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by a fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. A fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, a fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, a fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which a fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. Each fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. A fund may invest in both the interest-only or "IO" class and the principal- only or "PO" class. Each fund may also invest in asset-backed securities. Asset- backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of a fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which a fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause a fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of a fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on a fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, a fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting a fund's ability to buy or sell those securities at any particular time. Money market instruments. Each fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. Each fund may also hold a portion of its assets in cash. Foreign investments Each fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of a fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. Each fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject a fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of a fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, a fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of that fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit a fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The Conservative Portfolio expects that its investments in foreign securities generally will not exceed 40% of its total assets and each of the Growth and Balanced Portfolios expects that its investments in foreign securities generally will not exceed 60% of its total assets, although each fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions Each fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. A fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which a fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. A fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes a fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes a fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. A fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities a fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, a fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, a fund may also purchase or sell foreign currency on a spot basis. A fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for a fund. Cross hedging transactions by a fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. A fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in a fund's best interest but that securities denominated in that currency are unattractive. In that case a fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, a fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent a fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that a fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning a fund's use of foreign currency exchange transactions. Investments in premium securities At times, each fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. A fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of a fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on a fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in a fund, investors may find it useful to compare a fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time a fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a fund is known as "portfolio turnover." As a result of a fund's investment policies, under certain market conditions each fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing a fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, a fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options Each fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time a fund enters into and terminates a futures contract, that fund realizes a gain or loss. A fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase a fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase a fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. Each fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on a fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although a fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that a fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which a fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that a fund would enter into such option contracts with particular securities dealers who make markets in these options. A fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to that fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by a fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices Each fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. A fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. A fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When a fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, a fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. A fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. A fund may also buy and sell put and call options, including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. A fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. A fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and a fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification Each fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, a fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent a fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which each fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the funds' shareholders. These restrictions prohibit each fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit each fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities );* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change a fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for tax purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the funds pursue their objectives -- Investments in premium securities." Yield is based on the price of the shares, including the maximum initial sales charge in the case of class A and class M shares, but does not reflect any contingent deferred sales charge in the case of class B and class C shares. "Total return" for the one-, five- and ten-year periods (or for the life of a class, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in a fund invested at the maximum public offering price (in the case of class A and class M shares) or reflecting the deduction of any applicable contingent deferred sales charge (in the case of class B and class C shares). Total return may also be presented for other periods or based on investment at reduced sales charge levels. Any quotation of investment performance not reflecting the maximum initial sales charge or contingent deferred sales charge would be reduced if the sales charge were used. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with a fund's investment objectives and policies. These factors should be considered when comparing a fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. HOW THE FUNDS ARE MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for each fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages each fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on each fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of each fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to a fund will be paid from the assets of that fund. General expenses of the Trust will be allocated among and charged to the assets of the funds and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to , or the relative assets of, the funds and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The Trust is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into three series. Only class A, B, C and M shares are offered by this prospectus. Each fund may also offer other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if a fund were liquidated, would receive the net assets of that fund. Each fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), a fund may choose to redeem your shares. You will receive at least 30 days' written notice before a fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. A fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment ALTERNATIVE SALES ARRANGEMENTS Class A shares. If you purchase class A shares , you will generally pay a sales charge at the time of purchase and, as a result, will not have to pay any charges when you redeem the shares. If you purchase class A shares at net asset value you may have to pay a contingent deferred sales charge ("CDSC") when you redeem the shares. Certain purchases of class A shares qualify for reduced sales charges. Class A shares pay lower 12b-1 fees than class B, class C and class M shares. See "How to buy shares -- Class A shares" and "Distribution plans." Class B shares. If you purchase class B shares, you will not pay an initial sales charge, but you may have to pay a CDSC if you redeem the shares within six years. Class B shares also pay a higher 12b-1 fee than class A and class M shares. Class B shares automatically convert into class A shares, based on relative net asset value, approximately eight years after purchase. For more information about the conversion of class B shares, including information about how shares acquired through reinvestment of distributions are treated and certain circumstances under which class B shares may not convert into class A shares, see the SAI. Class B shares provide an investor the benefit of putting all of the investor's dollars to work from the time the investment is made. Until conversion, class B shares will have a higher expense ratio and pay lower dividends than class A and class M shares because of the higher 12b-1 fee. See "How to buy shares -- Class B shares" and "Distribution plans." Class C shares. Like class B shares, class C shares are sold without an initial sales charge and are subject to a CDSC if redeemed within one year of purchase. Class C shares also bear a higher 12b-1 fee than class A and class M shares. Unlike class B shares, class C shares do not convert into any other class of shares. Like class B shares, class C shares provide an investor the benefit of putting all of the investor's dollars to work from the time the investment is made. See "How to buy shares -- Class C shares" and "Distribution plans." Class M shares. If you purchase class M shares , you will generally pay a sales charge at the time of purchase that is lower than the sales charge you would pay for class A shares. Certain purchases of class M shares qualify for reduced sales charges. Class M shares pay 12b-1 fees that are lower than class B and class C shares but higher than class A shares. You will not have to pay any charges when you redeem class M shares, but class M shares will not convert into any other class of shares. See "How to buy shares -- Class M shares" and "Distribution plans." Which class is best for you? Which class of shares provides the most suitable investment for you depends on a number of factors, including the amount you intend to invest and how long you intend to hold the shares. If your intended purchase qualifies for reduced sales charges, you might consider class A or class M shares. If you prefer not to pay a sales charge at the time of purchase, you might consider class B or class C shares. Orders for class B shares for $250,000 or more will be treated as orders for class A shares or declined. In the case of class C shares, orders of $1,000,000 or more and orders which because of a right of accumulation or statement of intent would qualify for the class A shares breakpoint of $1,000,000 will be treated as orders for class A shares or declined. See the SAI for more information. For more information about these sales arrangements, consult your investment dealer or Putnam Investor Services. Shares may only be exchanged for shares of the same class of another Putnam fund. See "How to exchange shares." HOW TO BUY SHARES You can open a fund account with as little as $500 (in the case of class A shares, class B shares and class M shares) and make additional investments at any time with as little as $50. The minimum initial investment for class C shares is $10,000. You can buy fund shares three ways - through most investment dealers, through Putnam Mutual Funds (at 1-800-225-1581), or through a systematic investment plan. If you do not have a dealer, Putnam Mutual Funds can refer you to one. Buying shares through Putnam Mutual Funds. Complete an order form and write a check for the amount you wish to invest, payable to the appropriate fund. Return the completed form and check to Putnam Mutual Funds, which will act as your agent in purchasing shares . Buying shares through systematic investing. You can make regular investments of $25 or more per month through automatic deductions from your bank checking or savings account. Application forms are available from your investment dealer or through Putnam Investor Services. Shares are sold at the public offering price based on the net asset value next determined after Putnam Investor Services receives your order. In most cases, in order to receive that day's public offering price, Putnam Investor Services must receive your order before the close of regular trading on the New York Stock Exchange. If you buy shares through your investment dealer, the dealer must receive your order before the close of regular trading on the New York Stock Exchange to receive that day's public offering price. Class A shares The public offering price of class A shares is the net asset value plus a sales charge that varies depending on the size of your purchase. The fund in which you are investing receives the net asset value. The sales charge is allocated between your investment dealer and Putnam Mutual Funds as shown in the following table, except when Putnam Mutual Funds, in its discretion, allocates the entire amount to your investment dealer. Sales charge Amount of as a percentage of: sales charge ------------------- reallowed to Net dealers as a Amount of transaction amount Offering percentage of at offering price ($) invested price offering price - ----------------------------------------------------------------- Under 50,000 6.10% 5.75% 5.00% 50,000 but under 100,000 4.71 4.50 3.75 100,000 but under 250,000 3.63 3.50 2.75 250,000 but under 500,000 2.56 2.50 2.00 500,000 but under 1,000,000 2.04 2.00 1.75 - ----------------------------------------------------------------- No initial sales charge applies to purchases of class A shares of $1 million or more or to purchases by employer-sponsored retirement plans that have at least 200 eligible employees. However, a CDSC of 1.00% or 0.50% is imposed on redemptions of these shares within the first or second year, respectively, after purchase, unless the dealer of record waived its commission with Putnam Mutual Funds' approval or unless the purchaser is a class A qualified benefit plan (a retirement plan for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class A shares). Class A qualified benefit plans may also purchase class A shares with no initial sales charge. However, except as stated below, a CDSC of 0.75% of the total amount redeemed (1.00% in the case of plans for which Putnam Mutual Funds and its affiliates do not act as trustee or recordkeeper) is imposed on redemptions of these shares if, within two years of a plan's initial purchase of class A shares, it redeems 90% or more of its cumulative purchases. Thereafter, such a plan is no longer liable for any CDSC. The two-year CDSC applicable to class A qualified benefit plans for which Putnam Mutual Funds or its affiliates serve as trustee or recordkeeper ("full service plans") is 0.50% of the total amount redeemed for full service plans that initially invest at least $5 million but less than $10 million in Putnam funds and other investments managed by Putnam Management or its affiliates ("Putnam Assets"), and is 0.25% of the total amount redeemed for full service plans that initially invest at least $10 million but less than $20 million in Putnam Assets. Class A qualified benefit plans that initially invest at least $20 million in Putnam Assets, or whose dealer of record has, with Putnam Mutual Funds' approval, waived its commission or agreed to refund its commission to Putnam Mutual Funds in the event a CDSC would otherwise be applicable, are not subject to any CDSC. A class A qualified benefit plan participating in a "multi-fund" program approved by Putnam Mutual Funds may include amounts invested in other mutual funds participating in such program for purposes of determining whether the plan may purchase class A shares at net asset value. These investments will also be included for purposes of the discount privileges and programs described elsewhere in this prospectus and in the SAI. As described in the SAI, Putnam Mutual Funds pays the dealer of record a commission of up to 1% on sales to class A qualified benefit plans. Putnam Mutual Funds pays dealers of record commissions on sales of class A shares of $1 million or more and sales of class A shares to employer-sponsored retirement plans that have at least 200 eligible employees and that are not class A qualified benefit plans based on an investor's cumulative purchases during the one-year period beginning with the date of the initial purchase at net asset value. Each subsequent one- year measuring period for these purposes will begin with the first net asset value purchase following the end of the prior period. Such commissions are paid at the rate of 1.00% of the first $3 million of shares purchased, 0.50% of the next $47 million and 0.25% thereafter. Class B shares Class B shares are sold without an initial sales charge, although a CDSC will be imposed if you redeem shares within a specified period after purchase, as shown in the table below. Year 1 2 3 4 5 6 7+ - ------------------------------------------------------------- Charge 5% 4% 3% 3% 2% 1% 0% Putnam Mutual Funds pays a sales commission equal to 4.00% of the amount invested to dealers who sell class B shares. These commissions are not paid on exchanges from other Putnam funds or on sales to investors exempt from the CDSC. Class C shares Class C shares are sold without an initial sales charge, although a 1.00% CDSC is imposed if you redeem your shares within one year of purchase. Class C shares have no conversion feature and therefore will be subject to a higher 12b-1 fee than class A shares indefinitely. Putnam Mutual Funds pays a sales commission equal to 4.00% of the amount invested to dealers who sell class C shares. These commissions are not paid on sales to investors exempt from the CDSC. Class M shares The public offering price of class M shares is the net asset value plus a sales charge that varies depending on the size of your purchase. The fund receives the net asset value. The sales charge is allocated between your investment dealer and Putnam Mutual Funds as shown in the following table, except when Putnam Mutual Funds, at its discretion, allocates the entire amount to your investment dealer. Sales charge Amount of as a percentage of: sales charge ------------------- reallowed to Net dealers as a Amount of transaction amount Offering percentage of at offering price ($) invested price offering price - ----------------------------------------------------------------- Under 50,000 3.63% 3.50% 3.00% 50,000 but under 100,000 2.56 2.50 2.00 100,000 but under 250,000 1.52 1.50 1.00 250,000 but under 500,000 1.01 1.00 1.00 500,000 and above NONE NONE NONE - ----------------------------------------------------------------- Class M qualified benefit plans (retirement plans for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class M shares) and members of qualified groups may purchase class M shares without a sales charge. General You may be eligible to buy fund shares at reduced sales charges or to sell fund shares without a CDSC. Consult your investment dealer or Putnam Mutual Funds for details about Putnam's combined purchase privilege, cumulative quantity discount, statement of intention, group sales plan, employer-sponsored retirement plans and other plans. Descriptions are also included in the order form and in the SAI. Each fund may sell class A, class B, class C and class M shares at net asset value without an initial sales charge or a CDSC to current and retired Trustees (and their families), current and retired employees (and their families) of Putnam Management and affiliates, registered representatives and other employees (and their families) of broker-dealers having sales agreements with Putnam Mutual Funds, employees (and their families) of financial institutions having sales agreements with Putnam Mutual Funds (or otherwise having an arrangement with a broker-dealer or financial institution with respect to sales of fund shares), financial institution trust departments investing an aggregate of $1 million or more in Putnam funds, clients of certain administrators of tax-qualified plans, tax-qualified plans when proceeds from repayments of loans to participants are invested (or reinvested) in Putnam funds, "wrap accounts" for the benefit of clients of broker-dealers, financial institutions or financial planners adhering to certain standards established by Putnam Mutual Funds, and investors meeting certain requirements who sold shares of certain Putnam closed-end funds pursuant to a tender offer by the closed-end fund. In addition, each fund may sell shares at net asset value without an initial sales charge or a CDSC in connection with the acquisition by the fund of assets of an investment company or personal holding company. The CDSC will be waived on redemptions of shares arising out of the death or post-purchase disability of a shareholder or settlor of a living trust account, and on redemptions in connection with certain withdrawals from IRA or other retirement plans. Up to 12% of the value of shares subject to a systematic withdrawal plan may also be redeemed each year without a CDSC. The SAI contains additional information about purchasing shares at reduced sales charges. In determining whether a CDSC is payable on any redemption, shares not subject to any charge will be redeemed first, followed by shares held longest during the CDSC period. Any CDSC will be based on the lower of the shares' cost and net asset value. For this purpose, the amount of any increase in a share's value above its initial purchase price is not regarded as a share exempt from the CDSC. Thus, when you redeem a share that has appreciated in value during the CDSC period, a CDSC is assessed on its initial purchase price. Shares acquired by reinvestment of distributions may be redeemed without a CDSC at any time. For information on how sales charges are calculated if you exchange your shares, see "How to exchange shares." Putnam Mutual Funds receives the entire amount of any CDSC you pay. See the SAI for more information about the CDSC. Shareholders of other Putnam funds may be entitled to exchange their shares for, or reinvest distributions from their funds in, fund shares at net asset value. If you are considering redeeming or transferring shares to another person shortly after purchase, you should pay for those shares with a certified check to avoid any delay in redemption or transfer. Otherwise, payment may be delayed until the purchase price of those shares has been collected or, if you redeem by telephone, until 15 calendar days after the purchase date. To eliminate the need for safekeeping, certificates will not be issued for your shares unless you request them. Putnam Mutual Funds will from time to time, at its expense, provide additional promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. DISTRIBUTION PLANS The funds have adopted distribution plans to compensate Putnam Mutual Funds for services provided and expenses incurred by it as principal underwriter of fund shares, including the payments to dealers mentioned below. The plans provide for payments by each fund to Putnam Mutual Funds at the annual rates (expressed as a percentage of average net assets) of up to 0.35% on class A shares and up to 1.00% on class B, class C and class M shares. The Trustees currently limit payments on class A and class M shares to 0.25% and 0.75% of average net assets, respectively. Putnam Mutual Funds compensates qualifying dealers (including, for this purpose, certain financial institutions) for sales of shares and the maintenance of shareholder accounts. Putnam Mutual Funds makes quarterly payments to dealers at the annual rate of 0.25% of the average net asset value of class A shares for which such dealers are designated as the dealer of record, except that payments to dealers for shares held by class A qualified benefit plans are made at reduced rates, as described in the SAI. No payments are made during the first year after purchase on shares purchased at net asset value by shareholders investing $1 million or more or by employer-sponsored retirement plans that have at least 200 eligible employees or that are class A qualified benefit plans, unless the shareholder has made arrangements with Putnam Mutual Funds and the dealer of record has waived the sales commission. Putnam Mutual Funds makes quarterly payments to dealers at the annual rates of 0.25%, 0.75% and 0.65% of the average net asset value of class B, class C and class M shares, respectively, for which such dealers are designated as the dealer of record, provided, however, no payment will be made with respect to the first four quarters following the sale of class C shares . Putnam Mutual Funds may suspend or modify its payments to dealers. The payments are also subject to the continuation of the relevant distribution plan, the terms of service agreements between dealers and Putnam Mutual Funds, and any applicable limits imposed by the National Association of Securities Dealers, Inc. HOW TO SELL SHARES You can sell your shares to the appropriate fund any day the New York Stock Exchange is open, either directly to the fund or through your investment dealer. A fund will only redeem shares for which it has received payment. Selling shares directly to your fund. Send a signed letter of instruction or stock power form to Putnam Investor Services, along with any certificates that represent shares you want to sell. The price you will receive is the next net asset value calculated after a fund receives your request in proper form less any applicable CDSC. In order to receive that day's net asset value, Putnam Investor Services must receive your request before the close of regular trading on the New York Stock Exchange. If you sell shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. Stock power forms are available from your investment dealer, Putnam Investor Services and many commercial banks. If you want your redemption proceeds sent to an address other than your address as it appears on Putnam's records, a signature guarantee is required. Putnam Investor Services usually requires additional documentation for the sale of shares by a corporation, partnership, agent or fiduciary, or a surviving joint owner. Contact Putnam Investor Services for details. Your fund generally sends you payment for your shares the business day after your request is received. Under unusual circumstances, a fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. You may use Putnam's Telephone Redemption Privilege to redeem shares valued up to $100,000 unless you have notified Putnam Investor Services of an address change within the preceding 15 days. Unless you indicate otherwise on the account application, Putnam Investor Services will be authorized to act upon redemption and transfer instructions received by telephone from you, or any person claiming to act as your representative, who can provide Putnam Investor Services with your account registration and address as it appears on Putnam Investor Services' records. Putnam Investor Services will employ these and other reasonable procedures to confirm that instructions communicated by telephone are genuine; if it fails to employ reasonable procedures, Putnam Investor Services may be liable for any losses due to unauthorized or fraudulent instructions. For information, consult Putnam Investor Services. During periods of unusual market changes and shareholder activity, you may experience delays in contacting Putnam Investor Services by telephone. In this event, you may wish to submit a written redemption request, as described above, or contact your investment dealer, as described below. The Telephone Redemption Privilege is not available if you were issued certificates for shares that remain outstanding. The Telephone Redemption Privilege may be modified or terminated without notice. Selling shares through your investment dealer. Your dealer must receive your request before the close of regular trading on the New York Stock Exchange to receive that day's net asset value. Your dealer will be responsible for furnishing all necessary documentation to Putnam Investor Services, and may charge you for its services. HOW TO EXCHANGE SHARES You can exchange your class A shares, class B shares or class M shares for shares of the same class of certain other Putnam funds at net asset value. Not all Putnam funds offer all classes of shares. Class C shares may only be exchanged for class C shares of one of the other funds described in this prospectus. If you exchange shares subject to a CDSC, the transaction will not be subject to the CDSC. However, when you redeem the shares acquired through the exchange, the redemption may be subject to the CDSC, depending upon when you originally purchased the shares. The CDSC will be computed using the schedule of any fund into or from which you have exchanged your shares that would result in your paying the highest CDSC applicable to your class of shares. For purposes of computing the CDSC, the length of time you have owned your shares will be measured from the date of original purchase and will not be affected by any exchange. To exchange your shares, simply complete an Exchange Authorization Form and send it to Putnam Investor Services. The form is available from Putnam Investor Services. For federal income tax purposes, an exchange is treated as a sale of shares and generally results in a capital gain or loss. A Telephone Exchange Privilege is currently available for amounts up to $500,000. Putnam Investor Services' procedures for telephonic transactions are described above under "How to sell shares." The Telephone Exchange Privilege is not available if you were issued certificates for shares that remain outstanding. Ask your investment dealer or Putnam Investor Services for prospectuses of other Putnam funds. Shares of certain Putnam funds are not available to residents of all states. The exchange privilege is not intended as a vehicle for short- term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of your fund, the funds reserve the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW A FUND VALUES ITS SHARES Each fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW EACH FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The Growth Portfolio distributes any net investment income at least annually. The Conservative Portfolio and the Balanced Portfolio distribute any net investment income at least quarterly. Distributions from any net capital gains are made at least annually after applying any available capital loss carryovers. Distributions paid on class A shares will generally be greater than those paid on class B shares, class C shares and class M shares because expenses attributable to class B shares, class C shares and class M shares will generally be higher. You can choose from three distribution options: - - Reinvest all distributions in additional shares without a sales charge; - - Receive distributions from net investment income in cash while reinvesting capital gains distributions in additional shares without a sales charge; or - - Receive all distributions in cash. You can change your distribution option by notifying Putnam Investor Services in writing. If you do not select an option when you open your account, all distributions will be reinvested. All distributions not paid in cash will be reinvested in shares of the class on which the distributions are paid. You will receive a statement confirming reinvestment of distributions in additional fund shares (or in shares of other Putnam funds for Dividends Plus accounts) promptly following the quarter in which the reinvestment occurs. If a check representing a fund distribution is not cashed within a specified period, Putnam Investor Services will notify you that you have the option of requesting another check or reinvesting the distribution . If Putnam Investor Services does not receive your election, the distribution will be reinvested in the fund. Similarly, if correspondence sent by a fund or Putnam Investor Services is returned as "undeliverable," fund distributions will automatically be reinvested in that fund or in another Putnam fund. Each fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal taxes on income and gains it distributes to shareholders. Each fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Fund distributions will be taxable to you as ordinary income to the extent derived from the fund's investment income and net short-term gains (that is, net gains from securities held for not more than a year). Distributions designated by a fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable to you as such, regardless of how long you have held the shares. Distributions will be taxable as described above whether received in cash or in shares through the reinvestment of distributions. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, a fund's yield on those securities would be decreased. The funds do not expect to be eligible to elect to permit shareholders to claim a credit or deduction on their income tax return for their pro rata share of such taxes. If at the end of a fund's fiscal year more than 50% of the value of its total assets represents securities of foreign corporations, a fund intends to make an election permitted by the Internal Revenue Code to treat any foreign taxes paid by it as paid by it on securities it has held for at least the minimum period specified in the Internal Revenue Code as having been paid directly by a fund's shareholders. In this case, shareholders who are (i) U.S. citizens, U.S. corporations and, in some cases, U.S. residents and (ii) who hold their fund shares (without protection from risk of loss) on the ex-dividend date and for at least 15 additional days during the 30-day period surrounding the ex-dividend date generally will be required to include in U.S. taxable income their pro rata share of such taxes, but may then generally be entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. Fund transactions in foreign currencies and hedging activities may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in value of the foreign currency concerned. In addition, such activities will likely produce a difference between book income and taxable income. This difference may cause a portion of a fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject a fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. Early in each calendar year Putnam Investor Services will notify you of the amount and tax status of distributions paid to you for the preceding year. The foregoing is a summary of certain federal income tax consequences of investing in a fund. You should consult your tax adviser to determine the precise effect of an investment in a fund on your particular tax situation (including possible liability for state and local taxes). About Putnam Investments, Inc. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the funds and of other Putnam funds. Putnam Fiduciary Trust Company is the custodian of the funds. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the funds. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly- owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION FUNDS PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO One Post Office Square Boston, MA 02109 FUND INFORMATION: INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 INVESTOR SERVICING AGENT Putnam Investor Services Mailing address: P.O. Box 41203 Providence, RI 02940-1203 CUSTODIAN Putnam Fiduciary Trust Company One Post Office Square Boston, MA 02109 LEGAL COUNSEL Ropes & Gray One International Place Boston, MA 02110 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 160 Federal Street Boston, MA 02110 PUTNAMINVESTMENTS P.O. Box 989 Boston, Massachusetts 02103 Toll-free 1-800-225-1581 www.putnaminv.com PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO One Post Office Square, Boston, MA 02109 Class A shares PROSPECTUS - January 30, 1998 This prospectus explains concisely what you should know before investing in class A shares of Putnam Asset Allocation: Balanced Portfolio (the "fund") which are offered without a sales charge through eligible employer-sponsored retirement plans. The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or for other information, including a prospectus regarding class A shares for other investors, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown ............................. How the fund is managed............................... Organization and history ............................. ABOUT YOUR INVESTMENT How to buy shares..................................... Distribution plan..................................... How to sell shares ................................... How to exchange shares................................ How the fund values its shares ....................... How the fund makes distributions to shareholders; tax information........... ABOUT PUTNAM INVESTMENTS, INC......................... APPENDIX Securities ratings................................... About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class A shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class A shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fees 0.64% 12b-1 fees 0.25% Other expenses 0.38% Total fund operating expenses 1.27% The table is provided to help you understand the expenses of investing in the fund and your share of fund operating expenses . The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $13 $40 $70 $153 The example does not represent past or future expense levels, and actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The following table presents per share financial information for class A shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request. FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period)
Putnam Asset Allocation: Balanced Portfolio For the period CLASS A February 7, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $10.71 $9.67 $8.33 $8.50 Investment Operations: Net investment income(d) .28 .29 .27(a) .16(a) Net realized and unrealized gain (loss) on investments 2.13 1.32 1.27 (.28) Total from investment operations 2.41 1.61 1.54 (.12) Less Distributions: From net investment income (.31) (.28) (.20) (.05) From net realized gain on investments (.53) (.29) Total distributions (.84) (.57) (.20) (.05) Net asset value, end of period $12.28 $10.71 $9.67 $8.33 Total investment return at net asset value (%)(b) 23.82 17.41 18.73 (1.47)* Net assets, end of period $680,720 $327,326 $152,317 $54,483 (in thousands) Ratio of expenses to average net assets (%)(c) 1.27 1.33 1.32(a) .83(a)* Ratio of net investment income to average net assets (%) 2.44 2.83 2.95(a) 2.13(a)* Portfolio turnover (%) 136.75 122.12 106.03 52.62* Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks total return. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 65% 50-75% FIXED INCOME CLASS 35% 25-50% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion), and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's) and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. In addition, the fund will not purchase any fixed-income security rated, by all of the agencies rating the security, below BBB and Baa, or any unrated security determined by Putnam Management to be of comparable quality, if, as a result, more than 35% of the fund's total assets would be invested in securities of that quality. Securities rated BBB or Baa, while considered investment-grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 14.88% "AA" 0.04% "A" 0.97% "BBB" 1.75% "BB" 2.10% 0.02% "B" 4.51% 0.70% "CCC" 0.43% 0.02% "CC" 0.02% ----- ----- Total: 24.70% 0.74% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of that fund's goals is more dependent on Putnam Management's investment analysis than would be the case if that fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind- bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 60% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, that fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to that fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options, including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the fund's shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities);* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for tax purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class A shares, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund invested at the maximum public offering price. Total return may also be presented for other periods or based on investment at reduced sales charge levels. Any quotation of investment performance not reflecting the maximum initial sales charge would be reduced if the sales charge were used. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. Because shares sold through eligible employer-sponsored retirement plans are sold without a sales charge, quotations of investment performance reflecting the deduction of a sales charge will be lower than the actual investment performance, over the same period, of shares purchased through such plans. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for the fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on the fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to the fund will be paid from the assets of the fund. General expenses of the Trust will be allocated among and charged to the assets of the fund and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to, or the relative assets of, the fund and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. Only the fund's class A shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of that fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's retirement plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible employer-sponsored retirement plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. A class A qualified benefit plan (an employer-sponsored retirement plan for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class A shares) is eligible to purchase fund shares at net asset value pursuant to this prospectus if it initially invests at least $20 million in Putnam funds and other investments managed by Putnam Management or its affiliates or if its dealer of record has, with Putnam Mutual Fund's approval, waived its commission or agreed to refund its commission to Putnam Mutual Funds in the event the plan redeems 90% or more of its cumulative purchases within two years of its initial purchase. An employer-sponsored retirement plan, other than a class A qualified benefit plan, is eligible to purchase fund shares at net asset value pursuant to this prospectus if its investment in class A shares is at least $1 million, or it has at least 200 eligible employees, and the dealer of record waives its commission with the consent of Putnam Mutual Funds. Employer-sponsored retirement plans participating in a "multi- fund" program approved by Putnam Mutual Funds may include amounts invested in other mutual funds participating in such program for purposes of determining whether the plan may purchase class A shares at net asset value. Employer-sponsored plans may make additional investments of any amount at any time. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. As described in the SAI, Putnam Mutual Funds pays the dealer of record a commission of up to 1% on sales to class A qualified benefit plans. Putnam Mutual Funds will from time to time, at its expense, provide additional promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. DISTRIBUTION PLAN The fund has adopted a distribution plan to compensate Putnam Mutual Funds for services provided and expenses incurred by it as principal underwriter of fund shares, including the payments to dealers mentioned below. The plan provides for payments by the fund to Putnam Mutual Funds at the annual rate (expressed as a percentage of average net assets ) of up to 0.35% on class A shares. The Trustees currently limit payments under the plan to the annual rate of 0.25% . Putnam Mutual Funds compensates qualifying dealers (including, for this purpose, certain financial institutions) for sales of shares and the maintenance of shareholder accounts at the annual rate of up to 0.25% of the average net asset value of class A shares for which such dealers are designated as the dealer of record. The payments to dealers for shares held by class A qualified benefit plans are made at reduced rates, as described in the SAI. No payments are made during the first year after purchase on shares purchased at net asset value by shareholders investing $1 million or more , by employer-sponsored retirement plans that have at least 200 eligible employees or by class A qualified benefit plans, unless the shareholder has made arrangements with Putnam Mutual Funds and the dealer of record has waived the sales commission. Putnam Mutual Funds may suspend or modify its payments to dealers. The payments are also subject to the continuation of the relevant distribution plan, the terms of service agreements between dealers and Putnam Mutual Funds, and any applicable limits imposed by the National Association of Securities Dealers, Inc. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If your plan sells shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of your fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income at least quarterly and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal income taxes on income and gains it distributes to shareholders. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such regardless of how long you have held your shares. However, distributions by the fund to employer-sponsored retirement plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO One Post Office Square, Boston, MA 02109 Class A shares PROSPECTUS - JANUARY 30, 1998 This prospectus explains concisely what you should know before investing in class A shares of Putnam Asset Allocation: Conservative Portfolio (the "fund") which are offered without a sales charge through eligible employer-sponsored retirement plans. The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or for other information, including a prospectus regarding class A shares for other investors, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown ............................. How the fund is managed............................... Organization and history ............................. ABOUT YOUR INVESTMENT How to buy shares..................................... Distribution plan..................................... How to sell shares ................................... How to exchange shares................................ How the fund values its shares ....................... How the fund makes distributions to shareholders; tax information....................................... ABOUT PUTNAM INVESTMENTS, INC......................... APPENDIX Securities ratings.................................... About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class A shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class A shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fees 0.70% 12b-1 fees 0.25% Other expenses 0.43% Total fund operating expenses 1.38% The table is provided to help you understand the expenses of investing in the fund and your share of fund operating expenses . The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $14 $44 $76 $166 The example does not represent past or future expense levels, and actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The following table presents per share financial information for class A shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS A February 7, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $9.69 $9.19 $8.23 $8.50 Investment Operations: Net investment income .38(d) .36 .33(a) .18(a)(d) Net realized and unrealized gain (loss) on investments 1.22 .68 .90 (.39) Total from investment operations 1.60 1.04 1.23 (.21) Less Distributions: From net investment income (.35) (.36) (.27) (.06) From net realized gain on investments (.33) (.18) Total distributions (.68) (.54) (.27) (.06) Net asset value, end of period $10.61 $9.69 $9.19 $8.23 Total investment return at net asset value (%)(b) 17.26 11.73 15.27 (2.47)* Net assets, end of period $295,239 $106,933 $57,341 $25,782 (in thousands) Ratio of expenses to average net assets (%)(c) 1.38 1.47 1.22(a) .75(a)* Ratio of net investment income to average net assets (%) 3.74 4.08 4.48(a) 2.41(a)* Portfolio turnover (%) 219.44 183.67 159.80 59.27* Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of $0.03 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for periods ended on or after September 30, 1995 includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks total return consistent with preservation of capital. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed-income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 35% 25-45% FIXED INCOME CLASS 65% 55-75% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion) and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's) and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. In addition, the fund will not purchase any fixed-income security rated, by all of the agencies rating the security, below BBB and Baa, or any unrated security determined by Putnam Management to be of comparable quality, if, as a result, more than 10% of the fund's total assets would be invested in securities of that quality. Securities rated BBB or Baa, while considered investment-grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 34.71% "AA" 0.09% "A" 3.79% "BBB" 5.42% "BB" 2.28% 0.01% "B" 4.27% 0.62% "CCC" 0.44% 0.02% "CC" 0.03% ----- ----- Total 51.03% 0.65% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of the fund's goals is more dependent on Putnam Management's investment analysis than would be the case if the fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset- backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 40% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, the fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to the fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options , including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the funds' shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities );* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for tax purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class A shares , if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund invested at the maximum public offering price. Total return may also be presented for other periods or based on investment at reduced sales charge levels. Any quotation of investment performance not reflecting the maximum initial sales charge would be reduced if the sales charge were used. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. Because shares sold through eligible employer-sponsored retirement plans are sold without a sales charge, quotations of investment performance reflecting the deduction of a sales charge will be lower than the actual investment performance, over the same period, of shares purchased through such plans. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for the fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on the fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to the fund will be paid from the assets of the fund. General expenses of the Trust will be allocated among and charged to the assets of the fund and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to, or the relative assets of, the fund and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. Only the fund's class A shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of the fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's retirement plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible employer-sponsored retirement plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. A class A qualified benefit plan (an employer-sponsored retirement plan for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class A shares) is eligible to purchase fund shares at net asset value pursuant to this prospectus if it initially invests at least $20 million in Putnam funds and other investments managed by Putnam Management or its affiliates or if its dealer of record has, with Putnam Mutual Fund's approval, waived its commission or agreed to refund its commission to Putnam Mutual Funds in the event the plan redeems 90% or more of its cumulative purchases within two years of its initial purchase. An employer-sponsored retirement plan, other than a class A qualified benefit plan, is eligible to purchase fund shares at net asset value pursuant to this prospectus if its investment in class A shares is at least $1 million, or it has at least 200 eligible employees, and the dealer of record waives its commission with the consent of Putnam Mutual Funds. Employer-sponsored retirement plans participating in a "multi- fund" program approved by Putnam Mutual Funds may include amounts invested in other mutual funds participating in such program for purposes of determining whether the plan may purchase class A shares at net asset value. Employment-sponsored plans may make additional investments of any amount at any time. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. As described in the SAI, Putnam Mutual Funds pays the dealer of record a commission of up to 1% on sales to class A qualified benefit plans. Putnam Mutual Funds will from time to time, at its expense, provide additional promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. DISTRIBUTION PLAN The fund has adopted a distribution plan to compensate Putnam Mutual Funds for services provided and expenses incurred by it as principal underwriter of fund shares, including the payments to dealers mentioned below. The plan provides for payments by the fund to Putnam Mutual Funds at the annual rate (expressed as a percentage of average net assets ) of up to 0.35% on class A shares. The Trustees currently limit payments under the plan to the annual rate of 0.25% . Putnam Mutual Funds compensates qualifying dealers (including, for this purpose, certain financial institutions) for sales of shares and the maintenance of shareholder accounts at the annual rate of up to 0.25% of the average net asset value of class A shares for which such dealers are designated as the dealer of record. The payments to dealers for shares held by class A qualified benefit plans are made at reduced rates, as described in the SAI. No payments are made during the first year after purchase on shares purchased at net asset value by shareholders investing $1 million or more , by employer-sponsored retirement plans that have at least 200 eligible employees or by class A qualified benefit plans, unless the shareholder has made arrangements with Putnam Mutual Funds and the dealer of record has waived the sales commission. Putnam Mutual Funds may suspend or modify its payments to dealers. The payments are also subject to the continuation of the relevant distribution plan, the terms of service agreements between dealers and Putnam Mutual Funds, and any applicable limits imposed by the National Association of Securities Dealers, Inc. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If your plan sells shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of your fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income at least quarterly and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal income taxes on income and gains it distributes to shareholders. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such regardless of how long you have held your shares. However, distributions by the fund to employer-sponsored retirement plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO One Post Office Square, Boston, MA 02109 Class A shares PROSPECTUS - JANUARY 30, 1998 This prospectus explains concisely what you should know before investing in class A shares of Putnam Asset Allocation: Growth Portfolio (the "fund") which are offered without a sales charge through eligible employer-sponsored retirement plans. The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or for other information, including a prospectus regarding class A shares for other investors, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown ............................. How the fund is managed............................... Organization and history ............................. ABOUT YOUR INVESTMENT How to buy shares..................................... Distribution plan..................................... How to sell shares ................................... How to exchange shares................................ How the fund values its shares ....................... How the fund makes distributions to shareholders; tax information....................................... ABOUT PUTNAM INVESTMENTS, INC......................... APPENDIX Securities ratings..................................... About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class A shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class A shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fees 0.66% 12b-1 fees 0.25% Other expenses 0.48% Total fund operating expenses 1.39% The table is provided to help you understand the expenses of investing in the fund and your share of fund operating expenses . The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $14 $44 $76 $167 The example does not represent past or future expense levels, and actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The following table presents per share financial information for class A shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio For the period CLASS A February 8, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $11.41 $10.06 $8.43 $8.50 Investment Operations: Net investment income(d) .17 .18 .18(a) .10(a) Net realized and unrealized gain (loss) on investments 2.69 1.63 1.53 (.17) Total from investment operations 2.86 1.81 1.71 (.07) Less Distributions: From net investment income (.16) (.19) (.08) From net realized gain on investments (.47) (.27) Total distributions (.63) (.46) (.08) Net asset value, end of period $13.64 $11.41 $10.06 $8.43 Total investment return at 26.25 18.75 20.45 (.82)* net asset value (%)(b) Net assets, end of period $486,107 $210,531 $122,228 $43,669 (in thousands) Ratio of expenses to average net assets (%)(c) 1.39 1.45 1.49(a) .78(a)* Ratio of net investment income to average net assets (%) 1.42 1.72 1.98(a) 1.31(a)* Portfolio turnover (%) 99.96 100.93 88.36 39.90* Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.05 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks capital appreciation. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 80% 65-95% FIXED INCOME CLASS 20% 5-35% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion) and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's) and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 7.26% "AA" 0.02% "A" 0.48% "BBB" 0.88% "BB" 1.12% 0.01% "B" 2.57% 0.30% "CCC" 0.22% 0.01% "CC" 0.02% ----- ----- Total: 12.57% 0.32% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of that fund's goals is more dependent on Putnam Management's investment analysis than would be the case if that fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 60% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchange or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, that fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to that fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options, including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the fund's shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities);* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for tax purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class A shares, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund invested at the maximum public offering price. Total return may also be presented for other periods or based on investment at reduced sales charge levels. Any quotation of investment performance not reflecting the maximum initial sales charge would be reduced if the sales charge were used. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. Because shares sold through eligible employer-sponsored retirement plans are sold without a sales charge, quotations of investment performance reflecting the deduction of a sales charge will be lower than the actual investment performance, over the same period, of shares purchased through such plans. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for the fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on the fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to the fund will be paid from the assets of the fund. General expenses of the Trust will be allocated among and charged to the assets of the fund and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to, or the relative assets of, the fund and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. Only the fund's class A shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of that fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's retirement plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible employer-sponsored retirement plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. A class A qualified benefit plan (an employer-sponsored retirement plan for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class A shares) is eligible to purchase fund shares at net asset value pursuant to this prospectus if it initially invests at least $20 million in Putnam funds and other investments managed by Putnam Management or its affiliates or if its dealer of record has, with Putnam Mutual Fund's approval, waived its commission or agreed to refund its commission to Putnam Mutual Funds in the event the plan redeems 90% or more of its cumulative purchases within two years of its initial purchase. An employer-sponsored retirement plan, other than a class A qualified benefit plan, is eligible to purchase fund shares at net asset value pursuant to this prospectus if its investment in class A shares is at least $1 million, or it has at least 200 eligible employees, and the dealer of record waives its commission with the consent of Putnam Mutual Funds. Employer-sponsored retirement plans participating in a "multi- fund" program approved by Putnam Mutual Funds may include amounts invested in other mutual funds participating in such program for purposes of determining whether the plan may purchase class A shares at net asset value. Employer-sponsored plans may make additional investments of any amount at any time. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. As described in the SAI, Putnam Mutual Funds pays the dealer of record a commission of up to 1% on sales to class A qualified benefit plans. Putnam Mutual Funds will from time to time, at its expense, provide additional promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. DISTRIBUTION PLAN The fund has adopted a distribution plan to compensate Putnam Mutual Funds for services provided and expenses incurred by it as principal underwriter of fund shares, including the payments to dealers mentioned below. The plan provides for payments by the fund to Putnam Mutual Funds at the annual rate (expressed as a percentage of average net assets ) of up to 0.35% on class A shares. The Trustees currently limit payments under the plan to the annual rate of 0.25% . Putnam Mutual Funds compensates qualifying dealers (including, for this purpose, certain financial institutions) for sales of shares and the maintenance of shareholder accounts at the annual rate of up to 0.25% of the average net asset value of class A shares for which such dealers are designated as the dealer of record. The payments to dealers for shares held by class A qualified benefit plans are made at reduced rates, as described in the SAI. No payments are made during the first year after purchase on shares purchased at net asset value by shareholders investing $1 million or more , by employer-sponsored retirement plans that have at least 200 eligible employees or by class A qualified benefit plans, unless the shareholder has made arrangements with Putnam Mutual Funds and the dealer of record has waived the sales commission. Putnam Mutual Funds may suspend or modify its payments to dealers. The payments are also subject to the continuation of the relevant distribution plan, the terms of service agreements between dealers and Putnam Mutual Funds, and any applicable limits imposed by the National Association of Securities Dealers, Inc. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If your plan sells shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short-term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of your fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements necessary for it to be relieved of federal income taxes on income and gains it distributes to shareholders. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such regardless of how long you have held your shares. However, distributions by the fund to employer-sponsored retirement plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO One Post Office Square, Boston, MA 02109 Class Y shares PROSPECTUS - JANUARY 30, 1998 This prospectus explains concisely what you should know before investing in Class Y shares of Putnam Asset Allocation: Balanced Portfolio (the "fund"). The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or other information, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown ............................. How the fund is managed............................... Organization and history ............................. ABOUT YOUR INVESTMENT How to buy shares..................................... How to sell shares ................................... How to exchange shares................................ How the fund values its shares ....................... How the fund makes distributions to shareholders; tax information....................................... ABOUT PUTNAM INVESTMENTS, INC......................... APPENDIX Securities ratings About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class Y shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class Y shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fees 0.64% Other expenses 0.38% Total fund operating expenses 1.02% The table is provided to help you understand the expenses of investing in the fund and your share of fund operating expenses that the fund incurs. The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $10 $32 $56 $125 The example does not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The table below presents per share financial information for the life of class Y shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request. FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period) Putnam Asset Allocation: Balanced Portfolio For the period CLASS Y July 5, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $10.71 $9.66 $8.33 $8.11 Investment operations: Net investment income(d) .31 .31 .29(a) .05(a) Net realized and unrealized gain (loss) on investments 2.14 1.34 1.26 .22 Total from investment operations 2.45 1.65 1.55 .27 Less Distributions: From net investment income (.34) (.31) (.22) (.05) From net realized gain on investments (.53) (.29) Total distributions (.87) (.60) (.22) (.05) Net asset value, end of period $12.29 $10.71 $9.66 $8.33 Total investment return at net asset value (%)(b) 24.21 17.81 18.89 3.34* Net assets, end of period $232,021 $126,482 $71,661 $66,081 (in thousands) Ratio of expenses to average net assets (%)(c) 1.02 1.08 1.07(a) .23(a)* Ratio of net investment income to average net assets (%) 2.70 3.03 3.35(a) .62(a)* Portfolio turnover (%) 136.75 122.12 106.03 52.62* Average commission rate paid(e) $.0407 $.0470 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of none per share. Expenses for the year ended September 30, 1995 reflect a reduction of $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks total return. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 65% 50-75% FIXED INCOME CLASS 35% 25-50% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion), and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's") and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. In addition, the fund will not purchase any fixed-income security rated, by all of the agencies rating the security, below BBB and Baa, or any unrated security determined by Putnam Management to be of comparable quality, if, as a result, more than 35% of the fund's total assets would be invested in securities of that quality. Securities rated BBB or Baa, while considered investment-grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 14.88% "AA" 0.04% "A" 0.97% "BBB" 1.75% "BB" 2.10% 0.02% "B" 4.51% 0.70% "CCC" 0.43% 0.02% "CC" 0.02% Total: 24.70% 0.74% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of that fund's goals is more dependent on Putnam Management's investment analysis than would be the case if that fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind- bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 60% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, that fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to that fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options, including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the fund's shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities);* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for financial reporting purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class Y shares, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund. Total return may also be presented for other periods. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for each fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages each fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on each fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of each fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to a fund will be paid from the assets of that fund. General expenses of the Trust will be allocated among and charged to the assets of the funds and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to , or the relative assets of, the funds and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker -dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker -dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into three series. Only the fund's class Y shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of that fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's defined contribution plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible defined contribution plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. Class Y shares are available to defined contribution plans whose investment in Putnam funds and other assets managed by Putnam Management or its affiliates, combined with such investments by the plan's sponsor and the sponsor's other employee benefit plans, equals at least $250 million. Defined contribution plans that elect to buy class Y shares after attaining eligibility will receive class Y shares in place of any class A shares owned at the time of their first purchase of class Y shares. Class Y shares are also available to defined contribution plans whose sponsor confirms a good faith expectation that investments in Putnam- managed assets by the sponsor and its employee benefit plans will attain $250 million (using the higher of purchase price or current market value) within one year of the initial purchase of class Y shares, and agrees that class Y shares may be redeemed and class A shares purchased if that level is not attained. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. Putnam Mutual Funds will from time to time, at its expense, provide promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If you sell shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your employer's plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short- term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of the fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income at least quarterly and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal income taxes on income and gains it distributes. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such. However, distributions by the fund to employer-sponsored defined contribution plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO One Post Office Square, Boston, MA 02109 Class Y shares PROSPECTUS - JANUARY 30, 1998 This prospectus explains concisely what you should know before investing in Class Y shares of Putnam Asset Allocation: Conservative Portfolio (the "fund"). The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or other information, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown.............................. How the fund is managed............................... Organization and history.............................. ABOUT YOUR INVESTMENT How to buy shares..................................... How to sell shares.................................... How to exchange shares................................ How the fund values its shares........................ How the fund makes distributions to shareholders; tax information....................................... ABOUT PUTNAM INVESTMENTS, INC......................... APPENDIX Securities ratings.................................... About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class Y shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class Y shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fees 0.70% Other expenses 0.43% Total fund operating expenses 1.13% The table is provided to help you understand the expenses of investing in the fund and your share of the operating expenses that the fund incurs. The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $12 $36 $62 $137 The example does not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The following table presents per share financial information for the life of class Y shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request.
Financial Highlights (For a share outstanding throughout the period) Putnam Asset Allocation: Conservative Portfolio For the period CLASS Y July 14, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $9.69 $9.19 $8.23 $8.23 Investment operations: Net investment income .40(d) .38 .36(a) .07(a)(d) Net realized and unrealized gain (loss) on investments 1.23 .68 .89 Total from investment operations 1.63 1.06 1.25 .07 Less Distributions: From net investment income (.37) (.38) (.29) (.07) From net realized gain on investments (.33) (.18) Total distributions (.70) (.56) (.29) (.07) Net asset value, end of period $10.62 $9.69 $9.19 $8.23 Total investment return at 17.62 11.99 15.54 1.01* net asset value (%)(b) Net assets, end of period $18,760 $6,025 $1,818 $163 (in thousands) Ratio of expenses to average net assets (%)(c) 1.13 1.22 .92(a) .21(a)* Ratio of net investment income to average net assets (%) 3.96 4.45 4.93(a) 1.04(a)* Portfolio turnover (%) 219.44 183.67 159.80 59.27* Average commission rate paid(e) $.0398 $.0495 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.01 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.03 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks total return consistent with preservation of capital. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed-income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 35% 25-45% FIXED INCOME CLASS 65% 55-75% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion) and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's) and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. In addition, the fund will not purchase any fixed -income security rated, by all of the agencies rating the security, below BBB and Baa, or any unrated security determined by Putnam Management to be of comparable quality, if, as a result, more than 10% of the fund's total assets would be invested in securities of that quality. Securities rated BBB or Baa, while considered investment-grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 34.71% "AA" 0.09% "A" 3.79% "BBB" 5.42% "BB" 2.28% 0.01% "B" 4.27% 0.62% "CCC" 0.44% 0.02% "CC" 0.03% ----- ----- Total 51.03% 0.65% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of the fund's goals is more dependent on Putnam Management's investment analysis than would be the case if the fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, that fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: * Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; * Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and * Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset- backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 40% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, the fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to the fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options , including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the funds' shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities);* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of such class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for financial reporting purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class Y shares, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund. Total return may also be presented for other periods. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. Because shares sold through eligible participant-directed qualified retirement plans are sold without a sales charge, quotations of investment performance reflecting the deduction of a sales charge will be lower than the actual investment performance of shares purchased through such plans. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for the fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on the fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to the fund will be paid from the assets of the fund. General expenses of the Trust will be allocated among and charged to the assets of the fund and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to, or the relative assets of, the fund and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into three series. Only the fund's class Y shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses , the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of that fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's defined contribution plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible defined contribution plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. Class Y shares are available to defined contribution plans whose investment in Putnam funds and other assets managed by Putnam Management or its affiliates, combined with such investments by the plan's sponsor and the sponsor's other employee benefit plans, equals at least $250 million. Defined contribution plans that elect to buy class Y shares after attaining eligibility will receive class Y shares in place of any class A shares owned at the time of their first purchase of class Y shares. Class Y shares are also available to defined contribution plans whose sponsor confirms a good faith expectation that investments in Putnam- managed assets by the sponsor and its employee benefit plans will attain $250 million (using the higher of purchase price or current market value) within one year of the initial purchase of class Y shares, and agrees that class Y shares may be redeemed and class A shares purchased if that level is not attained. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. Putnam Mutual Funds will from time to time, at its expense, provide promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If you sell shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your employer's plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short- term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of the fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income at least quarterly and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal income taxes on income and gains it distributes. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such. However, distributions by the fund to employer-sponsored defined contribution plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent of the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO One Post Office Square, Boston, MA 02109 Class Y shares PROSPECTUS - JANUARY 30, 1998 This prospectus explains concisely what you should know before investing in Class Y shares of Putnam Asset Allocation: Growth Portfolio (the "fund"). The fund is a series of Putnam Asset Allocation Funds (the "Trust"). Please read this prospectus carefully and keep it for future reference. You can find more detailed information about the fund in the January 30, 1998 statement of additional information (the "SAI"), as amended from time to time. For a free copy of the SAI or other information, call Putnam Investor Services at 1-800-752-9894. The SAI has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated into this prospectus by reference. The Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference into this prospectus and the SAI, and other information regarding registrants that file electronically with the Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PUTNAMINVESTMENTS Putnam Defined Contribution Plans ABOUT THE FUND Expenses summary...................................... Financial highlights.................................. Objective............................................. How the fund pursues its objective.................... How performance is shown ............................. How the fund is managed............................... Organization and history ............................. ABOUT YOUR INVESTMENT How to buy shares...................................... How to sell shares .................................... How to exchange shares................................. How the fund values its shares ........................ How the fund makes distributions to shareholders; tax information...................................... ABOUT PUTNAM INVESTMENTS, INC.......................... APPENDIX Securities ratings About the fund EXPENSES SUMMARY Expenses are one of several factors to consider when investing. The following table summarizes expenses attributable to class Y shares based on the fund's most recent fiscal year. The example shows the cumulative expenses attributable to a hypothetical $1,000 investment in class Y shares over specified periods. Annual fund operating expenses (as a percentage of average net assets) Management fee 0.66% Other expenses 0.48% Total fund operating expenses 1.14% The table is provided to help you understand the expenses of investing in the fund and your share of fund operating expenses that the fund incurs. The expenses shown in the table do not reflect the application of credits that reduce fund expenses. Example Your investment of $1,000 would incur the following expenses, assuming 5% annual return and redemption at the end of each period: 1 3 5 10 year years years years $12 $36 $63 $139 The example does not represent past or future expense levels. Actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual return varies. The example does not reflect any charges or expenses related to your employer's plan. FINANCIAL HIGHLIGHTS The table below presents per share financial information for the life of class Y shares. This information has been derived from the fund's financial statements, which have been audited and reported on by the independent accountants. The "Report of independent accountants" and financial statements included in the Trust's annual report to shareholders for the 1997 fiscal year are incorporated by reference into this prospectus. The Trust's annual report, which contains additional unaudited performance information, is available without charge upon request.
Financial Highlights (For a share outstanding throughout the period) Putnam Asset Allocation: Growth Portfolio For the period CLASS Y July 14, 1994+ Year ended September 30 to September 30 1997 1996 1995 1994 Net asset value, beginning of period $11.47 $10.09 $8.43 $8.22 Investment Operations: Net investment income(d) .21 .21 .17(a) .03(a) Net realized and unrealized gain (loss) on investments 2.70 1.65 1.57 .18 Total from investment operations 2.91 1.86 1.74 .21 Less Distributions: From net investment income (.19) (.21) (.08) From net realized gain on investments (.47) (.27) Total distributions (.66) (.48) (.08) Net asset value, end of period $13.72 $11.47 $10.09 $8.43 Total investment return at 26.54 19.20 20.94 2.55* net asset value (%)(b) Net assets, end of period $233,292 $58,301 $45,150 $775 (in thousands) Ratio of expenses to average net assets (%)(c) 1.14 1.21 1.28(a) .20(a)* Ratio of net investment income to average net assets (%) 1.71 1.97 2.05(a) .50(a)* Portfolio turnover (%) 99.96 100.93 88.36 39.90* Average commission rate paid(e) $.0417 $.0486 + Commencement of operations. * Not annualized. (a) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the period ended September 30, 1994 reflect a reduction of $0.01 per share. Expenses for the year ended September 30, 1995 reflect a reduction of less than $0.01 per share. (b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (c) The ratio of expenses to average net assets for years ended on or after September 30, 1995 includes amounts paid through expense offset and brokerage service arrangements. Prior period ratios exclude these amounts. (d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period. (e) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995.
OBJECTIVE The fund seeks capital appreciation. The fund is not intended to be a complete investment program, and there is no assurance that the fund will achieve its objective. HOW THE FUND PURSUES ITS OBJECTIVE Basic investment strategy The fund's strategic allocation indicates the typical percentage allocation of the fund's investments between equity securities and fixed income securities (including money market instruments), although Putnam Investment Management, Inc., the fund's investment manager ("Putnam Management"), may adjust this allocation within the ranges described below. The strategic allocation and the range of active allocation are shown below: Strategic Allocation Range EQUITY CLASS 80% 65-95% FIXED INCOME CLASS 20% 5-35% The percentage limitations are applied at the time of purchase. The fund may also select other investments that do not fall within the asset classes listed above. Under normal market conditions, Putnam Management will allocate the assets of the fund within the specified ranges above or below the strategic allocation whenever, based on Putnam Management's experience in qualitative analysis and disciplined quantitative techniques, its research and analysis indicate changes in financial markets that reflect changed valuations within and between the asset classes. Allocating assets within a specified range above or below a strategic allocation permits the fund to attempt to optimize performance consistent with its investment objective. The risks of each asset class vary. For example, the values of equity securities change in response to general market and economic conditions and the activities and changing circumstances of individual issuers, and the values of fixed- income securities change in response to changes in economic conditions, interest rates and the creditworthiness of individual issuers. A significant portion of the fund's equity and fixed- income investments may consist of foreign securities, which involve certain special risks set forth in "Foreign investments," below. Equity Class The fund will invest its assets allocated to the Equity Class in a diversified portfolio of equity securities that Putnam Management believes have the potential for capital appreciation. These may include securities of larger companies (defined for these purposes as companies with equity market capitalization of at least $1 billion), equity securities of smaller, less well- known companies (defined for these purposes as companies with equity market capitalizations of less than $1 billion) and equity securities principally traded on foreign markets that Putnam Management believes, in each case, have potential for capital appreciation due to above-average earnings growth or because they are undervalued at the time of purchase . In selecting equity securities for the fund, Putnam Management will consider, among other things, an issuer's financial strength, competitive position and projected future earnings and dividends. Common stocks are normally the main type of the fund's equity investments. However, the fund may also purchase preferred stocks, convertible securities, warrants and other equity securities. Investing in securities of smaller, less well-known companies may present greater opportunities for capital appreciation, but may also involve greater risks. These companies may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume, and only in the over-the- counter market or on a regional securities exchange. As a result, these securities may fluctuate in value more than securities of larger, more established companies. Fixed Income Class The fund will invest its assets allocated to the Fixed Income Class in a diversified portfolio of fixed-income securities, including both U.S. and foreign government obligations and corporate obligations. The values of fixed-income securities generally fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of fund assets allocated to the Fixed Income Class. Conversely, during periods of rising interest rates, the value of fund assets allocated to such class will generally decline. The magnitude of these fluctuations will generally be greater for securities with longer maturities. However, the yields on such securities are also generally higher. In addition, the values of fixed-income securities are affected by changes in general economic and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of a fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund may invest in lower-rated fixed-income securities and in unrated securities determined by Putnam Management to be of comparable quality. Lower-rated fixed-income securities are securities rated below BBB or Baa by nationally recognized securities rating agencies, such as Standard & Poor's ("S&P") and Moody's Investors Service, Inc. ("Moody's") and, together with unrated securities of comparable quality, are commonly known as "junk bonds." The values of these securities generally fluctuate more than those of higher-rated securities. In addition, the lower rating reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions, or both, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values placed on such securities. In the absence of a liquid trading market for its portfolio securities, the fund at times may be unable to establish the fair value of such securities. The rating assigned to a security by a rating agency does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security. The fund will not purchase any fixed-income security that is rated, by all of the agencies rating the security, lower than CCC or Caa, or any unrated security determined to be of comparable quality by Putnam Management, if as a result, more than 5% of the fund's total assets would be invested in securities of that quality. Such securities may be in default and are generally regarded as having predominantly speculative characteristics. The rating services' descriptions of debt securities are included in the Appendix to this prospectus. The foregoing investment limitations will be measured at the time of purchase and, to the extent that a security is assigned a different rating by one or more of the various rating agencies, Putnam Management will use the highest rating assigned by any agency in determining compliance with the foregoing investment limitations. The table below shows the percentages of fund assets invested during fiscal 1997 in securities assigned to the various rating categories by S&P, or, if unrated by S&P, assigned to comparable rating categories by another rating agency, and in unrated securities determined by Putnam Management to be of comparable quality . Unrated securities Rated securities, of comparable quality, as percentage of as percentage of Rating net assets net assets "AAA" 7.26% "AA" 0.02% "A" 0.48% "BBB" 0.88% "BB" 1.12% 0.01% "B" 2.57% 0.30% "CCC" 0.22% 0.01% "CC" 0.02% ----- ----- Total: 12.57% 0.32% ===== ===== Putnam Management seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the fund invests in securities in the lower rating categories, the achievement of the fund's goals is more dependent on Putnam Management's investment analysis than would be the case if that fund were investing in fixed-income securities in the higher rating categories. Investors should carefully consider their ability to assume the risks of owning shares of a mutual fund that may invest in lower-rated securities before making an investment. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether continued investment in the security will assist in meeting the fund's investment objective. At times, a substantial portion of fund assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, it may be more difficult to sell these securities when Putnam Management believes it advisable to do so or the fund may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of these securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase fund operating expenses and adversely affect the fund's net asset value. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, the securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, the fund might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The fund at times may invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Both zero-coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest in cash currently. The values of zero-coupon bonds and payment-in-kind- bonds are also subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest in cash currently. Even though such bonds do not pay current interest in cash, the fund nonetheless is required to accrue interest income on these investments and to distribute the interest income on a current basis. Thus, the fund could be required at times to liquidate other investments in order to satisfy its distribution requirements. Certain investment grade securities in which the fund may invest share some of the risk factors discussed above with respect to lower-rated securities. For additional information regarding the risks associated with investing in securities in the lower rating categories, see the SAI. Asset-backed and mortgage-backed securities. The fund may invest some or all of its assets allocated to the Fixed Income Class in asset-backed and mortgage-backed securities, including collateralized mortgage obligations ("CMOs"). CMOs and other mortgage-backed securities represent participations in, or are secured by, mortgage loans and include: - - Certain securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; - - Securities issued by private issuers that represent an interest in or are secured by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and - - Securities issued by private issuers that represent an interest in or are secured by mortgage loans or mortgage- backed securities without a government guarantee but usually having some form of private credit enhancement. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The fund may also invest in asset-backed securities. Asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements. The ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited. Prepayment risk. Mortgage-backed and asset-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed and asset-backed securities include both interest and a partial payment of principal. Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans or other assets. Mortgage-backed and asset-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed and asset-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs. CMOs are issued with a number of classes or series that have different maturities and that may represent interests in some or all of the interest or principal on the underlying collateral. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Stripped mortgage-backed securities. The yield to maturity on an IO or PO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurably adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. In either event, the secondary market for stripped mortgage- backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. Money market instruments. The fund may invest in high quality money market obligations that Putnam Management believes present minimal credit risk and may include U.S. government obligations, certificates of deposit, bankers' acceptances, bank deposits, other financial institution obligations and commercial paper and other short-term corporate obligations. These instruments have various maturities and may have fixed or variable interest rates. The fund may also hold a portion of its assets in cash. Foreign investments The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The fund may engage in a variety of foreign currency exchange transactions in connection with its foreign investments, including transactions involving futures contracts, forward contracts and options. Investments in foreign securities may subject the fund to other risks as well. For example, there may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments , which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above are typically increased in connection with investments in less developed and developing nations, which are sometimes referred to as "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, causing instability. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The fund expects that its investments in foreign securities generally will not exceed 60% of its total assets, although the fund's investments in foreign securities may exceed these amounts from time to time. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or to securities of U.S. issuers having significant foreign operations. For more information about foreign securities and the risks associated with investment in such securities, see the SAI. Foreign currency exchange transactions The fund may engage in foreign currency exchange transactions to manage its exposure to foreign currencies. Putnam Management may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging"). It may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. The fund may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the fund contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the- counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchange or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies . In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. For a further discussion of the risks associated with purchasing and selling futures contracts and options, see "Financial futures and options." The SAI also contains additional information concerning the fund's use of foreign currency exchange transactions. Investments in premium securities At times, the fund may invest some or all of its assets allocated to the Fixed Income Class in securities bearing coupon rates higher than prevailing market rates. Such "premium" securities are typically purchased at prices greater than the principal amounts payable on maturity. The fund does not amortize the premium paid for these securities in calculating its net investment income. As a result, the purchase of premium securities provides a higher level of investment income distributable to shareholders on a current basis than if the fund purchased securities bearing current market rates of interest. Because the value of premium securities tends to approach the principal amount as they approach maturity (or call price in the case of securities approaching their first call date), the purchase of such securities may increase the risk of capital loss if such securities are held to maturity (or first call date). During a period of declining interest rates, many of the fund's portfolio investments will likely bear coupon rates that are higher than the current market rates, regardless of whether the securities were originally purchased at a premium. These securities would generally carry premium market values that would be reflected in the net asset value of fund shares. As a result, an investor who purchases fund shares during such periods would initially receive higher taxable monthly distributions (derived from the higher coupon rates payable on the fund's investments) than might be available from alternative investments bearing current market interest rates, but the investor may face an increased risk of capital loss as these higher coupon securities approach maturity (or first call date). In evaluating the potential performance of an investment in the fund, investors may find it useful to compare the fund's current dividend rate with its "yield," which is computed on a yield-to-maturity basis in accordance with SEC regulations and which reflects amortization of market premiums. See "How performance is shown." Portfolio turnover The length of time the fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the fund is known as "portfolio turnover." As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense, including brokerage commissions or dealer markups and other transaction costs in connection with the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Portfolio turnover rates are shown in the section "Financial highlights." Defensive strategies At times Putnam Management may judge that conditions in the securities markets make pursuing the fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Putnam Management may temporarily use alternative strategies that are primarily designed to reduce fluctuations in the value of fund assets. In implementing these defensive strategies, the fund may invest without regard to the ranges described above for investments in the various asset classes and may invest without limit in equity securities, debt securities, preferred stocks, U.S. government and agency obligations, cash or money market instruments, or in other securities Putnam Management considers consistent with such defensive strategies. It is impossible to predict when, or for how long, these alternative strategies would be used. Financial futures and options The fund may purchase and sell financial futures contracts on stock indexes, U.S. government securities, foreign fixed-income securities and foreign currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed-income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time the fund enters into and terminates a futures contract, that fund realizes a gain or loss. The fund may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to relevant markets or as a substitute for direct investment. For example, when Putnam Management wants to increase the fund's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices, such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when Putnam Management wants to increase the fund's exposure to fixed-income securities, it may do so by taking long positions in futures contracts relating to fixed-income securities such as futures contracts on U.S. Treasury securities. The fund may buy and sell call and put options on futures contracts or on stock indexes in addition to or as an alternative to purchasing or selling futures contracts or, to earn additional income. Options and futures transactions involve costs and may result in losses. The effective use of options and futures strategies depends on the fund's ability to terminate options and futures positions at times when Putnam Management deems it desirable to do so. Although the fund will enter into an option or futures contract position only if Putnam Management believes that a liquid secondary market exists for such option or futures contract, there is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the fund may purchase or sell may be traded in the "over-the-counter" market rather than on an exchange. This means that the fund would enter into such option contracts with particular securities dealers who make markets in these options. The fund's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to that fund. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the values of the index, currency or security underlying the futures and options purchased and sold by the fund, of the option or futures contract itself, and of the security or currency which is the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. Because the markets for options and futures on foreign equity indexes, foreign fixed-income securities and foreign currencies are relatively new and still developing, the fund's ability to engage in such transactions may be limited. Certain provisions of the Internal Revenue Code and certain regulatory requirements may also limit the use of futures and options transactions. For a more detailed explanation of futures and options transactions and the risks associated with them, see the SAI. Other investment practices The fund may also engage to a limited extent in the following investment practices, each of which involves certain special risks. The SAI contains more detailed information about these practices, including limitations designed to reduce these risks. Options. The fund may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest and on foreign currencies. The fund receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit. When the fund writes a call option, it gives up the opportunity to profit from any increase in the price of a security or currency above the exercise price of the option; when it writes a put option, the fund takes the risk that it will be required to purchase a security or currency from the option holder at a price above the current market price of the security or currency. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund may also buy and sell put and call options, including combinations of put and call options on the same underlying security or currency. The use of these strategies may be limited by applicable law. Securities loans, repurchase agreements and forward commitments. The fund may lend portfolio securities amounting to not more than 25% of its assets to broker-dealers and may enter into repurchase agreements on up to 25% of its assets. These transactions must be fully collateralized at all times. The fund may also purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk if the other party should default on its obligation and the fund is delayed or prevented from recovering the collateral or completing the transaction. Diversification The fund is a "diversified" investment company under the Investment Company Act of 1940. This means that with respect to 75% of its total assets, the fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. government securities). The remaining 25% of its total assets is not subject to this restriction. To the extent the fund invests a significant portion of its assets in the securities of a particular issuer, it will be subject to an increased risk of loss if the market value of such issuer's securities declines. Derivatives Certain of the instruments in which the fund may invest, such as futures contracts, options, forward contracts and CMOs, are considered to be "derivatives." Derivatives are financial instruments whose value depends upon, or is derived from, the value of an underlying asset, such as a security, a currency or an index. Further information about these instruments and the risks involved in their use is included elsewhere in this prospectus and in the SAI. Limiting investment risk Specific investment restrictions help to limit investment risks for the fund's shareholders. These restrictions prohibit the fund, with respect to 75% of its total assets, from acquiring more than 10% of the voting securities of any one issuer.* They also prohibit the fund from investing more than: (a) (with respect to 75% of its total assets) 5% of its total assets in securities of any one issuer (other than the U.S. government , its agencies or instrumentalities );* (b) 25% of its total assets in any one industry (securities of the U.S. government, its agencies or instrumentalities, or of any foreign government, its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries);* or (c) 15% of its net assets in any combination of securities that are not readily marketable, securities restricted as to resale (excluding securities determined by the Trustees (or the person designated by the Trustees to make such determinations) to be readily marketable), and repurchase agreements maturing in more than seven days. Restrictions marked with an asterisk (*) above are summaries of fundamental investment policies. See the SAI for the full text of these policies and other fundamental investment policies. Except as otherwise noted, all percentage limitations described in this prospectus and the SAI will apply at the time an investment is made, and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for investment policies designated as fundamental in this prospectus or the SAI, the investment policies described in this prospectus and in the SAI are not fundamental investment policies. The Trustees may change any non-fundamental investment policy without shareholder approval. As a matter of policy, the Trustees would not materially change the fund's investment objective without shareholder approval. HOW PERFORMANCE IS SHOWN Fund advertisements may, from time to time, include performance information. "Yield" for each class of shares is calculated by dividing the annualized net investment income per share during a recent 30-day period by the maximum public offering price per share of the class on the last day of that period. For purposes of calculating yield, net investment income is calculated in accordance with SEC regulations and may differ from net investment income as determined for financial reporting purposes. SEC regulations require that net investment income be calculated on a "yield-to-maturity" basis, which has the effect of amortizing any premiums or discounts in the current market value of fixed-income securities. The current dividend rate is based on net investment income as determined for tax purposes, which may not reflect amortization in the same manner. See "How the fund pursues its objective -- Investments in premium securities." "Total return" for the one-, five- and ten-year periods (or for the life of the class Y shares, if shorter) through the most recent calendar quarter represents the average annual compounded rate of return on an investment of $1,000 in the fund. Total return may also be presented for other periods. All data are based on past investment results and do not predict future performance. Investment performance, which will vary, is based on many factors, including market conditions, portfolio composition, fund operating expenses and the class of shares the investor purchases. Investment performance also often reflects the risks associated with the fund's investment objective and policies. These factors should be considered when comparing the fund's investment results with those of other mutual funds and other investment vehicles. Quotations of investment performance for any period when an expense limitation was in effect will be greater than if the limitation had not been in effect. Fund performance may be compared to that of various indexes. See the SAI. HOW THE FUND IS MANAGED The Trustees are responsible for generally overseeing the conduct of fund business. Subject to such policies as the Trustees may determine, Putnam Management furnishes a continuing investment program for the fund and makes investment decisions on its behalf. Subject to the control of the Trustees, Putnam Management also manages the fund's other affairs and business. The Trust pays Putnam Management a quarterly fee for these services based on the fund's average net assets. See "Expenses summary" and the SAI. Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the fund's portfolio. The Trust pays all expenses not assumed by Putnam Management, including Trustees' fees, auditing, legal, custodial, investor servicing and shareholder reporting expenses, and payments under its distribution plans (which are in turn allocated to the relevant class of shares). Expenses of the Trust directly charged or attributable to the fund will be paid from the assets of the fund. General expenses of the Trust will be allocated among and charged to the assets of the fund and any other series of the Trust on a basis that the Trustees deem fair and equitable, which may be based on the nature of the services performed and relative applicability to, or the relative assets of, the fund and such series. The Trust also reimburses Putnam Management for the compensation and related expenses of certain fund officers and their staff who provide administrative services. The total reimbursement is determined annually by the Trustees. Putnam Management places all orders for purchases and sales of fund securities. In selecting broker-dealers, Putnam Management may consider research and brokerage services furnished to it and its affiliates. Subject to seeking the most favorable price and execution available, Putnam Management may consider sales of fund shares (and, if permitted by law, shares of the other Putnam funds) as a factor in the selection of broker-dealers. ORGANIZATION AND HISTORY The Trust is a Massachusetts business trust organized on November 4, 1993. A copy of the Agreement and Declaration of Trust, which is governed by Massachusetts law, is on file with the Secretary of State of The Commonwealth of Massachusetts. The fund is an open-end, diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Trustees may, without shareholder approval, create two or more series of shares representing separate investment portfolios. Any such series of shares may be divided without shareholder approval into two or more classes of shares having such preferences and special or relative rights and privileges as the Trustees determine. The Trust's shares are currently divided into three series. Only the fund's class Y shares are offered by this prospectus. The fund also offers other classes of shares with different sales charges and expenses. Because of these different sales charges and expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase any other class of shares, contact your investment dealer or Putnam Mutual Funds (at 1-800-225-1581). Each share has one vote, with fractional shares voting proportionally. All shares of the Trust will vote together as a single class without regard to series or classes of shares on all matters except, (i) when required by the Investment Company Act of 1940 or when the Trustees have determined that the matter affects the interests of one or more series or classes materially differently, shares will be voted by individual series or class; and (ii) when the Trustees have determined that the matter affects only the interest of one or more series or classes, only shareholders of that series or class shall be entitled to vote thereon. Shares are freely transferable, are entitled to dividends as declared by the Trustees, and, if the fund were liquidated, would receive the net assets of the fund. The fund may suspend the sale of shares at any time and may refuse any order to purchase shares. Although the Trust is not required to hold annual meetings of its shareholders, shareholders holding at least 10% of the outstanding shares entitled to vote have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust. If you own fewer shares than the minimum set by the Trustees (presently 20 shares), the fund may choose to redeem your shares. You will receive at least 30 days' written notice before the fund redeems your shares, and you may purchase additional shares at any time to avoid a redemption. The fund may also redeem shares if you own shares above a maximum amount set by the Trustees. There is presently no maximum, but the Trustees may , at any time, establish one which could apply to both present and future shareholders. The Trust's Trustees: George Putnam,* Chairman. President of the Putnam funds. Chairman and Director of Putnam Management and Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director, Marsh & McLennan Companies, Inc.; William F. Pounds, Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology; Jameson Adkins Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice Chairman, North American Management Corp.; John A. Hill, Chairman and Managing Director, First Reserve Corporation; Ronald J. Jackson, Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc. , Trustee of Salem Hospital and the Peabody Essex Museum; Paul L. Joskow,* Professor of Economics and Management, Massachusetts Institute of Technology, Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research; Elizabeth T. Kennan, President Emeritus and Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice President of the Putnam funds. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Management. Director, Marsh & McLennan Companies, Inc.; John H. Mullin, III, Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation, and The Ryland Group, Inc.; Robert E. Patterson, Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership; Donald S. Perkins,* Director of various corporations, including Cummins Engine Company, Lucent Technologies, Inc., Springs Industries, Inc. and Time Warner Inc.; George Putnam, III,* President, New Generation Research, Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc.; W. Thomas Stephens, President and Chief Executive Officer of MacMillan Bloedel Ltd., Director of Mail-Well, Inc., Qwest Communications, The Eagle Picher Trust and New Century Energies; and W. Nicholas Thorndike, Director of various corporations and charitable organizations, including Data General Corporation, Bradley Real Estate, Inc. and Providence Journal Co. Also, Trustee of Massachusetts General Hospital and Eastern Utilities Associates. The Trust's Trustees are also Trustees of the other Putnam funds. Those marked with an asterisk (*) are or may be deemed to be "interested persons" of the Trust, Putnam Management or Putnam Mutual Funds. About Your Investment HOW TO BUY SHARES All orders to purchase shares must be made through your employer's defined contribution plan. For more information about how to purchase shares of the fund through your employer's plan or limitations on the amount that may be purchased, please consult your employer. Shares are sold to eligible defined contribution plans at the net asset value per share next determined after receipt of an order by Putnam Mutual Funds. Orders must be received by Putnam Mutual Funds before the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. Class Y shares are available to defined contribution plans whose investment in Putnam funds and other assets managed by Putnam Management or its affiliates, combined with such investments by the plan's sponsor and the sponsor's other employee benefit plans, equals at least $250 million. Defined contribution plans that elect to buy class Y shares after attaining eligibility will receive class Y shares in place of any class A shares owned at the time of their first purchase of class Y shares. Class Y shares are also available to defined contribution plans whose sponsor confirms a good faith expectation that investments in Putnam- managed assets by the sponsor and its employee benefit plans will attain $250 million (using the higher of purchase price or current market value) within one year of the initial purchase of class Y shares, and agrees that class Y shares may be redeemed and class A shares purchased if that level is not attained. To eliminate the need for safekeeping, the fund will not issue certificates for your shares. Putnam Mutual Funds will from time to time, at its expense, provide promotional incentives or payments to dealers that sell shares of the Putnam funds. These incentives or payments may include payments for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and their guests to locations within and outside the United States for meetings or seminars of a business nature. In some instances, these incentives or payments may be offered only to certain dealers who have sold or may sell significant amounts of shares. Certain dealers may not sell all classes of shares. HOW TO SELL SHARES Subject to any restrictions imposed by your employer's plan, you can sell your shares through the plan to the fund any day the New York Stock Exchange is open. For more information about how to sell shares of the fund through your employer's plan, including any charges that may be imposed by the plan, please consult with your employer. Your plan administrator must send a signed letter of instruction to Putnam Investor Services. The price you will receive is the next net asset value calculated after the fund receives the request in proper form. All requests must be received by the fund prior to the close of regular trading on the New York Stock Exchange in order to receive that day's net asset value. If you sell shares having a net asset value of $100,000 or more, the signatures of registered owners or their legal representatives must be guaranteed by a bank, broker-dealer or certain other financial institutions. See the SAI for more information about where to obtain a signature guarantee. The fund generally provides payment for redeemed shares the business day after the request is received. Under unusual circumstances, the fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. The fund will only redeem shares for which it has received payment. HOW TO EXCHANGE SHARES Subject to any restrictions contained in your employer's plan, you can exchange your shares for shares of other Putnam funds available through your employer's plan at net asset value. Contact your plan administrator or Putnam Investor Services for more information on how to exchange your shares or how to obtain prospectuses of other Putnam funds in which you may invest. The exchange privilege is not intended as a vehicle for short- term trading. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. In order to limit excessive exchange activity and in other circumstances where Putnam Management or the Trustees believe doing so would be in the best interests of the fund, the fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges or reject any exchange. Consult Putnam Investor Services before requesting an exchange. See the SAI to find out more about the exchange privilege. HOW THE FUND VALUES ITS SHARES The fund calculates the net asset value of a share of each class by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Portfolio securities for which market quotations are readily available are valued at market value. Short-term investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION The fund distributes any net investment income and any net capital gains at least annually. Distributions from net capital gains are made after applying any available capital loss carryovers. The terms of your employer's plan will govern how your employer's plan may receive distributions from the fund. Generally, periodic distributions from the fund to your employer's plan are reinvested in additional fund shares, although your employer's plan may permit you to receive fund distributions from net investment income in cash while reinvesting capital gains distributions in additional shares or to receive all fund distributions in cash. If another option is not selected, all distributions will be reinvested in additional fund shares. The fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal income taxes on income and gains it distributes. The fund will distribute substantially all of its ordinary income and capital gain net income on a current basis. Generally, fund distributions are taxable as ordinary income, except that any distributions designated by the fund as deriving from net gains on securities held for more than one year but not more than 18 months and from net gains on securities held for more than 18 months will be taxable as such. However, distributions by the fund to employer-sponsored defined contribution plans that qualify for tax-exempt treatment under federal income tax laws will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax adviser to determine the suitability of the fund as an investment through such a plan and the tax treatment of distributions (including distributions of amounts attributable to an investment in the fund) from such a plan. Fund investments in foreign securities may be subject to withholding taxes at the source on dividend or interest payments. In that case, the fund's yield on those securities would be decreased. Fund transactions in foreign currencies and hedging activities will likely produce a difference between book income and taxable income. This difference may cause a portion of the fund's income distributions to constitute a return of capital for tax purposes or require the fund to make distributions exceeding book income to qualify as a regulated investment company for tax purposes. Investment in an entity that qualifies as a "passive foreign investment company" under the Internal Revenue Code could subject the fund to a U.S. federal income tax or other charge on certain "excess distributions" with respect to the investment, and on the proceeds from disposition of the investment. The foregoing is a summary of certain federal income tax consequences of investing in the fund. You should consult your tax adviser to determine the precise effect of an investment in the fund on your particular tax situation (including possible liability for state and local taxes). ABOUT PUTNAM INVESTMENTS, INC. Putnam Management has been managing mutual funds since 1937. Putnam Mutual Funds is the principal underwriter of the fund and of other Putnam funds. Putnam Defined Contribution Plans is a division of Putnam Mutual Funds. Putnam Fiduciary Trust Company is the custodian of the fund. Putnam Investor Services, a division of Putnam Fiduciary Trust Company, is the investor servicing and transfer agent for the fund. Putnam Management, Putnam Mutual Funds, and Putnam Fiduciary Trust Company are located at One Post Office Square, Boston, Massachusetts 02109 and are subsidiaries of Putnam Investments, Inc., which is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. APPENDIX SECURITIES RATINGS The following rating services describe rated securities as follows: Moody's Investors Service, Inc. Bonds Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Bonds AAA -- Debt rated `AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated `AA' has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A -- Debt rated `A' has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB-B-CCC-CC-C -- Debt rated `BB', `B', `CCC', `CC' and `C' is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. `BB' indicates the lowest degree of speculation and `C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB -- Debt rated `BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The `BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BBB-' rating. B -- Debt rated `B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The `B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `BB' or `BB-' rating. CCC -- Debt rated `CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The `CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied `B' or `B-' rating. CC -- The rating `CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied `CCC' rating. C -- The rating `C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. D -- Bonds rated `D' are in payment default. The `D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The `D' rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized. Duff & Phelps Corporation Long-Term Debt AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial protection factors fluctuate according to industry conditions or company fortunes. Overall quality may move up or down frequently within this category. B+, B, B- -- Below investment grade and possessing risk that obligations will not be met when due. Financial protection factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes. Potential exists for frequent changes in the rating within this category or into a higher or lower rating grade. CCC -- Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal, interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable economic/industry conditions, and/or with unfavorable company developments. DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Fitch Investors Service, Inc. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. A -- Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB -- Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB -- Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B -- Bonds are considered highly speculative. Bonds in this class are lightly protected as to the obligor's ability to pay interest over the life of the issue and repay principal when due. CCC -- Bonds have certain characteristics which, with passing of time, could lead to the possibility of default on either principal or interest payments. CC -- Bonds are minimally protected. Default in payment of interest and/or principal seems probable. C -- Bonds are in actual or imminent default in payment of interest or principal. DDD -- Bonds are in default and in arrears in interest and/or principal payments. Such bonds are extremely speculative and should be valued only on the basis of their value in liquidation or reorganization of the obligor. PUTNAM ASSET ALLOCATION FUNDS (the "Trust") PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO ("Growth Portfolio") PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO ("Balanced Portfolio") PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO ("Conservative Portfolio") (each referred to herein as a "fund") FORM N-1A PART B STATEMENT OF ADDITIONAL INFORMATION ("SAI") January 30, 1998 This SAI is not a prospectus and is only authorized for distribution when accompanied or preceded by a prospectus of the Trust dated January 30, 1998, as revised from time to time. This SAI contains information which may be useful to investors but which is not included in any of the Trust's prospectuses. Each reference to the prospectus in this SAI shall include all of the Trust's prospectuses, unless otherwise noted. The SAI should be read together with the applicable prospectus. Investors may obtain a free copy of the applicable prospectus from Putnam Investor Services, Mailing address: P.O. Box 41203, Providence, RI 02940-1203. Part I of this SAI contains specific information about the Trust. Part II includes information about the Trust and the other Putnam funds. Table of Contents Part I Page INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . .1-3 CHARGES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . .1-5 INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . 1- 15 ADDITIONAL OFFICERS . . . . . . . . . . . . . . . . . . . . . 1- 17 INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . . 1- 17 Part II MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . II-1 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .II- 30 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .II- 36 DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . .II- 46 HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . .II- 47 DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . .II- 59 INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . .II- 61 SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . .II- 66 SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . .II- 67 SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . .II- 67 STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . .II- 67 COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . .II- 69 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . .II- 73 SAI PART I INVESTMENT RESTRICTIONS As fundamental investment restrictions, which may not be changed without a vote of a majority of the outstanding voting securities, a fund may not and will not: (1) Borrow money in excess of 10% of the value (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) at the time the borrowing is made, and then only from banks as a temporary measure to facilitate the meeting of redemption requests (not for leverage) which might otherwise require the untimely disposition of portfolio investments or for extraordinary or emergency purposes. Such borrowings will be repaid before any additional investments are purchased. (2) Underwrite securities issued by other persons except to the extent that, in connection with the disposition of its portfolio investments, it may be deemed to be an underwriter under certain federal securities laws. (3) Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein. (4) Purchase or sell commodities or commodity contracts, except that the fund may purchase and sell financial futures contracts and options and may enter into foreign exchange contracts and other financial transactions not involving physical commodities. (5) Make loans, except by purchase of debt obligations in which the fund may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities. (6) With respect to 75% of its total assets, invest in the securities of any issuer if, immediately after such investment, more than 5% of the total assets of the fund (taken at current value) would be invested in the securities of such issuer; provided that this limitation does not apply to obligations issued or guaranteed as to interest or principal by the U.S. government or its agencies or instrumentalities. (7) With respect to 75% of its total assets, acquire more than 10% of the outstanding voting securities of any issuer. (8) Purchase securities if, as a result of such purchase, more than 25% of the fund's total assets would be invested in any one industry. (Securities of the U.S. government or its agencies or instrumentalities, or of any foreign government or its agencies or instrumentalities, securities of supranational entities, and securities backed by the credit of a governmental entity are not considered to represent industries.) (9) Issue any class of securities which is senior to the fund's shares of beneficial interest, except for permitted borrowings. Although certain of the funds' fundamental investment restrictions permit the funds to borrow money to a limited extent, the funds do not currently intend to do so and did not do so last year. The Investment Company Act of 1940 provides that a "vote of a majority of the outstanding voting securities" of a fund means the affirmative vote of the lesser of (1) more than 50% of the outstanding fund shares, or (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding fund shares are represented at the meeting in person or by proxy. It is contrary to each fund's present policy, which may be changed without shareholder approval, to: Invest in (a) securities which are not readily marketable, (b) securities restricted as to resale (excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees of the Trust to make such determinations) to be readily marketable), and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the fund's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above. --------------------- All percentage limitations on investments (other than pursuant to the non-fundamental restriction ) will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. ---------------------- CHARGES AND EXPENSES MANAGEMENT FEES Under a Management Contract dated January 20, 1997 the Trust pays a quarterly fee to Putnam Management based on the average net assets of each fund, as determined at the close of each business day during the quarter, at an annual rate of 0.70% of the first $500 million of the average net asset value of each fund, 0.60% of the next $500 million, 0.55% of the next $500 million and 0.50% of the next $5 billion, 0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.440% of the next $5 billion and 0.430% of any excess over $21.5 billion of such average net asset value. For the past three fiscal years, pursuant to the Management Contract and a management contract in effect prior to January 20, 1997, under which the management fee payable to Putnam Management was paid at the rate of 0.70% of the first $500 million of the average net asset value of each fund, 0.60% of the next $500 million, 0.55% of the next $500 million and 0.50% of any excess over $1.5 billion, the funds incurred the following fees: Reflecting a reduction in the following amounts pursuant to an Fiscal Management expense year fee paid limitation Growth Portfolio 1997 $5,592,040 $0 1996 $2,703,753 $0 1995 $1,216,103 $94,394 Balanced Portfolio 1997 $7,033,919 $0 1996 $3,833,531 $0 1995 $2,052,911 $64,532 Conservative Portfolio 1997 $2,847,969 $0 1996 $1,281,120 $0 1995 $278,517 $392,573 Brokerage commissions The following table shows brokerage commissions paid during the fiscal periods indicated : Fiscal Brokerage year commissions Growth Portfolio 1997 $1,461,261 1996 $682,563 1995 $527,394 Balanced Portfolio 1997 $1,573,783 1996 $876,649 1995 $611,612 Conservative Portfolio 1997 $367,837 1996 $169,902 1995 $120,247 The following table shows transactions placed with brokers and dealers during the most recent fiscal year to recognize research, statistical and quotation services received by Putnam Management and its affiliates : Dollar value Percent of of these total Amount of transactions transactions commissions Growth Portfolio $572,921,007 56.66% $836,348 Balanced Portfolio $618,076,554 57.72% $916,564 Conservative Portfolio $121,351,546 49.26% $213,918 Administrative expense reimbursement The funds reimbursed Putnam Management for administrative services during fiscal 1997, including compensation of certain fund officers and contributions to the Putnam Investments, Inc. Profit Sharing Retirement Plan for their benefit, as follows: Portion of total reimbursement for compensation Total and reimbursement contributions Growth Portfolio $12,590 $11,100 Balanced Portfolio $17,999 $15,869 Conservative Portfolio $9,347 $8,241 Trustee Fees Each Trustee receives a fee for his or her services. Each Trustee also receives fees for serving as Trustee of other Putnam funds. The Trustees periodically review their fees to assure that such fees continue to be appropriate in light of their responsibilities as well as in relation to fees paid to Trustees of other mutual fund complexes. The Trustees meet monthly over a two-day period, except in August. The Compensation Committee, which consists solely of Trustees not affiliated with Putnam Management and is responsible for recommending Trustee compensation, estimates that Committee and Trustee meeting time together with the appropriate preparation requires the equivalent of at least three business days per Trustee meeting. The following table shows the year each Trustee was first elected a Trustee of the Putnam funds, the fees paid to each Trustee by each fund for fiscal 1997 and the fees paid to each Trustee by all of the Putnam funds during calendar year 1997:
COMPENSATION TABLE GROWTH PORTFOLIO Pension or Estimated retirement annual Total benefits benefits compensation accrued as from all from all Aggregate part of fund Putnam funds Putnam Trustee/Year compensation(1) expenses upon retirement(2) funds(3) Jameson A. Baxter/1994 $1,122 $298 $ 87,500 $176,000(4) Hans H. Estin/1972 1,109 913 87,500 175,000 John A. Hill/1985 1,115 342 87,500 175,000(4) Ronald J. Jackson/1996(5) 1,122 69 87,500 176,000(4) Paul L. Joskow/1997(6) 87,500 25,500 Elizabeth T. Kennan/1992 1,108 568 87,500 174,000 Lawrence J. Lasser/1992 1,095 426 87,500 172,000 John H. Mullin, III/1997(6) 87,500 25,500 Robert E. Patterson/1984 1,122 274 87,500 176,000 Donald S. Perkins/1982 1,122 993 87,500 176,000 William F. Pounds/1971(7) 1,248 954 98,000 201,000 George Putnam/1957 1,115 1,047 87,500 175,000 George Putnam, III/1984 1,108 180 87,500 174,000 A.J.C. Smith/1986 1,082 612 87,500 170,000 W. Thomas Stephens/1997(8) 102 87,500 53,000(4) W. Nicholas Thorndike/1992 1,122 816 87,500 176,000 (1) Includes an annual retainer and an attendance fee for each meeting attended. (2) Assumes that each Trustee retires at the normal retirement date. Estimated benefits for each Trustee are based on Trustee fee rates in effect during calendar 1997. (3) As of December 31, 1997, there were 101 funds in the Putnam family. (4) Includes compensation deferred pursuant to a Trustee Compensation Deferral Plan. (5)Elected as a Trustee in May 1996. (6) Elected as a Trustee in November 1997. (7) Includes additional compensation for service as Vice Chairman of the Putnam funds. (8) Elected as a Trustee in September 1997.
COMPENSATION TABLE BALANCED PORTFOLIO Pension or Estimated retirement annual Total benefits benefits compensation accrued as from all from all Aggregate part of fund Putnam funds Putnam Trustee/Year compensation(1) expenses upon retirement(2) funds(3) Jameson A. Baxter/1994 $1,278 $312 $ 87,500 176,000(4) Hans H. Estin/1972 1,264 955 87,500 175,000 John A. Hill/1985 1,271 358 87,500 175,000(4) Ronald J. Jackson/1996(5) 1,278 73 87,500 176,000(4) Paul L. Joskow/1997(6) 87,500 25,500 Elizabeth T. Kennan/1992 1,264 593 87,500 174,000 Lawrence J. Lasser/1992 1,249 445 87,500 172,000 John H. Mullin, III/1997(6) 87,500 25,500 Robert E. Patterson/1984 1,278 286 87,500 176,000 Donald S. Perkins/1982 1,278 1,039 87,500 176,000 William F. Pounds/1971(7) 1,453 999 98,000 201,000 George Putnam/1957 1,271 1,095 87,500 175,000 George Putnam, III/1984 1,264 188 87,500 174,000 A.J.C. Smith/1986 1,235 640 87,500 170,000 W. Thomas Stephens/1997(8) 113 87,500 53,000(4) W. Nicholas Thorndike/1992 1,278 852 87,500 176,000 (1) Includes an annual retainer and an attendance fee for each meeting attended. (2) Assumes that each Trustee retires at the normal retirement date. Estimated benefits for each Trustee are based on Trustee fee rates in effect during calendar 1997. (3) As of December 31, 1997, there were 101 funds in the Putnam family. (4) Includes compensation deferred pursuant to a Trustee Compensation Deferral Plan. (5) Elected as a Trustee in May 1996. (6) Elected as a Trustee in November 1997. (7) Includes additional compensation for service as Vice Chairman of the Putnam funds. (8) Elected as a Trustee in September 1997.
COMPENSATION TABLE CONSERVATIVE PORTFOLIO Pension or Estimated retirement annual Total benefits benefits compensation accrued as from all from all Aggregate part of fund Putnam funds Putnam Trustee/Year compensation(1) expenses upon retirement(2) funds(3) Jameson A. Baxter/1994 $ 786 $ 228 $ 87,500 $176,000(4) Hans H. Estin/1972 778 716 87,500 175,000 John A. Hill/1985 782 268 87,500 175,000(4) Ronald J. Jackson/1996(5) 786 47 87,500 176,000(4) Paul L. Joskow/1997(6) 87,500 25,500 Elizabeth T. Kennan/1992 778 453 87,500 174,000 Lawrence J. Lasser/1992 769 340 87,500 172,000 John H. Mullin, III/1997(6) 87,500 25,500 Robert E. Patterson/1984 786 215 87,500 176,000 Donald S. Perkins/1982 786 779 87,500 176,000 William F. Pounds/1971(7) 851 742 98,000 201,000 George Putnam/1957 782 821 87,500 175,000 George Putnam, III/1984 778 141 87,500 174,000 A.J.C. Smith/1986 761 479 87,500 170,000 W. Thomas Stephens/1997(8) 65 87,500 53,000(4) W. Nicholas Thorndike/1992 786 651 87,500 176,000 (1) Includes an annual retainer and an attendance fee for each meeting attended. (2) Assumes that each Trustee retires at the normal retirement date. Estimated benefits for each Trustee are based on Trustee fee rates in effect during calendar 1997. (3) As of December 31, 1997, there were 101 funds in the Putnam family. (4) Includes compensation deferred pursuant to a Trustee Compensation Deferral Plan. (5) Elected as a Trustee in May 1996. (6) Elected as a Trustee in November 1997. (7) Includes additional compensation for service as Vice Chairman of the Putnam funds. (8) Elected as a Trustee in September 1997.
Under a Retirement Plan for Trustees of the Putnam funds (the "Plan"), each Trustee who retires with at least five years of service as a Trustee of the funds is entitled to receive an annual retirement benefit equal to one-half of the average annual compensation paid to such Trustee for the last three years of service prior to retirement. This retirement benefit is payable during a Trustee's lifetime, beginning the year following retirement, for a number of years equal to such Trustee's years of service. A death benefit is also available under the Plan which assures that the Trustee and his or her beneficiaries will receive benefit payments for the lesser of an aggregate period of (i) ten years or (ii) such Trustee's total years of service. The Plan Administrator (a committee comprised of Trustees that are not "interested persons" of the fund, as defined in the Investment Company Act of 1940) may terminate or amend the Plan at any time, but no termination or amendment will result in a reduction in the amount of benefits (i) currently being paid to a Trustee at the time of such termination or amendment, or (ii) to which a current Trustee would have been entitled had he or she retired immediately prior to such termination or amendment. For additional information concerning the Trustees, see "Management" in Part II of this SAI. Share ownership At December 31, 1997, the officers and Trustees of each fund as a group owned less than 1% of the outstanding shares of each class of the fund, and, except as noted below, to the knowledge of each fund no person owned of record or beneficially 5% or more of any class of shares of that fund : Shareholder Name Percentage Fund name Class and address owned Balanced Portfolio C Merrill Lynch 7.20% 165 Broadway 1 Liberty Plaza New York, NY 10006 M Whitelaw & Co. 6.50% P.O. Box 94984 Cleveland, OH 44101-4984 MThe Putnam Companies Inc.* 6.20% Y Illinois Toolworks Inc. 67.40% Savings and Investment Plan** Y Whirlpool Corporation 21.00% 401(k) Plan** Y IT Corp.** 7.35% Conservative Portfolio A The Solo Cup Company**27.40% Profit Sharing Plus B Merrill Lynch 5.10% 165 Broadway 1 Liberty Plaza New York, NY 10006 C Merrill Lynch 8.00% 165 Broadway 1 Liberty Plaza New York, NY 10006 M The Putnam Companies Inc.* 9.30% MNational Financial 7.60% Service Corporation 200 Liberty Street One World Financial Center New York, NY 10281 Y Illinois Toolworks Inc. 52.36% Savings and Investment Plan** Y Whirlpool Corporation 37.89% 401(k) Plan** YCalifornia State Automobile 5.26% Association and California State Automobile Association Inter-Insurance Bureau Autosave Plan** Growth Portfolio A The Quadion Corporation** 5.92% C Merrill Lynch 8.70% 165 Broadway 1 Liberty Plaza New York, NY 10006 Y Illinois Toolworks Inc. 30.45% Savings and Investment Plan** Y Whirlpool Corporation 5.71% 401(k) Plan** Y First Chicago NBD TTEE 60.24% 107 N. Cross Street Wheaton, IL 60187 * The address for the name listed is: c/o Putnam Fiduciary Trust Company, as trustee or agent One Post Office Square, Boston, MA 02109 ** The address for the name listed is: c/o Putnam Fiduciary Trust Company, as trustee or agent 859 Willard Street, Quincy, MA 02269.
Distribution fees During fiscal 1997, the funds paid the following 12b-1 fees to Putnam Mutual Funds: Fund name Class A Class B Class C Class M Growth Portfolio $806,669 $2,698,162 $462,107 $171,491 Balanced Portfolio $1,223,892$3,441,956 $483,446 $209,501 Conservative Portfolio $617,818 $1,144,691 $227,417 $62,112
Class A sales charges and contingent deferred sales charges Putnam Mutual Funds received sales charges with respect to class A shares in the following amounts during the periods indicated: Sales charges retained by Putnam Contingent Total Mutual Funds deferred front-end after sales sales chargesdealer concessions charges Growth Portfolio Fiscal year 1997 $2,166,112 $351,085 $419 1996 $1,399,408 $224,056 $207 1995 $1,056,923 $155,805 $7,730 Balanced Portfolio Fiscal year 1997 $2,290,439 $385,482 $1,454 1996 $1,469,003 $241,358 $1,546 1995 $1,136,612 $168,465 $1,217 Conservative Portfolio Fiscal year 1997 $646,185 $105,536 $0 1996 $601,069 $106,124 $13 1995 $485,967 $74,774 $0 Class B and class C contingent deferred sales charges Putnam Mutual Funds received contingent deferred sales charges upon redemptions of class B shares and class C shares in the following amounts during the periods indicated: Contingent deferred sales charges Class B Class C Growth Portfolio Fiscal year 1997 $371,708 $25,139 1996 $242,476 $5,537 1995 $153,704 $4,284 Balanced Portfolio Fiscal year 1997 $480,989 $15,170 1996 $270,720 $7,624 1995 $246,928 $1,709 Conservative Portfolio Fiscal year 1997 $161,766 $21,495 1996 $185,550 $7,843 1995 $176,199 $2,193 Class M sales charges Putnam Mutual Funds received sales charges with respect to class M shares in the following amounts during the periods indicated: Sales charges retained by Putnam Mutual Funds Total after sales charges dealer concessions Growth Portfolio Fiscal year 1997 $226,232 $38,974 1996 $115,877 $19,702 1995 $ 47,591 $ 6,872 Balanced Portfolio Fiscal year 1997 $206,410 $35,515 1996 $150,594 $23,820 1995 $ 60,916 $10,721 Conservative Portfolio Fiscal year 1997 $68,856 $13,065 1996 $43,484 $7,196 1995 $22,787 $3,142 Investor servicing and custody fees and expenses During the 1997 fiscal year, each fund incurred the following fees and out-of-pocket expenses for investor servicing and custody services provided by Putnam Fiduciary Trust Company: Growth Portfolio $3,600,260 Balanced Portfolio $3,701,475 Conservative Portfolio $1,521,253 INVESTMENT PERFORMANCE Standard performance measures (for periods ended September 30, 1997) Growth Portfolio Class A Class B Class C Class M Class Y Inception date: 2/8/94 2/16/94 9/1/94 2/3/95 7/14/94 Average annual total return - ----------------------------------------------------------------- 1 year 18.95% 20.33% 24.31% 21.24% 26.54% Life of fund 15.46 15.99 16.36 15.61 17.69 Yield - ----------------------------------------------------------------- 30-day Yield 1.07% 0.35% 0.42% 0.65% 1.35% Balanced Portfolio Class A Class B Class C Class M Class Y Inception date: 2/7/94 2/11/94 9/1/94 2/6/95 7/5/94 Average annual total return - ----------------------------------------------------------------- 1 year 16.74% 17.95% 21.86% 18.86% 24.21% Life of fund 13.84 14.29 14.70 14.11 15.98 Yield - ----------------------------------------------------------------- 30-day Yield 1.58% 0.92% 0.85% 1.11% 1.86% Conservative Portfolio Class A Class B Class C Class M Class Y Inception date: 2/7/94 2/18/94 9/1/94 2/7/95 7/14/94 Average annual total return - ----------------------------------------------------------------- 1 year 10.53% 11.36% 15.52% 12.72% 17.62% Life of fund 9.43 9.76 10.33 9.63 11.48 Yield - ----------------------------------------------------------------- 30-day Yield 2.37% 1.80% 1.77% 1.96% 2.70% Returns for class A and class M shares reflect the deduction of the current maximum initial sales charges of 5.75% for class A shares and 3.50% for class M shares. Returns for class B and class C shares reflect the deduction of the applicable contingent deferred sales charge ("CDSC") which, for class B shares, is 5% in the first year, declining to 1% in the sixth year and is eliminated thereafter and, for class C shares, is 1% in the first year and is eliminated thereafter. Returns shown for class B, class C, class M and class Y shares for periods prior to their inception are derived from the historical performance of class A shares, adjusted to reflect both the deduction of the initial sales charge or CDSC, if any, currently applicable to each class and, in the case of class B, class C and class M shares, the higher operating expenses applicable to such shares. Returns shown for class A shares have not been adjusted to reflect payments under the class A distribution plan prior to its implementation. All returns assume reinvestment of distributions at net asset value and represent past performance; they do not guarantee future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. See "Standard Performance measures" in Part II of this SAI for information on how performance is calculated. ADDITIONAL OFFICERS In addition to the persons listed as Trust officers in Part II of this SAI, each of the following persons is also a Vice President of the Trust and certain of the other Putnam funds, the total number of which is noted parenthetically. Officers of Putnam Management hold the same offices in Putnam Management's parent company, Putnam Investments, Inc. Officer Name (Age) (Number of funds) Ian C. Ferguson (Age 40) (56 funds). Senior Managing Director. Prior to April 1996, Mr. Ferguson was CEO at Hong Kong Shanghai Banking Corporation. William J. Curtin (Age 38) (60 funds). Managing Director of Putnam Management. Prior to August 1996, Mr. Curtin was Managing Director of Lehman Brothers. William E. Zieff (Age 37) (19 funds). Managing Director of Putnam Management. Prior to December 1996, Mr. Zieff was Manager of Global Asset Allocation Group at Grantham, Mayo, Van Otterloo & Co. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS Price Waterhouse LLP, 160 Federal Street, Boston, MA 02110, are the Trust's independent accountants, providing audit services, tax return review and other tax consulting services and assistance and consultation in connection with the review of various Securities and Exchange Commission filings. The Report of Independent Accountants, financial highlights and financial statements included in the Trust's Annual Report for the fiscal year ended September 30, 1997, filed electronically on December 23, 1997 (File No. 811-7121), are incorporated by reference into this SAI. The financial highlights included in the prospectus and incorporated by reference into this SAI and the financial statements incorporated by reference into the prospectus and this SAI have been so included and incorporated in reliance upon the report of the independent accountants, given on their authority as experts in auditing and accounting. TABLE OF CONTENTS MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . II-1 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-30 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-36 DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . .II-46 HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . .II-47 DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . .II-60 INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . .II-61 SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . .II-66 SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . .II-67 SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . .II-67 STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . . . . .II-67 COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . . . . . .II-69 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-73 THE PUTNAM FUNDS STATEMENT OF ADDITIONAL INFORMATION ("SAI") PART II The following information applies generally to your fund and to the other Putnam funds. In certain cases the discussion applies to some but not all of the funds or their shareholders, and you should refer to your prospectus to determine whether the matter is applicable to you or your fund. You will also be referred to Part I for certain information applicable to your particular fund. Shareholders who purchase shares at net asset value through employer-sponsored defined contribution plans should also consult their employer for information about the extent to which the matters described below apply to them. MISCELLANEOUS INVESTMENT PRACTICES YOUR FUND'S PROSPECTUS STATES WHICH OF THE FOLLOWING INVESTMENT PRACTICES ARE AVAILABLE TO YOUR FUND. THE FACT THAT YOUR FUND IS AUTHORIZED TO ENGAGE IN A PARTICULAR PRACTICE DOES NOT NECESSARILY MEAN THAT IT WILL ACTUALLY DO SO. YOU SHOULD DISREGARD ANY PRACTICE DESCRIBED BELOW WHICH IS NOT MENTIONED IN THE PROSPECTUS. SHORT-TERM TRADING In seeking the fund's objective(s), Putnam Management will buy or sell portfolio securities whenever Putnam Management believes it appropriate to do so. In deciding whether to sell a portfolio security, Putnam Management does not consider how long the fund has owned the security. From time to time the fund will buy securities intending to seek short-term trading profits. A change in the securities held by the fund is known as "portfolio turnover" and generally involves some expense to the fund. This expense may include brokerage commissions or dealer markups and other transaction costs on both the sale of securities and the reinvestment of the proceeds in other securities. If sales of portfolio securities cause the fund to realize net short-term capital gains, such gains will be taxable as ordinary income. As a result of the fund's investment policies, under certain market conditions the fund's portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover rate for a fiscal year is the ratio of the lesser of purchases or sales of portfolio securities to the monthly average of the value of portfolio securities -- excluding securities whose maturities at acquisition were one year or less. The fund's portfolio turnover rate is not a limiting factor when Putnam Management considers a change in the fund's portfolio. Convertible Securities. Convertible securities include bonds, debentures, notes, preferred stocks and other securities that may be converted into or exchanged for, at a specific price or formula within a particular period of time, a prescribed amount of common stock or other equity securities of the same or a different issuer. Convertible securities entitle the holder to receive interest paid or accrued on debt or dividends paid or accrued on preferred stock until the security matures or is redeemed, converted or exchanged. The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. The fund's investments in convertible securities may at times include securities that have a mandatory conversion feature, pursuant to which the securities convert automatically into common stock or other equity securities at a specified date and a specified conversion ratio, or that are convertible at the option of the issuer. Because conversion of the security is not at the option of the holder, the fund may be required to convert the security into the underlying common stock even at times when the value of the underlying common stock or other equity security has declined substantially. The fund's investments in convertible securities, particularly securities that are convertible into securities of an issuer other than the issuer of the convertible security, may be illiquid. The fund may not be able to dispose of such securities in a timely fashion or for a fair price, which could result in losses to the fund. LOWER-RATED SECURITIES The fund may invest in lower-rated fixed-income securities (commonly known as "junk bonds"), to the extent described in the prospectus. The lower ratings of certain securities held by the fund reflect a greater possibility that adverse changes in the financial condition of the issuer or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by the fund more volatile and could limit the fund's ability to sell its securities at prices approximating the values the fund had placed on such securities. In the absence of a liquid trading market for securities held by it, the fund at times may be unable to establish the fair value of such securities. Securities ratings are based largely on the issuer's historical financial condition and the rating agencies' analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. In addition, the rating assigned to a security by Moody's Investors Service, Inc. or Standard & Poor's (or by any other nationally recognized securities rating organization) does not reflect an assessment of the volatility of the security's market value or the liquidity of an investment in the security. See the prospectus or Part I of this SAI for a description of security ratings. Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of the fund's assets. Conversely, during periods of rising interest rates, the value of the fund's assets will generally decline. The values of lower- rated securities may often be affected to a greater extent by changes in general economic conditions and business conditions affecting the issuers of such securities and their industries. Negative publicity or investor perceptions may also adversely affect the values of lower-rated securities. Changes by recognized rating services in their ratings of any fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the fund's net asset value. The fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Putnam Management will monitor the investment to determine whether its retention will assist in meeting the fund's investment objective(s). Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. Such issuers may not have more traditional methods of financing available to them and may be unable to repay outstanding obligations at maturity by refinancing. The risk of loss due to default in payment of interest or repayment of principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. At times, a substantial portion of the fund's assets may be invested in securities of which the fund, by itself or together with other funds and accounts managed by Putnam Management or its affiliates, holds all or a major portion. Although Putnam Management generally considers such securities to be liquid because of the availability of an institutional market for such securities, it is possible that, under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the fund could find it more difficult to sell these securities when Putnam Management believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. In order to enforce its rights in the event of a default of such securities, the fund may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on such securities. This could increase the fund's operating expenses and adversely affect the fund's net asset value. In the case of tax-exempt funds, any income derived from the fund's ownership or operation of such assets would not be tax-exempt. The ability of a holder of a tax-exempt security to enforce the terms of that security in a bankruptcy proceeding may be more limited than would be the case with respect to securities of private issuers. In addition, the fund's intention to qualify as a "regulated investment company" under the Internal Revenue Code may limit the extent to which the fund may exercise its rights by taking possession of such assets. Certain securities held by the fund may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by the fund during a time of declining interest rates, the fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. If the fund's prospectus describes so-called "zero-coupon" bonds and "payment-in-kind" bonds as possible investments, the fund may invest without limit in such bonds unless otherwise specified in the prospectus. Zero-coupon bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Because zero-coupon and payment-in- kind bonds do not pay current interest in cash, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently in cash. The fund is required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders even though such bonds do not pay current interest in cash. Thus, it may be necessary at times for the fund to liquidate investments in order to satisfy its dividend requirements. To the extent the fund invests in securities in the lower rating categories, the achievement of the fund's goals is more dependent on Putnam Management's investment analysis than would be the case if the fund were investing in securities in the higher rating categories. This may be particularly true with respect to tax- exempt securities, as the amount of information about the financial condition of an issuer of tax-exempt securities may not be as extensive as that which is made available by corporations whose securities are publicly traded. INVESTMENTS IN MISCELLANEOUS FIXED-INCOME SECURITIES Unless otherwise specified in the prospectus or elsewhere in this SAI, if the fund may invest in inverse floating obligations, premium securities, or interest-only or principal-only classes of mortgage-backed securities (IOs and POs), it may do so without limit. The fund, however, currently does not intend to invest more than 15% of its assets in inverse floating obligations or more than 35% of its assets in IOs and POs under normal market conditions. PRIVATE PLACEMENTS The fund may invest in securities that are purchased in private placements and, accordingly, are subject to restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few potential purchasers for such investments, especially under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the fund could find it more difficult to sell such securities when Putnam Management believes it advisable to do so or may be able to sell such securities only at prices lower than if such securities were more widely held. At times, it may also be more difficult to determine the fair value of such securities for purposes of computing the fund's net asset value. LOAN PARTICIPATIONS The fund may invest in "loan participations." By purchasing a loan participation, the fund acquires some or all of the interest of a bank or other lending institution in a loan to a particular borrower. Many such loans are secured, and most impose restrictive covenants which must be met by the borrower. The loans in which the fund may invest are typically made by a syndicate of banks, represented by an agent bank which has negotiated and structured the loan and which is responsible generally for collecting interest, principal, and other amounts from the borrower on its own behalf and on behalf of the other lending institutions in the syndicate and for enforcing its and their other rights against the borrower. Each of the lending institutions, including the agent bank, lends to the borrower a portion of the total amount of the loan, and retains the corresponding interest in the loan. The fund's ability to receive payments of principal and interest and other amounts in connection with loan participations held by it will depend primarily on the financial condition of the borrower. The failure by the fund to receive scheduled interest or principal payments on a loan participation would adversely affect the income of the fund and would likely reduce the value of its assets, which would be reflected in a reduction in the fund's net asset value. Banks and other lending institutions generally perform a credit analysis of the borrower before originating a loan or participating in a lending syndicate. In selecting the loan participations in which the fund will invest, however, Putnam Management will not rely solely on that credit analysis, but will perform its own investment analysis of the borrowers. Putnam Management's analysis may include consideration of the borrower's financial strength and managerial experience, debt coverage, additional borrowing requirements or debt maturity schedules, changing financial conditions, and responsiveness to changes in business conditions and interest rates. Because loan participations in which the fund may invest are not generally rated by independent credit rating agencies, a decision by the fund to invest in a particular loan participation will depend almost exclusively on Putnam Management's, and the original lending institution's, credit analysis of the borrower. Loan participations may be structured in different forms, including novations, assignments, and participating interests. In a novation, the fund assumes all of the rights of a lending institution in a loan, including the right to receive payments of principal and interest and other amounts directly from the borrower and to enforce its rights as a lender directly against the borrower. The fund assumes the position of a co-lender with other syndicate members. As an alternative, the fund may purchase an assignment of a portion of a lender's interest in a loan. In this case, the fund may be required generally to rely upon the assigning bank to demand payment and enforce its rights against the borrower, but would otherwise be entitled to all of such bank's rights in the loan. The fund may also purchase a participating interest in a portion of the rights of a lending institution in a loan. In such case, it will be entitled to receive payments of principal, interest, and premium, if any, but will not generally be entitled to enforce its rights directly against the agent bank or the borrower, but must rely for that purpose on the lending institution. The fund may also acquire a loan participation directly by acting as a member of the original lending syndicate. The fund will in many cases be required to rely upon the lending institution from which it purchases the loan participation to collect and pass on to the fund such payments and to enforce the fund's rights under the loan. As a result, an insolvency, bankruptcy, or reorganization of the lending institution may delay or prevent the fund from receiving principal, interest, and other amounts with respect to the underlying loan. When the fund is required to rely upon a lending institution to pay to the fund principal, interest, and other amounts received by it, Putnam Management will also evaluate the creditworthiness of the lending institution. The borrower of a loan in which the fund holds a participation interest may, either at its own election or pursuant to terms of the loan documentation, prepay amounts of the loan from time to time. There is no assurance that the fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan participation. Corporate loans in which the fund may purchase a loan participation are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs, and other corporate activities. Under current market conditions, most of the corporate loan participations purchased by the fund will represent interests in loans made to finance highly leveraged corporate acquisitions, known as "leveraged buy-out" transactions. The highly leveraged capital structure of the borrowers in such transactions may make such loans especially vulnerable to adverse changes in economic or market conditions. In addition, loan participations generally are subject to restrictions on transfer, and only limited opportunities may exist to sell such participations in secondary markets. As a result, the fund may be unable to sell loan participations at a time when it may otherwise be desirable to do so or may be able to sell them only at a price that is less than their fair market value. Certain of the loan participations acquired by the fund may involve revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the fund would have an obligation to advance its portion of such additional borrowings upon the terms specified in the loan participation. To the extent that the fund is committed to make additional loans under such a participation, it will at all times hold and maintain in a segregated account liquid assets in an amount sufficient to meet such commitments. Certain of the loan participations acquired by the fund may also involve loans made in foreign currencies. The fund's investment in such participations would involve the risks of currency fluctuations described above with respect to investments in the foreign securities. MORTGAGE RELATED SECURITIES The fund may invest in mortgage-backed securities, including collateralized mortgage obligations ("CMOs") and certain stripped mortgage-backed securities. CMOs and other mortgage-backed securities represent a participation in, or are secured by, mortgage loans. Mortgage-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed securities include both interest and a partial repayment of principal. Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will result in early payment of the applicable mortgage-related securities. In that event the fund may be unable to invest the proceeds from the early payment of the mortgage-related securities in an investment that provides as high a yield as the mortgage-related securities. Consequently, early payment associated with mortgage-related securities may cause these securities to experience significantly greater price and yield volatility than that experienced by traditional fixed- income securities. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of mortgage- related securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities. If the life of a mortgage-related security is inaccurately predicted, the fund may not be able to realize the rate of return it expected. Mortgage-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates. Prepayments may also significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments may cause losses on securities purchased at a premium. At times, some of the mortgage-backed securities in which the fund may invest will have higher than market interest rates and therefore will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause the fund to experience a loss equal to any unamortized premium. CMOs may be issued by a U.S. government agency or instrumentality or by a private issuer. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. government or its agencies or instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. government, its agencies or instrumentalities or any other person or entity. Prepayments could cause early retirement of CMOs. CMOs are designed to reduce the risk of prepayment for investors by issuing multiple classes of securities, each having different maturities, interest rates and payment schedules, and with the principal and interest on the underlying mortgages allocated among the several classes in various ways. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOS of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO held by the fund would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities. Conversely, slower than anticipated prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the fund. Prepayments could result in losses on stripped mortgage-backed securities. Stripped mortgage-backed securities are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The fund may invest in both the interest-only or "IO" class and the principal-only or "PO" class. The yield to maturity on an IO class of stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a measurable adverse effect on the fund's yield to maturity to the extent it invests in IOs. If the assets underlying the IO experience greater than anticipated prepayments of principal, the fund may fail to recoup fully its initial investment in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped mortgage-backed securities may be more volatile and less liquid than that for other mortgage- backed securities, potentially limiting the fund's ability to buy or sell those securities at any particular time. SECURITIES LOANS The fund may make secured loans of its portfolio securities, on either a short-term or long-term basis, amounting to not more than 25% of its total assets, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. As a matter of policy, securities loans are made to broker-dealers pursuant to agreements requiring that the loans be continuously secured by collateral consisting of cash or short-term debt obligations at least equal at all times to the value of the securities on loan, "marked-to-market" daily. The borrower pays to the fund an amount equal to any dividends or interest received on securities lent. The fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. Although voting rights, or rights to consent, with respect to the loaned securities may pass to the borrower, the fund retains the right to call the loans at any time on reasonable notice, and it will do so to enable the fund to exercise voting rights on any matters materially affecting the investment. The fund may also call such loans in order to sell the securities. FORWARD COMMITMENTS The fund may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the fund sets aside, on the books and records of its custodian, liquid assets in an amount sufficient to meet the purchase price, or if the fund enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced ("TBA") purchase commitments, the unit price and the estimated principal amount are established when the fund enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Where such purchases are made through dealers, the fund relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the fund of an advantageous yield or price. Although the fund will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. The fund may realize short-term profits or losses upon the sale of forward commitments. The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the fund delivers securities under the commitment, the fund realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. REPURCHASE AGREEMENTS The fund may enter into repurchase agreements up to the limit specified in the prospectus. A repurchase agreement is a contract under which the fund acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the fund to resell such security at a fixed time and price (representing the fund's cost plus interest). It is the fund's present intention to enter into repurchase agreements only with commercial banks and registered broker-dealers and only with respect to obligations of the U.S. government or its agencies or instrumentalities. Repurchase agreements may also be viewed as loans made by the fund which are collateralized by the securities subject to repurchase. Putnam Management will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. If the seller defaults, the fund could realize a loss on the sale of the underlying security to the extent that the proceeds of sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, if the seller should be involved in bankruptcy or insolvency proceedings, the fund may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if the fund is treated as an unsecured creditor and required to return the underlying collateral to the seller's estate. Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint account, along with cash of other Putnam funds and certain other accounts. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. OPTIONS ON SECURITIES WRITING COVERED OPTIONS. The fund may write covered call options and covered put options on optionable securities held in its portfolio, when in the opinion of Putnam Management such transactions are consistent with the fund's investment objective(s) and policies. Call options written by the fund give the purchaser the right to buy the underlying securities from the fund at a stated exercise price; put options give the purchaser the right to sell the underlying securities to the fund at a stated price. The fund may write only covered options, which means that, so long as the fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, the fund will hold cash and/or high-grade short-term debt obligations equal to the price to be paid if the option is exercised. In addition, the fund will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. The fund may write combinations of covered puts and calls on the same underlying security. The fund will receive a premium from writing a put or call option, which increases the fund's return on the underlying security in the event the option expires unexercised or is closed out at a profit. The amount of the premium reflects, among other things, the relationship between the exercise price and the current market value of the underlying security, the volatility of the underlying security, the amount of time remaining until expiration, current interest rates, and the effect of supply and demand in the options market and in the market for the underlying security. By writing a call option, the fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option but continues to bear the risk of a decline in the value of the underlying security. By writing a put option, the fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then-current market value, resulting in a potential capital loss unless the security subsequently appreciates in value. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction, in which it purchases an offsetting option. The fund realizes a profit or loss from a closing transaction if the cost of the transaction (option premium plus transaction costs) is less or more than the premium received from writing the option. If the fund writes a call option but does not own the underlying security, and when it writes a put option, the fund may be required to deposit cash or securities with its broker as "margin," or collateral, for its obligation to buy or sell the underlying security. As the value of the underlying security varies, the fund may have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations. PURCHASING PUT OPTIONS. The fund may purchase put options to protect its portfolio holdings in an underlying security against a decline in market value. Such protection is provided during the life of the put option since the fund, as holder of the option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, the fund will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs. PURCHASING CALL OPTIONS. The fund may purchase call options to hedge against an increase in the price of securities that the fund wants ultimately to buy. Such hedge protection is provided during the life of the call option since the fund, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. RISK FACTORS IN OPTIONS TRANSACTIONS The successful use of the fund's options strategies depends on the ability of Putnam Management to forecast correctly interest rate and market movements. For example, if the fund were to write a call option based on Putnam Management's expectation that the price of the underlying security would fall, but the price were to rise instead, the fund could be required to sell the security upon exercise at a price below the current market price. Similarly, if the fund were to write a put option based on Putnam Management's expectation that the price of the underlying security would rise, but the price were to fall instead, the fund could be required to purchase the security upon exercise at a price higher than the current market price. When the fund purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the fund exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the fund will lose part or all of its investment in the option. This contrasts with an investment by the fund in the underlying security, since the fund will not realize a loss if the security's price does not change. The effective use of options also depends on the fund's ability to terminate option positions at times when Putnam Management deems it desirable to do so. There is no assurance that the fund will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the fund could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unavailable, the fund as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the fund, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the fund could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the fund as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the fund as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The fund, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. Foreign-traded options are subject to many of the same risks presented by internationally-traded securities. In addition, because of time differences between the United States and various foreign countries, and because different holidays are observed in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As a result, option premiums may not reflect the current prices of the underlying interest in the United States. Over-the-counter ("OTC") options purchased by the fund and assets held to cover OTC options written by the fund may, under certain circumstances, be considered illiquid securities for purposes of any limitation on the fund's ability to invest in illiquid securities. FUTURES CONTRACTS AND RELATED OPTIONS Subject to applicable law, and unless otherwise specified in the prospectus, the fund may invest without limit in the types of futures contracts and related options identified in the prospectus for hedging and non-hedging purposes, such as to manage the effective duration of the fund's portfolio or as a substitute for direct investment. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of financial instrument called for in the contract in a specified delivery month at a stated price. The specific instruments delivered or taken, respectively, at settlement date are not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market. Although futures contracts (other than index futures) by their terms call for actual delivery or acceptance of commodities or securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out a futures contract sale is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity with the same delivery date. If the price of the initial sale of the futures contract exceeds the price of the offsetting purchase, the seller is paid the difference and realizes a gain. Conversely, if the price of the offsetting purchase exceeds the price of the initial sale, the seller realizes a loss. If the fund is unable to enter into a closing transaction, the amount of the fund's potential loss is unlimited. The closing out of a futures contract purchase is effected by the purchaser's entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the purchaser realizes a gain, and if the purchase price exceeds the offsetting sale price, he realizes a loss. In general, 40% of the gain or loss arising from the closing out of a futures contract traded on an exchange approved by the CFTC is treated as short-term gain or loss, and 60% is treated as long-term gain or loss. Unlike when the fund purchases or sells a security, no price is paid or received by the fund upon the purchase or sale of a futures contract. Upon entering into a contract, the fund is required to deposit with its custodian in a segregated account in the name of the futures broker an amount of liquid assets. This amount is known as "initial margin." The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds to finance the transactions. Rather, initial margin is similar to a performance bond or good faith deposit which is returned to the fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Futures contracts also involve brokerage costs. Subsequent payments, called "variation margin" or "maintenance margin," to and from the broker (or the custodian) are made on a daily basis as the price of the underlying security or commodity fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking to the market." For example, when the fund has purchased a futures contract on a security and the price of the underlying security has risen, that position will have increased in value and the fund will receive from the broker a variation margin payment based on that increase in value. Conversely, when the fund has purchased a security futures contract and the price of the underlying security has declined, the position would be less valuable and the fund would be required to make a variation margin payment to the broker. The fund may elect to close some or all of its futures positions at any time prior to their expiration in order to reduce or eliminate a hedge position then currently held by the fund. The fund may close its positions by taking opposite positions which will operate to terminate the fund's position in the futures contracts. Final determinations of variation margin are then made, additional cash is required to be paid by or released to the fund, and the fund realizes a loss or a gain. Such closing transactions involve additional commission costs. The fund does not intend to purchase or sell futures or related options for other than hedging purposes, if, as a result, the sum of the initial margin deposits on the fund's existing futures and related options positions and premiums paid for outstanding options on futures contracts would exceed 5% of the fund's net assets. OPTIONS ON FUTURES CONTRACTS. The fund may purchase and write call and put options on futures contracts it may buy or sell and enter into closing transactions with respect to such options to terminate existing positions. In return for the premium paid, options on future contracts give the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The fund may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its portfolio securities, the fund may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, the fund may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the fund expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments. As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected. The fund will be required to deposit initial margin and maintenance margin with respect to put and call options on futures contracts written by it pursuant to brokers' requirements similar to those described above in connection with the discussion of futures contracts. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful use of futures contracts by the fund is subject to Putnam Management's ability to predict movements in various factors affecting securities markets, including interest rates. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to the fund when the purchase or sale of a futures contract would not, such as when there is no movement in the prices of the hedged investments. The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. The use of options and futures strategies also involves the risk of imperfect correlation among movements in the prices of the securities underlying the futures and options purchased and sold by the fund, of the options and futures contracts themselves, and, in the case of hedging transactions, of the securities which are the subject of a hedge. The successful use of these strategies further depends on the ability of Putnam Management to forecast interest rates and market movements correctly. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain market clearing facilities inadequate, and thereby result in the institution by exchanges of special procedures which may interfere with the timely execution of customer orders. To reduce or eliminate a position held by the fund, the fund may seek to close out such position. The ability to establish and close out positions will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop or continue to exist for a particular futures contract or option. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain contracts or options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of contracts or options, or underlying securities; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of contracts or options (or a particular class or series of contracts or options), in which event the secondary market on that exchange for such contracts or options (or in the class or series of contracts or options) would cease to exist, although outstanding contracts or options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury security futures contracts require the seller to deliver, or the purchaser to take delivery of, the type of U.S. Treasury security called for in the contract at a specified date and price. Options on U.S. Treasury security futures contracts give the purchaser the right in return for the premium paid to assume a position in a U.S. Treasury security futures contract at the specified option exercise price at any time during the period of the option. Successful use of U.S. Treasury security futures contracts by the fund is subject to Putnam Management's ability to predict movements in the direction of interest rates and other factors affecting markets for debt securities. For example, if the fund has sold U.S. Treasury security futures contracts in order to hedge against the possibility of an increase in interest rates which would adversely affect securities held in its portfolio, and the prices of the fund's securities increase instead as a result of a decline in interest rates, the fund will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the fund has insufficient cash, it may have to sell securities to meet daily maintenance margin requirements at a time when it may be disadvantageous to do so. There is also a risk that price movements in U.S. Treasury security futures contracts and related options will not correlate closely with price movements in markets for particular securities. For example, if the fund has hedged against a decline in the values of tax-exempt securities held by it by selling Treasury security futures and the values of Treasury securities subsequently increase while the values of its tax-exempt securities decrease, the fund would incur losses on both the Treasury security futures contracts written by it and the tax-exempt securities held in its portfolio. INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position. A unit is the current value of the index. The fund may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective(s). The fund may also purchase and sell options on index futures contracts. For example, the Standard & Poor's 500 Composite Stock Price Index ("S&P 500") is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 assigns relative weightings to the common stocks included in the Index, and the value fluctuates with changes in the market values of those common stocks. In the case of the S&P 500, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the fund enters into a futures contract to buy 500 units of the S&P 500 at a specified future date at a contract price of $150 and the S&P 500 is at $154 on that future date, the fund will gain $2,000 (500 units x gain of $4). If the fund enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 is at $152 on that future date, the fund will lose $1,000 (500 units x loss of $2). There are several risks in connection with the use by the fund of index futures. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedge. Putnam Management will, however, attempt to reduce this risk by buying or selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of the securities sought to be hedged. Successful use of index futures by the fund is also subject to Putnam Management's ability to predict movements in the direction of the market. For example, it is possible that, where the fund has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in the fund's portfolio may decline. If this occurred, the fund would lose money on the futures and also experience a decline in value in its portfolio securities. It is also possible that, if the fund has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the fund will lose part or all of the benefit of the increased value of those securities it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it is disadvantageous to do so. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the portion of the portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than the securities market does. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and also because of the imperfect correlation between movements in the index and movements in the prices of index futures, even a correct forecast of general market trends by Putnam Management may still not result in a profitable position over a short time period. OPTIONS ON STOCK INDEX FUTURES. Options on index futures are similar to options on securities except that options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the index future. If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. OPTIONS ON INDICES As an alternative to purchasing call and put options on index futures, the fund may purchase and sell call and put options on the underlying indices themselves. Such options would be used in a manner identical to the use of options on index futures. INDEX WARRANTS The fund may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices ("index warrants"). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at any time when, in the case of a call warrant, the exercise price is greater than the value of the underlying index, or, in the case of a put warrant, the exercise price is less than the value of the underlying index. If the fund were not to exercise an index warrant prior to its expiration, then the fund would lose the amount of the purchase price paid by it for the warrant. The fund will normally use index warrants in a manner similar to its use of options on securities indices. The risks of the fund's use of index warrants are generally similar to those relating to its use of index options. Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index warrants generally have longer terms than index options. Although the fund will normally invest only in exchange-listed warrants, index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of index warrants may limit the fund's ability to exercise the warrants at such time, or in such quantities, as the fund would otherwise wish to do. FOREIGN INVESTMENTS The fund may invest in securities of foreign issuers that are not actively traded in U.S. markets. These foreign investments involve certain special risks described below. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the fund's foreign investments and the value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. There may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of the fund's assets held abroad) and expenses not present in the settlement of investments in U.S. markets. In addition, the fund's investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls, foreign withholding taxes or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and diplomatic developments which could affect the value of the fund's investments in certain foreign countries. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes, and special U.S. tax considerations may apply. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. The laws of some foreign countries may limit the fund's ability to invest in securities of certain issuers organized under the laws of those foreign countries. The risks described above, including the risks of nationalization or expropriation of assets, are typically increased in connection with investments in "emerging markets." For example, political and economic structures in these countries may be in their infancy and developing rapidly, and such countries may be in their infancy and developing rapidly, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of these countries have in the past failed to recognize private property rights and have at times nationalized and expropriated the assets of private companies. High rates of inflation or currency devaluations may adversely affect the economies and securities markets of such countries. Investments in emerging markets may be considered speculative. The currencies of certain emerging market countries have experienced a steady devaluation relative to the U.S. dollar, and continued devaluations may adversely affect the value of a fund's assets denominated in such currencies. Many emerging market companies have experienced substantial, and in some periods extremely high, rates of inflation for many years, and continued inflation may adversely affect the economies and securities markets of such countries. In addition, unanticipated political or social developments may affect the value of the fund's investments in emerging markets and the availability to the fund of additional investments in these markets. The small size, limited trading volume and relative inexperience of the securities markets in these countries may make the fund's investments in securities traded in emerging markets illiquid and more volatile than investments in securities traded in more developed countries, and the fund may be required to establish special custodial or other arrangements before making investments in securities traded in emerging markets. There may be little financial or accounting information available with respect to issuers of emerging market securities, and it may be difficult as a result to assess the value of prospects of an investment in such securities. Certain of the foregoing risks may also apply to some extent to securities of U.S. issuers that are denominated in foreign currencies or that are traded in foreign markets, or securities of U.S. issuers having significant foreign operations. FOREIGN CURRENCY TRANSACTIONS Unless otherwise specified in the prospectus or Part I of this SAI, the fund may engage without limit in currency exchange transactions, including purchasing and selling foreign currency, foreign currency options, foreign currency forward contracts and foreign currency futures contracts and related options, to manage its exposure to foreign currencies. In addition, the fund may write covered call and put options on foreign currencies for the purpose of increasing its current return. Generally, the fund may engage in both "transaction hedging" and "position hedging." The fund may also engage in foreign currency transactions for non-hedging purposes, subject to applicable law. When it engages in transaction hedging, the fund enters into foreign currency transactions with respect to specific receivables or payables, generally arising in connection with the purchase or sale of portfolio securities. The fund will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging the fund will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is earned, and the date on which such payments are made or received. The fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, for transaction hedging purposes the fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the fund may also purchase or sell exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. The fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. For transaction hedging purposes the fund may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the fund the right to assume a short position in the futures contract until the expiration of the option. A put option on a currency gives the fund the right to sell the currency at an exercise price until the expiration of the option. A call option on a futures contract gives the fund the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the fund the right to purchase the currency at the exercise price until the expiration of the option. The fund may engage in position hedging to protect against a decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of the currency in which the securities the fund intends to buy are denominated, when the fund holds cash or short-term investments). For position hedging purposes, the fund may purchase or sell, on exchanges or in over- the-counter markets, foreign currency futures contracts, foreign currency forward contracts and options on foreign currency futures contracts and on foreign currencies. In connection with position hedging, the fund may also purchase or sell foreign currency on a spot basis. It is impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for the fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency the fund is obligated to deliver and a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities if the market value of such security or securities exceeds the amount of foreign currency the fund is obligated to deliver. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the fund owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in value of such currency. See "Risk factors in options transactions" above. The fund may seek to increase its current return or to offset some of the costs of hedging against fluctuations in current exchange rates by writing covered call options and covered put options on foreign currencies. The fund receives a premium from writing a call or put option, which increases the fund's current return if the option expires unexercised or is closed out at a net profit. The fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The fund's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. Putnam Management will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the fund. Cross hedging transactions by the fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge. The fund may also engage in non-hedging currency transactions. For example, Putnam Management may believe that exposure to a currency is in the fund's best interest but that securities denominated in that currency are unattractive. In that case the fund may purchase a currency forward contract or option in order to increase its exposure to the currency. In accordance with SEC regulations, the fund will segregate liquid assets in its portfolio to cover forward contracts used for non-hedging purposes. The value of any currency, including U.S. dollars and foreign currencies, may be affected by complex political and economic factors applicable to the issuing country. In addition, the exchange rates of foreign currencies (and therefore the values of foreign currency options, forward contracts and futures contracts) may be affected significantly, fixed, or supported directly or indirectly by U.S. and foreign government actions. Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces. The value of a foreign currency option, forward contract or futures contract reflects the value of an exchange rate, which in turn reflects relative values of two currencies, the U.S. dollar and the foreign currency in question. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the exercise of foreign currency options, forward contracts and futures contracts, investors may be disadvantaged by having to deal in an odd-lot market for the underlying foreign currencies in connection with options at prices that are less favorable than for round lots. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies. There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large round-lot transactions in the interbank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. The decision as to whether and to what extent the fund will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the fund's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in foreign currency exchange transactions at any given time or from time to time. CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amount agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit. At the maturity of a forward or futures contract, the fund either may accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts. Positions in the foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the fund intends to purchase or sell foreign currency futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position and, in the event of adverse price movements, the fund would continue to be required to make daily cash payments of variation margin. FOREIGN CURRENCY OPTIONS. In general, options on foreign currencies operate similarly to options on securities and are subject to many of the risks described above. Foreign currency options are traded primarily in the over-the-counter market, although options on foreign currencies are also listed on several exchanges. Options are traded not only on the currencies of individual nations, but also on the European Currency Unit ("ECU"). The ECU is composed of amounts of a number of currencies, and is the official medium of exchange of the European Community's European Monetary System. The fund will only purchase or write foreign currency options when Putnam Management believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally. SETTLEMENT PROCEDURES. Settlement procedures relating to the fund's investments in foreign securities and to the fund's foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in the fund's domestic investments. For example, settlement of transactions involving foreign securities or foreign currencies may occur within a foreign country, and the fund may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations. FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the fund at one rate, while offering a lesser rate of exchange should the fund desire to resell that currency to the dealer. RESTRICTED SECURITIES The SEC Staff currently takes the view that any delegation by the Trustees of the authority to determine that a restricted security is readily marketable (as described in the investment restrictions of the funds) must be pursuant to written procedures established by the Trustees. It is the present intention of the funds' Trustees that, if the Trustees decide to delegate such determinations to Putnam Management or another person, they would do so pursuant to written procedures, consistent with the Staff's position. Should the Staff modify its position in the future, the Trustees would consider what action would be appropriate in light of the Staff's position at that time. TAXES TAXATION OF THE FUND. The fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order so to qualify and to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the fund must, among other things: (a) Derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale of stock, securities and foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies; (b) distribute with respect to each taxable year at least 90% of the sum of its taxable net investment income, its net tax-exempt income, and the excess, if any, of net short-term capital gains over net long-term capital losses for such year; and (c) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the fund's assets is represented by cash and cash items, U.S. government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the fund's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the fund controls and which are engaged in the same, similar, or related trades or businesses. In addition, until the start of the fund's first tax year beginning after August 5, 1997, the fund must derive less than 30% of its gross income from the sale or other disposition of certain assets (including stock or securities and certain options, futures contracts, forward contracts and foreign currencies) held for less than three months in order to qualify as a regulated investment company. If the fund qualifies as a regulated investment company that is accorded special tax treatment, the fund will not be subject to federal income tax on income paid to its shareholders in the form of dividends (including capital gain dividends). If the fund failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary income. In addition, the fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment. If the fund fails to distribute in a calendar year substantially all of its ordinary income for such year and substantially all of its capital gain net income for the one-year period ending October 31 (or later if the fund is permitted so to elect and so elects), plus any retained amount from the prior year, the fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders by the fund in January of a year generally is deemed to have been paid by the fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax. FUND DISTRIBUTIONS. Distributions from the fund (other than exempt-interest dividends, as discussed below) will be taxable to shareholders as ordinary income to the extent derived from the fund's investment income and net short-term gains. Pursuant to the Taxpayer Relief Act of 1997, two different tax rates apply to net capital gains (that is, the excess of net gains from captial assets held more than one year over net losses from capital assets held for not more than one year). One rate (generally 28%) applies to net gains on capital assets held for more than one year but not more than 18 months ("mid-term gains") and a second, preferred rate (generally 20%) applies to the balance of such net capital gains ("adjusted net capital gains"). Distributions of net capital gains will be treated in the hands of shareholders as mid-term gains to the extent designated by the fund as deriving from net gains from assets held for more than one year but not more than 18 months, and the balance will be treated as adjusted net capital gains. Distributions of mid-term gains and adjusted net capital gains will be taxable to shareholders as such, regardless of how long a shareholder has held the shares in the fund. EXEMPT-INTEREST DIVIDENDS. The fund will be qualified to pay exempt-interest dividends to its shareholders only if, at the close of each quarter of the fund's taxable year, at least 50% of the total value of the fund's assets consists of obligations the interest on which is exempt from federal income tax. Distributions that the fund properly designates as exempt- interest dividends are treated as interest excludable from shareholders' gross income for federal income tax purposes but may be taxable for federal alternative minimum tax purposes and for state and local purposes. If the fund intends to be qualified to pay exempt-interest dividends, the fund may be limited in its ability to enter into taxable transactions involving forward commitments, repurchase agreements, financial futures and options contracts on financial futures, tax-exempt bond indices and other assets. Part or all of the interest on indebtedness, if any, incurred or continued by a shareholder to purchase or carry shares of a fund paying exempt-interest dividends is not deductible. The portion of interest that is not deductible is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of the fund's total distributions (not including distributions from net long-term capital gains) paid to the shareholder that are exempt-interest dividends. Under rules used by the Internal Revenue Service for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares. In general, exempt-interest dividends, if any, attributable to interest received on certain private activity obligations and certain industrial development bonds will not be tax-exempt to any shareholders who are "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. A fund which is qualified to pay exempt-interest dividends will inform investors within 60 days of the fund's fiscal year-end of the percentage of its income distributions designated as tax-exempt. The percentage is applied uniformly to all distributions made during the year. The percentage of income designated as tax-exempt for any particular distribution may be substantially different from the percentage of the fund's income that was tax-exempt during the period covered by the distribution. HEDGING TRANSACTIONS. If the fund engages in hedging transactions, including hedging transactions in options, futures contracts, and straddles, or other similar transactions, it will be subject to special tax rules (including constructive sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of which may be to accelerate income to the fund, defer losses to the fund, cause adjustments in the holding periods of the fund's securities, or convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. The fund will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interests of the fund. Under the 30% of gross income test described above (see "Taxation of the fund"), the fund will be restricted in selling assets held or considered under Code rules to have been held for less than three months, and in engaging in certain hedging transactions (including hedging transactions in options and futures) that in some circumstances could cause certain fund assets to be treated as held for less than three months. Certain of the fund's hedging activities (including its transactions, if any, in foreign currencies or foreign currency-denominated instruments) are likely to produce a difference between its book income and its taxable income. If the fund's book income exceeds its taxable income, the distribution (if any) of such excess will be treated as (i) a dividend to the extent of the fund's remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter as a return of capital to the extent of the recipient's basis in the shares, and (iii) thereafter as gain from the sale or exchange of a capital asset. If the fund's book income is less than its taxable income, the fund could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment. RETURN OF CAPITAL DISTRIBUTIONS. If the fund makes a distribution to you in excess of its current and accumulated "earnings and profits" in any taxable year, the excess distribution will be treated as a return of capital to the extent of your tax basis in your shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces your tax basis in your shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by you of your shares. SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. The fund's investment in securities issued at a discount and certain other obligations will (and investments in securities purchased at a discount may) require the fund to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, the fund may be required to sell securities in its portfolio that it otherwise would have continued to hold. CAPITAL LOSS CARRYOVER. Distributions from capital gains are made after applying any available capital loss carryovers. The amounts and expiration dates of any capital loss carryovers available to the fund are shown in Note 1 (Federal income taxes) to the financial statements included in Part I of this SAI or incorporated by reference into this SAI. FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS. The fund's transactions in foreign currencies, foreign currency-denominated debt securities and certain foreign currency options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. If more than 50% of the fund's assets at year end consists of the securities of foreign corporations, the fund may elect to permit shareholders to claim a credit or deduction on their income tax returns for their pro rata portion of qualified taxes paid by the fund to foreign countries in respect of foreign securities the fund has held for at least the minimum period specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes. A shareholder's ability to claim a foreign tax credit or deduction in respect of foreign taxes paid by the fund may be subject to certain limitations imposed by the Code, as a result of which a shareholder may not get a full credit or deduction for the amount of such taxes. In particular, shareholders must hold their fund shares (without protection from risk of loss) on the ex-dividend date and for at least 15 additional days during the 30-day period surrounding the ex-dividend date to be eligible to claim a foreign tax credit with respect to a given dividend. Shareholders who do not itemize on their federal income tax returns may claim a credit (but no deduction) for such foreign taxes. Investment by the fund in "passive foreign investment companies" could subject the fund to a U.S. federal income tax or other charge on the proceeds from the sale of its investment in such a company; however, this tax can be avoided by making an election to mark such investments to market annually or to treat the passive foreign investment company as a "qualified electing fund." A "passive foreign investment company" is any foreign corporation: (i) 75 percent of more of the income of which for the taxable year is passive income, or (ii) the average percentage of the assets of which (generally by value, but by adjusted tax basis in certain cases) that produce or are held for the production of passive income is at least 50 percent. Generally, passive income for this purpose means dividends, interest (including income equivalent to interest), royalties, rents, annuities, the excess of gains over losses from certain property transactions and commodities transactions, and foreign currency gains. Passive income for this purpose does not include rents and royalties received by the foreign corporation from active business and certain income received from related persons. SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of fund shares may give rise to a gain or loss. In general, any gain realized upon a taxable disposition of shares will not be treated as mid-term capital gain if the shares have been held for more than 12 months but not more than 18 months, as adjusted net capital gains if the shares have been held for more than 18 months. Otherwise the gain on the sale, exchange or redemption of fund shares will be treated as short-term capital gain. In general, any loss realized upon a taxable disposition of shares will be treated as long-term loss if the shares have been held for more than 12 months, and otherwise as short-term capital gains. However, if a shareholder sells shares at a loss within six months of purchase, any loss will be disallowed for Federal income tax purposes to the extent of any exempt-interest dividends received on such shares. In addition, any loss (not already disallowed as provided in the preceding sentence) realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of fund shares will be disallowed if other shares of the same fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss. SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to investments though defined contribution plans and other tax-qualified plans. Shareholders should consult their tax adviser to determine the suitability of shares of a fund as an investment through such plans and the precise effect of an investment on their particular tax situation. BACKUP WITHHOLDING. The fund generally is required to withhold and remit to the U.S. Treasury 31% of the taxable dividends and other distributions paid to any individual shareholder who fails to furnish the fund with a correct taxpayer identification number (TIN), who has under-reported dividends or interest income, or who fails to certify to the fund that he or she is not subject to such withholding. Shareholders who fail to furnish their correct TIN are subject to a penalty of $50 for each such failure unless the failure is due to reasonable cause and not wilful neglect. An individual's taxpayer identification number is his or her social security number. MANAGEMENT TRUSTEES NAME (AGE) *+GEORGE PUTNAM (71), Chairman and President. Chairman and Director of Putnam Management and Putnam Mutual Funds. Director, Freeport-McMoRan, Inc., Freeport Copper and Gold, Inc., McMoRan Oil and Gas, Inc., General Mills, Inc., Houghton Mifflin Company and Marsh & McLennan Companies, Inc. +WILLIAM F. POUNDS (69), Vice Chairman. Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology. Director of IDEXX Laboratories, Inc., Perseptive Biosystems, Inc., Management Sciences for Health, Inc., and Sun Company, Inc. JAMESON A. BAXTER (54), Trustee. President, Baxter Associates, Inc. (a management and financial consultant). Director of Avondale Federal Savings Bank, ASHTA Chemicals, Inc. and Banta Corporation (printing and digital imaging). Chairman Emeritus of the Board of Trustees, Mount Holyoke College. +HANS H. ESTIN (69), Trustee. Chartered Financial Analyst and Vice Chairman, North American Management Corp. (a registered investment adviser). JOHN A. HILL (55), Trustee. Chairman and Managing Director, First Reserve Corporation (a registered investment adviser investing in companies in the world-wide energy industry on behalf of institutional investors). Director of Maverick Tube Corporation, PetroCorp Incorporated, Snyder Oil Corporation, TransMontaigne Oil Company, Weatherford Enterra, Inc. (an oil field service company) and various private companies owned by First Reserve Corporation, such as James River Coal and Anker Coal Corporation, and various First Reserve Funds, such as American Gas & Oil Investors, Ltd., AmGO II, L.P., First Reserve Secured Energy Assets Fund, L.P., First Reserve Fund V., L.P., First Reserve Fund VI, L.P., and First Reserve Fund VII, L.P. RONALD J. JACKSON (53), Trustee. Former Chairman, President and Chief Executive Officer of Fisher-Price, Inc., Director of Safety 1st, Inc., Trustee of Salem Hospital and the Peabody Essex Museum. PAUL L. JOSKOW (50), Trustee. Professor of Economics and Management, Massachusetts Institute of Technology. Director, New England Electric System, State Farm Indemnity Company and Whitehead Institute for Biomedical Research. ELIZABETH T. KENNAN (59), Trustee. President Emeritus and Professor, Mount Holyoke College. Director, the Kentucky Home Life Insurance Companies, NYNEX Corporation, Northeast Utilities and Talbots. *LAWRENCE J. LASSER (54), Trustee and Vice President. President, Chief Executive Officer and Director of Putnam Investments, Inc. and Putnam Investment Management, Inc. Director of Marsh & McLennan Companies, Inc. and the United Way of Massachusetts Bay. JOHN E. MULLIN, III (56), Trustee. Chairman and CEO of Ridgeway Farm, Director of ACX Technologies, Inc., Alex. Brown Realty, Inc., The Liberty Corporation and The Ryland Group, Inc. +ROBERT E. PATTERSON (52), Trustee. Executive Vice President and Director of Acquisitions, Cabot Partners Limited Partnership (a registered investment adviser) and Massachusetts Industrial Finance Agency. *DONALD S. PERKINS (70), Trustee. Director of various corporations, including AON Corp., Cummins Engine Company, Inc., Current Assets L.L.C., LaSalle Street Fund, Inc., LaSalle U.S. Realty Income and Growth Fund, Inc., Lucent Technologies Inc., Ryerson Tull, Inc. (a steel service corporation) Springs Industries, Inc. (a textile manufacturer), and Time Warner Inc. *#GEORGE PUTNAM III (46), Trustee. President, New Generation Research, Inc. (publisher of bankruptcy information) and New Generation Advisers, Inc. (a registered investment adviser). Director, Massachusetts Audubon Society and The Boston Family Office, L.L.C. (a registered investment adviser). W. THOMAS STEPHENS (55), Trustee. President and Chief Executive Officer of MacMillan Bloedel Ltd. Director, Mail-Well Inc. (a supplier of envelopes and high-quality printing services), Qwest Communications (a fiber optics manufacturer), The Eagle Picher Trust (a trust etablished to fund the settlement of asbestos- rerlated claims) and New Century Energies (a public utlity company). *A.J.C. SMITH (63), Trustee. Chairman and Chief Executive Officer, Marsh & McLennan Companies, Inc. Director, Trident Corp. W. NICHOLAS THORNDIKE (64), Trustee. Director of various corporations and charitable organizations, including Courier Corporation, Data General Corporation, Bradley Real Estate, Inc., and Providence Journal Co. and Courier Corporation. OFFICERS NAME (AGE) CHARLES E. PORTER (59), Executive Vice President. Managing Director of Putnam Investments, Inc. and Putnam Management. PATRICIA C. FLAHERTY (50), Senior Vice President. Senior Vice President of Putnam Investments, Inc. and Putnam Management. WILLIAM N. SHIEBLER (55), Vice President. Director and Senior Managing Director of Putnam Investments, Inc. President and Director of Putnam Mutual Funds. GORDON H. SILVER (50), Vice President. Director and Senior Managing Director of Putnam Investments, Inc. and Putnam Management. JOHN R. VERANI (58), Vice President. Senior Vice President of Putnam Investments, Inc. and Putnam Management. PAUL M. O'NEIL (44), Vice President. Vice President of Putnam Investments, Inc. and Putnam Management. JOHN D. HUGHES (62), Senior Vice President and Treasurer. BEVERLY MARCUS (53), Clerk and Assistant Treasurer. *Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management or Putnam Mutual Funds. +Members of the Executive Committee of the Trustees. The Executive Committee meets between regular meetings of the Trustees as may be required to review investment matters and other affairs of the fund and may exercise all of the powers of the Trustees. #George Putnam, III is the son of George Putnam. ----------------- Certain other officers of Putnam Management are officers of the fund. SEE "ADDITIONAL OFFICERS" IN PART I OF THIS SAI. The mailing address of each of the officers and Trustees is One Post Office Square, Boston, Massachusetts 02109. Except as stated below, the principal occupations of the officers and Trustees for the last five years have been with the employers as shown above, although in some cases they have held different positions with such employers. Prior to 1993, Mr. Jackson was Chairman of the Board, President and Chief Executive Officer of Fisher-Price, Inc. Prior to 1996, Mr. Stephens was Chairman of the Board of Directors, President and Chief Executive Officer of Johns Manville Corporation. Each Trustee of the fund receives an annual fee and an additional fee for each Trustees' meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings and for special services rendered in that connection. All of the Trustees are Trustees of all the Putnam funds and each receives fees for his or her services. FOR DETAILS OF TRUSTEES' FEES PAID BY THE FUND AND INFORMATION CONCERNING RETIREMENT GUIDELINES FOR THE TRUSTEES, SEE "CHARGES AND EXPENSES" IN PART I OF THIS SAI. The Agreement and Declaration of Trust of the fund provides that the fund will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the fund, except if it is determined in the manner specified in the Agreement and Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the fund or that such indemnification would relieve any officer or Trustee of any liability to the fund or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. The fund, at its expense, provides liability insurance for the benefit of its Trustees and officers. PUTNAM MANAGEMENT AND ITS AFFILIATES Putnam Management is one of America's oldest and largest money management firms. Putnam Management's staff of experienced portfolio managers and research analysts selects securities and constantly supervises the fund's portfolio. By pooling an investor's money with that of other investors, a greater variety of securities can be purchased than would be the case individually; the resulting diversification helps reduce investment risk. Putnam Management has been managing mutual funds since 1937. Today, the firm serves as the investment manager for the funds in the Putnam Family, with nearly $160 billion in assets in over 8 million shareholder accounts at June 30, 1997. An affiliate, The Putnam Advisory Company, Inc., manages domestic and foreign institutional accounts and mutual funds, including the accounts of many Fortune 500 companies. Another affiliate, Putnam Fiduciary Trust Company, provides investment advice to institutional clients under its banking and fiduciary powers. At June 30, 1997, Putnam Management and its affiliates managed nearly $207 billion in assets, including over $18 billion in tax- exempt securities and over $51 billion in retirement plan assets. Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust Company are subsidiaries of Putnam Investments, Inc., a holding company which is in turn wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal operating subsidiaries are international insurance and reinsurance brokers, investment managers and management consultants. Trustees and officers of the fund who are also officers of Putnam Management or its affiliates or who are stockholders of Marsh & McLennan Companies, Inc. will benefit from the advisory fees, sales commissions, distribution fees, custodian fees and transfer agency fees paid or allowed by the fund. THE MANAGEMENT CONTRACT Under a Management Contract between the fund and Putnam Management, subject to such policies as the Trustees may determine, Putnam Management, at its expense, furnishes continuously an investment program for the fund and makes investment decisions on behalf of the fund. Subject to the control of the Trustees, Putnam Management also manages, supervises and conducts the other affairs and business of the fund, furnishes office space and equipment, provides bookkeeping and clerical services (including determination of the fund's net asset value, but excluding shareholder accounting services) and places all orders for the purchase and sale of the fund's portfolio securities. Putnam Management may place fund portfolio transactions with broker-dealers which furnish Putnam Management, without cost to it, certain research, statistical and quotation services of value to Putnam Management and its affiliates in advising the fund and other clients. In so doing, Putnam Management may cause the fund to pay greater brokerage commissions than it might otherwise pay. FOR DETAILS OF PUTNAM MANAGEMENT'S COMPENSATION UNDER THE MANAGEMENT CONTRACT, SEE "CHARGES AND EXPENSES" IN PART I OF THIS SAI. Putnam Management's compensation under the Management Contract may be reduced in any year if the fund's expenses exceed the limits on investment company expenses imposed by any statute or regulatory authority of any jurisdiction in which shares of the fund are qualified for offer or sale. The term "expenses" is defined in the statutes or regulations of such jurisdictions, and generally excludes brokerage commissions, taxes, interest, extraordinary expenses and, if the fund has a distribution plan, payments made under such plan. Under the Management Contract, Putnam Management may reduce its compensation to the extent that the fund's expenses exceed such lower expense limitation as Putnam Management may, by notice to the fund, declare to be effective. The expenses subject to this limitation are exclusive of brokerage commissions, interest, taxes, deferred organizational and extraordinary expenses and, if the fund has a distribution plan, payments required under such plan. For the purpose of determining any such limitation on Putnam Management's compensation, expenses of the fund shall not reflect the application of commissions or cash management credits that may reduce designated fund expenses. THE TERMS OF ANY EXPENSE LIMITATION FROM TIME TO TIME IN EFFECT ARE DESCRIBED IN THE PROSPECTUS AND/OR PART I OF THIS SAI. In addition to the fee paid to Putnam Management, the fund reimburses Putnam Management for the compensation and related expenses of certain officers of the fund and their assistants who provide certain administrative services for the fund and the other Putnam funds, each of which bears an allocated share of the foregoing costs. The aggregate amount of all such payments and reimbursements is determined annually by the Trustees. THE AMOUNT OF THIS REIMBURSEMENT FOR THE FUND'S MOST RECENT FISCAL YEAR IS INCLUDED IN "CHARGES AND EXPENSES" IN PART I OF THIS SAI. Putnam Management pays all other salaries of officers of the fund. The fund pays all expenses not assumed by Putnam Management including, without limitation, auditing, legal, custodial, investor servicing and shareholder reporting expenses. The fund pays the cost of typesetting for its prospectuses and the cost of printing and mailing any prospectuses sent to its shareholders. Putnam Mutual Funds pays the cost of printing and distributing all other prospectuses. The Management Contract provides that Putnam Management shall not be subject to any liability to the fund or to any shareholder of the fund for any act or omission in the course of or connected with rendering services to the fund in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its duties on the part of Putnam Management. The Management Contract may be terminated without penalty by vote of the Trustees or the shareholders of the fund, or by Putnam Management, on 30 days' written notice. It may be amended only by a vote of the shareholders of the fund. The Management Contract also terminates without payment of any penalty in the event of its assignment. The Management Contract provides that it will continue in effect only so long as such continuance is approved at least annually by vote of either the Trustees or the shareholders, and, in either case, by a majority of the Trustees who are not "interested persons" of Putnam Management or the fund. In each of the foregoing cases, the vote of the shareholders is the affirmative vote of a "majority of the outstanding voting securities" as defined in the Investment Company Act of 1940. PERSONAL INVESTMENTS BY EMPLOYEES OF PUTNAM MANAGEMENT Employees of Putnam Management are permitted to engage in personal securities transactions, subject to requirements and restrictions set forth in Putnam Management's Code of Ethics. The Code of Ethics contains provisions and requirements designed to identify and address certain conflicts of interest between personal investment activities and the interests of investment advisory clients such as the funds. Among other things, the Code of Ethics, consistent with standards recommended by the Investment Company Institute's Advisory Group on Personal Investing, prohibits certain types of transactions absent prior approval, imposes time periods during which personal transactions may not be made in certain securities, and requires the submission of duplicate broker confirmations and quarterly reporting of securities transactions. Additional restrictions apply to portfolio managers, traders, research analysts and others involved in the investment advisory process. Exceptions to these and other provisions of the Code of Ethics may be granted in particular circumstances after review by appropriate personnel. PORTFOLIO TRANSACTIONS INVESTMENT DECISIONS. Investment decisions for the fund and for the other investment advisory clients of Putnam Management and its affiliates are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in Putnam Management's opinion is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients. BROKERAGE AND RESEARCH SERVICES. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions involve the payment by the fund of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the fund usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the fund includes a disclosed, fixed commission or discount retained by the underwriter or dealer. It is anticipated that most purchases and sales of securities by funds investing primarily in tax-exempt securities and certain other fixed-income securities will be with the issuer or with underwriters of or dealers in those securities, acting as principal. Accordingly, those funds would not ordinarily pay significant brokerage commissions with respect to securities transactions. SEE "CHARGES AND EXPENSES" IN PART I OF THIS SAI FOR INFORMATION CONCERNING COMMISSIONS PAID BY THE FUND. It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive brokerage and research services (as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that execute portfolio transactions for the clients of such advisers and from third parties with which such broker-dealers have arrangements. Consistent with this practice, Putnam Management receives brokerage and research services and other similar services from many broker-dealers with which Putnam Management places the fund's portfolio transactions and from third parties with which these broker-dealers have arrangements. These services include such matters as general economic and market reviews, industry and company reviews, evaluations of investments, recommendations as to the purchase and sale of investments, newspapers, magazines, pricing services, quotation services, news services and personal computers utilized by Putnam Management's managers and analysts. Where the services referred to above are not used exclusively by Putnam Management for research purposes, Putnam Management, based upon its own allocations of expected use, bears that portion of the cost of these services which directly relates to their non-research use. Some of these services are of value to Putnam Management and its affiliates in advising various of their clients (including the fund), although not all of these services are necessarily useful and of value in managing the fund. The management fee paid by the fund is not reduced because Putnam Management and its affiliates receive these services even though Putnam Management might otherwise be required to purchase some of these services for cash. Putnam Management places all orders for the purchase and sale of portfolio investments for the fund and buys and sells investments for the fund through a substantial number of brokers and dealers. In so doing, Putnam Management uses its best efforts to obtain for the fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions as described below. In seeking the most favorable price and execution, Putnam Management, having in mind the fund's best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security or other investment, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions. As permitted by Section 28(e) of the 1934 Act, and by the Management Contract, Putnam Management may cause the fund to pay a broker-dealer which provides "brokerage and research services" (as defined in the 1934 Act) to Putnam Management an amount of disclosed commission for effecting securities transactions on stock exchanges and other transactions for the fund on an agency basis in excess of the commission which another broker-dealer would have charged for effecting that transaction. Putnam Management's authority to cause the fund to pay any such greater commissions is also subject to such policies as the Trustees may adopt from time to time. Putnam Management does not currently intend to cause the fund to make such payments. It is the position of the staff of the Securities and Exchange Commission that Section 28(e) does not apply to the payment of such greater commissions in "principal" transactions. Accordingly Putnam Management will use its best effort to obtain the most favorable price and execution available with respect to such transactions, as described above. The Management Contract provides that commissions, fees, brokerage or similar payments received by Putnam Management or an affiliate in connection with the purchase and sale of portfolio investments of the fund, less any direct expenses approved by the Trustees, shall be recaptured by the fund through a reduction of the fee payable by the fund under the Management Contract. Putnam Management seeks to recapture for the fund soliciting dealer fees on the tender of the fund's portfolio securities in tender or exchange offers. Any such fees which may be recaptured are likely to be minor in amount. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, Putnam Management may consider sales of shares of the fund (and, if permitted by law, of the other Putnam funds) as a factor in the selection of broker-dealers to execute portfolio transactions for the fund. PRINCIPAL UNDERWRITER Putnam Mutual Funds is the principal underwriter of shares of the fund and the other continuously offered Putnam funds. Putnam Mutual Funds is not obligated to sell any specific amount of shares of the fund and will purchase shares for resale only against orders for shares. SEE "CHARGES AND EXPENSES" IN PART I OF THIS SAI FOR INFORMATION ON SALES CHARGES AND OTHER PAYMENTS RECEIVED BY PUTNAM MUTUAL FUNDS. INVESTOR SERVICING AGENT AND CUSTODIAN Putnam Investor Services, a division of Putnam Fiduciary Trust Company ("PFTC"), is the fund's investor servicing agent (transfer, plan and dividend disbursing agent), for which it receives fees which are paid monthly by the fund as an expense of all its shareholders. The fee paid to Putnam Investor Services is determined on the basis of the number of shareholder accounts, the number of transactions and the assets of the fund. Putnam Investor Services won the DALBAR Quality Tested Service Seal in 1990, 1991, 1992, 1993, 1994 and 1995. Over 10,000 tests of 38 separate shareholder service components demonstrated that Putnam Investor Services tied for highest scores, with two other mutual fund companies, in all categories. PFTC is the custodian of the fund's assets. In carrying out its duties under its custodian contract, PFTC may employ one or more subcustodians whose responsibilities include safeguarding and controlling the fund's cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the fund's investments. PFTC and any subcustodians employed by it have a lien on the securities of the fund (to the extent permitted by the fund's investment restrictions) to secure charges and any advances made by such subcustodians at the end of any day for the purpose of paying for securities purchased by the fund. The fund expects that such advances will exist only in unusual circumstances. Neither PFTC nor any subcustodian determines the investment policies of the fund or decides which securities the fund will buy or sell. PFTC pays the fees and other charges of any subcustodians employed by it. The fund may from time to time pay custodial expenses in full or in part through the placement by Putnam Management of the fund's portfolio transactions with the subcustodians or with a third- party broker having an agreement with the subcustodians. The fund pays PFTC an annual fee based on the fund's assets, securities transactions and securities holdings and reimburses PFTC for certain out-of-pocket expenses incurred by it or any subcustodian employed by it in performing custodial services. SEE "CHARGES AND EXPENSES" IN PART I OF THIS SAI FOR INFORMATION ON FEES AND REIMBURSEMENTS FOR INVESTOR SERVICING AND CUSTODY RECEIVED BY PFTC. THE FEES MAY BE REDUCED BY CREDITS ALLOWED BY PFTC. DETERMINATION OF NET ASSET VALUE The fund determines the net asset value per share of each class of shares once each day the New York Stock Exchange (the "Exchange") is open. Currently, the Exchange is closed Saturdays, Sundays and the following holidays: New Year's Day, Rev. Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas. The fund determines net asset value as of the close of regular trading on the Exchange, currently 4:00 p.m. However, equity options held by the fund are priced as of the close of trading at 4:10 p.m., and futures contracts on U.S. government and other fixed-income securities and index options held by the fund are priced as of their close of trading at 4:15 p.m. Securities for which market quotations are readily available are valued at prices which, in the opinion of Putnam Management, most nearly represent the market values of such securities. Currently, such prices are determined using the last reported sale price or, if no sales are reported (as in the case of some securities traded over-the-counter), the last reported bid price, except that certain securities are valued at the mean between the last reported bid and asked prices. Short-term investments having remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. Liabilities are deducted from the total, and the resulting amount is divided by the number of shares of the class outstanding. Reliable market quotations are not considered to be readily available for long-term corporate bonds and notes, certain preferred stocks, tax-exempt securities, and certain foreign securities. These investments are valued at fair value on the basis of valuations furnished by pricing services, which determine valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. If any securities held by the fund are restricted as to resale, Putnam Management determines their fair value following procedures approved by the Trustees. The fair value of such securities is generally determined as the amount which the fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. The valuation procedures applied in any specific instance are likely to vary from case to case. However, consideration is generally given to the financial position of the issuer and other fundamental analytical data relating to the investment and to the nature of the restrictions on disposition of the securities (including any registration expenses that might be borne by the fund in connection with such disposition). In addition, specific factors are also generally considered, such as the cost of the investment, the market value of any unrestricted securities of the same class, the size of the holding, the prices of any recent transactions or offers with respect to such securities and any available analysts' reports regarding the issuer. Generally, trading in certain securities (such as foreign securities) is substantially completed each day at various times prior to the close of the Exchange. The values of these securities used in determining the net asset value of the fund's shares are computed as of such times. Also, because of the amount of time required to collect and process trading information as to large numbers of securities issues, the values of certain securities (such as convertible bonds, U.S. government securities, and tax-exempt securities) are determined based on market quotations collected earlier in the day at the latest practicable time prior to the close of the Exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange which will not be reflected in the computation of the fund's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value following procedures approved by the Trustees. Money market funds generally value their portfolio securities at amortized cost according to Rule 2a-7 under the Investment Company Act of 1940. HOW TO BUY SHARES GENERAL The prospectus contains a general description of how investors may buy shares of the fund and states whether the fund offers more than one class of shares. This SAI contains additional information which may be of interest to investors. Class A shares and class M shares are generally sold with a sales charge payable at the time of purchase (except for class A shares and class M shares of money market funds). As used in this SAI and unless the context requires otherwise, the term "class A shares" includes shares of funds that offer only one class of shares. The prospectus contains a table of applicable sales charges. For information about how to purchase class A or class M shares of a Putnam fund at net asset value through an employer- sponsored retirement plan, please consult your employer. Certain purchases of class A shares and class M shares may be exempt from a sales charge or, in the case of class A shares, may be subject to a contingent deferred sales charge ("CDSC"). See "General-- Sales without sales charges or contingent deferred sales charges," "Additional Information About Class A and Class M shares," and "Contingent Deferred Sales Charges--Class A shares." Class B shares and class C shares are sold subject to a CDSC payable upon redemption within a specified period after purchase. The prospectus contains a table of applicable CDSCs. Class B shares will automatically convert into class A shares at the end of the month eight years after the purchase date. Class B shares acquired by exchanging class B shares of another Putnam fund will convert into class A shares based on the time of the initial purchase. Class B shares acquired through reinvestment of distributions will convert into Class A shares based on the date of the initial purchase to which such shares relate. For this purpose, class B shares acquired through reinvestment of distributions will be attributed to particular purchases of class B shares in accordance with such procedures as the Trustees may determine from time to time. The conversion of class B shares to class A shares is subject to the condition that such conversions will not constitute taxable events for Federal tax purposes. Class Y shares, which are not subject to sales charges or a CDSC, are available only to certain defined contribution plans. See the prospectus that offers class Y shares for more information. Certain purchase programs described below are not available to defined contribution plans. Consult your employer for information on how to purchase shares through your plan. The fund is currently making a continuous offering of its shares. The fund receives the entire net asset value of shares sold. The fund will accept unconditional orders for shares to be executed at the public offering price based on the net asset value per share next determined after the order is placed. In the case of class A shares and class M shares, the public offering price is the net asset value plus the applicable sales charge, if any. No sales charge is included in the public offering price of other classes of shares. In the case of orders for purchase of shares placed through dealers, the public offering price will be based on the net asset value determined on the day the order is placed, but only if the dealer receives the order before the close of regular trading on the Exchange. If the dealer receives the order after the close of the Exchange, the price will be based on the net asset value next determined. If funds for the purchase of shares are sent directly to Putnam Investor Services, they will be invested at the public offering price based on the net asset value next determined after receipt. Payment for shares of the fund must be in U.S. dollars; if made by check, the check must be drawn on a U.S. bank. Initial and subsequent purchases must satisfy the minimums stated in the prospectus, except that (i) individual investments under certain employee benefit plans or Tax Qualified Retirement Plans may be lower, (ii) persons who are already shareholders may make additional purchases of $50 or more by sending funds directly to Putnam Investor Services (see "Your investing account" below), and (iii) for investors participating in systematic investment plans and military allotment plans, the initial and subsequent purchases must be $25 or more. Information about these plans is available from investment dealers or from Putnam Mutual Funds. As a convenience to investors, shares may be purchased through a systematic investment plan. Pre-authorized monthly bank drafts for a fixed amount (at least $25) are used to purchase fund shares at the applicable public offering price next determined after Putnam Mutual Funds receives the proceeds from the draft. A shareholder may choose any day of the month and, if a given month (for example, February) does not contain that particular date, or if the date falls on a weekend or holiday, the draft will be processed on the next business day. Further information and application forms are available from investment dealers or from Putnam Mutual Funds. Except for funds that declare a distribution daily, distributions to be reinvested are reinvested without a sales charge in shares of the same class as of the ex-dividend date using the net asset value determined on that date, and are credited to a shareholder's account on the payment date. Dividends for Putnam money market funds are credited to a shareholder's account on the payment date. Distributions for all other funds that declare a distribution daily are reinvested without a sales charge as of the last day of the period for which distributions are paid using the net asset value determined on that date, and are credited to a shareholder's account on the payment date. PAYMENT IN SECURITIES. In addition to cash, the fund may accept securities as payment for fund shares at the applicable net asset value. Generally, the fund will only consider accepting securities to increase its holdings in a portfolio security, or if Putnam Management determines that the offered securities are a suitable investment for the fund and in a sufficient amount for efficient management. While no minimum has been established, it is expected that the fund would not accept securities with a value of less than $100,000 per issue as payment for shares. The fund may reject in whole or in part any or all offers to pay for purchases of fund shares with securities, may require partial payment in cash for such purchases to provide funds for applicable sales charges, and may discontinue accepting securities as payment for fund shares at any time without notice. The fund will value accepted securities in the manner described in the section "Determination of Net Asset Value" for valuing shares of the fund. The fund will only accept securities which are delivered in proper form. The fund will not accept options or restricted securities as payment for shares. The acceptance of securities by certain funds in exchange for fund shares is subject to additional requirements. For federal income tax purposes, a purchase of fund shares with securities will be treated as a sale or exchange of such securities on which the investor will realize a taxable gain or loss. The processing of a purchase of fund shares with securities involves certain delays while the fund considers the suitability of such securities and while other requirements are satisfied. For information regarding procedures for payment in securities, contact Putnam Mutual Funds. Investors should not send securities to the fund except when authorized to do so and in accordance with specific instructions received from Putnam Mutual Funds. SALES WITHOUT SALES CHARGES OR CONTINGENT DEFERRED SALES CHARGES. The fund may sell shares without a sales charge or CDSC to: (i) current and retired Trustees of the fund; officers of the fund; directors and current and retired U.S. full-time employees of Putnam Management, Putnam Mutual Funds, their parent corporations and certain corporate affiliates; family members of and employee benefit plans for the foregoing; and partnerships, trusts or other entities in which any of the foregoing has a substantial interest; (ii) employer-sponsored retirement plans, for the repurchase of shares in connection with repayment of plan loans made to plan participants (if the sum loaned was obtained by redeeming shares of a Putnam fund sold with a sales charge) (not offered by tax-exempt funds); (iii) clients of administrators of tax-qualified employer- sponsored retirement plans which have entered into agreements with Putnam Mutual Funds (not offered by tax-exempt funds); (iv) registered representatives and other employees of broker-dealers having sales agreements with Putnam Mutual Funds; employees of financial institutions having sales agreements with Putnam Mutual Funds or otherwise having an arrangement with any such broker-dealer or financial institution with respect to sales of fund shares; and their spouses and children under age 21 (Putnam Mutual Funds is regarded as the dealer of record for all such accounts); (v) investors meeting certain requirements who sold shares of certain Putnam closed-end funds pursuant to a tender offer by such closed-end fund; (vi) a trust department of any financial institution purchasing shares of the fund in its capacity as trustee of any trust, if the value of the shares of the fund and other Putnam funds purchased or held by all such trusts exceeds $1 million in the aggregate; and (vii) "wrap accounts" maintained for clients of broker- dealers, financial institutions or financial planners who have entered into agreements with Putnam Mutual Funds with respect to such accounts. In addition, the fund may issue its shares at net asset value without an initial sales charge or a CDSC in connection with the acquisition of substantially all of the securities owned by other investment companies or personal holding companies, and the CDSC will be waived on redemptions of shares arising out of death or post-purchase disability or in connection with certain withdrawals from IRA or other retirement plans. Up to 12% of the value of shares subject to a systematic withdrawal plan may also be redeemed each year without a CDSC. The fund may sell class M shares at net asset value to members of qualified groups. See "Group purchases of class A and class M shares" below. Class A shares are available without an initial sales charge to eligible employer-sponsored retirement plans, as described below. PAYMENTS TO DEALERS. Putnam Mutual Funds may, at its expense, pay concessions in addition to the payments disclosed in the prospectus to dealers which satisfy certain criteria established from time to time by Putnam Mutual Funds relating to increasing net sales of shares of the Putnam funds over prior periods, and certain other factors. ADDITIONAL INFORMATION ABOUT CLASS A AND CLASS M SHARES The underwriter's commission is the sales charge shown in the prospectus less any applicable dealer discount. Putnam Mutual Funds will give dealers ten days' notice of any changes in the dealer discount. Putnam Mutual Funds retains the entire sales charge on any retail sales made by it. Putnam Mutual Funds offers several plans by which an investor may obtain reduced sales charges on purchases of class A shares and class M shares. The variations in sales charges reflect the varying efforts required to sell shares to separate categories of purchasers. These plans may be altered or discontinued at any time. COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the sales charge reductions or eliminations shown in the prospectus by combining into a single transaction the purchase of class A shares or class M shares with other purchases of any class of shares: (i) an individual, or a "company" as defined in Section 2(a)(8) of the Investment Company Act of 1940 (which includes corporations which are corporate affiliates of each other); (ii) an individual, his or her spouse and their children under twenty-one, purchasing for his, her or their own account; (iii) a trustee or other fiduciary purchasing for a single trust estate or single fiduciary account (including a pension, profit-sharing, or other employee benefit trust created pursuant to a plan qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code")); (iv) tax-exempt organizations qualifying under Section 501(c)(3) of the Internal Revenue Code (not including tax- exempt organizations qualifying under Section 403(b)(7) (a "403(b) plan") of the Code; and (v) employee benefit plans of a single employer or of affiliated employers, other than 403(b) plans. A combined purchase currently may also include shares of any class of other continuously offered Putnam funds (other than money market funds) purchased at the same time through a single investment dealer, if the dealer places the order for such shares directly with Putnam Mutual Funds. CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). A purchaser of class A shares or class M shares may qualify for a cumulative quantity discount by combining a current purchase (or combined purchases as described above) with certain other shares of any class of Putnam funds already owned. The applicable sales charge is based on the total of: (i) the investor's current purchase; and (ii) the maximum public offering price (at the close of business on the previous day) of: (a) all shares held by the investor in all of the Putnam funds (except money market funds); and (b) any shares of money market funds acquired by exchange from other Putnam funds; and (iii) the maximum public offering price of all shares described in paragraph (ii) owned by another shareholder eligible to participate with the investor in a "combined purchase" (see above). To qualify for the combined purchase privilege or to obtain the cumulative quantity discount on a purchase through an investment dealer, when each purchase is made the investor or dealer must provide Putnam Mutual Funds with sufficient information to verify that the purchase qualifies for the privilege or discount. The shareholder must furnish this information to Putnam Investor Services when making direct cash investments. STATEMENT OF INTENTION. Investors may also obtain the reduced sales charges for class A shares or class M shares shown in the prospectus for investments of a particular amount by means of a written Statement of Intention, which expresses the investor's intention to invest that amount (including certain "credits," as described below) within a period of 13 months in shares of any class of the fund or any other continuously offered Putnam fund (excluding money market funds). Each purchase of class A shares or class M shares under a Statement of Intention will be made at the public offering price applicable at the time of such purchase to a single transaction of the total dollar amount indicated in the Statement of Intention. A Statement of Intention may include purchases of shares made not more than 90 days prior to the date that an investor signs a Statement; however, the 13-month period during which the Statement of Intention is in effect will begin on the date of the earliest purchase to be included. An investor may receive a credit toward the amount indicated in the Statement of Intention equal to the maximum public offering price as of the close of business on the previous day of all shares he or she owns on the date of the Statement of Intention which are eligible for purchase under a Statement of Intention (plus any shares of money market funds acquired by exchange of such eligible shares). Investors do not receive credit for shares purchased by the reinvestment of distributions. Investors qualifying for the "combined purchase privilege" (see above) may purchase shares under a single Statement of Intention. The Statement of Intention is not a binding obligation upon the investor to purchase the full amount indicated. The minimum initial investment under a Statement of Intention is 5% of such amount, and must be invested immediately. Class A shares or class M shares purchased with the first 5% of such amount will be held in escrow to secure payment of the higher sales charge applicable to the shares actually purchased if the full amount indicated is not purchased. When the full amount indicated has been purchased, the escrow will be released. If an investor desires to redeem escrowed shares before the full amount has been purchased, the shares will be released from escrow only if the investor pays the sales charge that, without regard to the Statement of Intention, would apply to the total investment made to date. To the extent that an investor purchases more than the dollar amount indicated on the Statement of Intention and qualifies for a further reduced sales charge, the sales charge will be adjusted for the entire amount purchased at the end of the 13-month period, upon recovery from the investor's dealer of its portion of the sales charge adjustment. Once received from the dealer, which may take a period of time or may never occur, the sales charge adjustment will be used to purchase additional shares at the then current offering price applicable to the actual amount of the aggregate purchases. These additional shares will not be considered as part of the total investment for the purpose of determining the applicable sales charge pursuant to the Statement of Intention. No sales charge adjustment will be made unless and until the investor's dealer returns any excess commissions previously received. To the extent that an investor purchases less than the dollar amount indicated on the Statement of Intention within the 13- month period, the sales charge will be adjusted upward for the entire amount purchased at the end of the 13-month period. This adjustment will be made by redeeming shares from the account to cover the additional sales charge, the proceeds of which will be paid to the investor's dealer and Putnam Mutual Funds in accordance with the prospectus. If the account exceeds an amount that would otherwise qualify for a reduced sales charge, that reduced sales charge will be applied. Statements of Intention are not available for certain employee benefit plans. Statement of Intention forms may be obtained from Putnam Mutual Funds or from investment dealers. Interested investors should read the Statement of Intention carefully. GROUP PURCHASES OF CLASS A AND CLASS M SHARES. Members of qualified groups may purchase class A shares of the fund at a group sales charge rate of 4.50% of the public offering price (4.71% of the net amount invested). The dealer discount on such sales is 3.75% of the offering price. Members of qualified groups may also purchase class M shares at net asset value. To receive the class A or class M group rate, group members must purchase shares through a single investment dealer designated by the group. The designated dealer must transmit each member's initial purchase to Putnam Mutual Funds, together with payment and completed application forms. After the initial purchase, a member may send funds for the purchase of shares directly to Putnam Investor Services. Purchases of shares are made at the public offering price based on the net asset value next determined after Putnam Mutual Funds or Putnam Investor Services receives payment for the shares. The minimum investment requirements described above apply to purchases by any group member. Only shares purchased under the class A group discount are included in calculating the purchased amount for the purposes of these requirements. Qualified groups include the employees of a corporation or a sole proprietorship, members and employees of a partnership or association, or other organized groups of persons (the members of which may include other qualified groups) provided that: (i) the group has at least 25 members of which, with respect to the class A discount only, at least 10 members participate in the initial purchase; (ii) the group has been in existence for at least six months; (iii) the group has some purpose in addition to the purchase of investment company shares at a reduced sales charge; (iv) the group's sole organizational nexus or connection is not that the members are credit card holders of a company, policy holders of an insurance company, customers of a bank or broker-dealer, clients of an investment adviser or security holders of a company; (v) with respect to the class A discount only, the group agrees to provide its designated investment dealer access to the group's membership by means of written communication or direct presentation to the membership at a meeting on not less frequently than an annual basis; (vi) the group or its investment dealer will provide annual certification in form satisfactory to Putnam Investor Services that the group then has at least 25 members and, with respect to the class A discount only, that at least ten members participated in group purchases during the immediately preceding 12 calendar months; and (vii) the group or its investment dealer will provide periodic certification in form satisfactory to Putnam Investor Services as to the eligibility of the purchasing members of the group. Members of a qualified group include: (i) any group which meets the requirements stated above and which is a constituent member of a qualified group; (ii) any individual purchasing for his or her own account who is carried on the records of the group or on the records of any constituent member of the group as being a good standing employee, partner, member or person of like status of the group or constituent member; or (iii) any fiduciary purchasing shares for the account of a member of a qualified group or a member's beneficiary. For example, a qualified group could consist of a trade association which would have as its members individuals, sole proprietors, partnerships and corporations. The members of the group would then consist of the individuals, the sole proprietors and their employees, the members of the partnerships and their employees, and the corporations and their employees, as well as the trustees of employee benefit trusts acquiring class A shares for the benefit of any of the foregoing. A member of a qualified group may, depending upon the value of class A shares of the fund owned or proposed to be purchased by the member, be entitled to purchase class A shares of the fund at non-group sales charge rates shown in the prospectus which may be lower than the group sales charge rate, if the member qualifies as a person entitled to reduced non-group sales charges. Such a group member will be entitled to purchase at the lower rate if, at the time of purchase, the member or his or her investment dealer furnishes sufficient information for Putnam Mutual Funds or Putnam Investor Services to verify that the purchase qualifies for the lower rate. Interested groups should contact their investment dealer or Putnam Mutual Funds. The fund reserves the right to revise the terms of or to suspend or discontinue group sales at any time. QUALIFIED BENEFIT PLANS; INDIVIDUAL ACCOUNT PLANS. The terms "class A qualified benefit plan" and "class M qualified benefit plan" mean any employer-sponsored plan or arrangement, whether or not tax-qualified, for which Putnam Fiduciary Trust Company or its affiliates provide recordkeeping or other services in connection with the purchase of class A shares or class M shares, respectively. The term "affiliated employer" means employers who are affiliated with each other within the meaning of Section 2(a)(3)(C) of the Investment Company Act of 1940. The term "individual account plan" means any employee benefit plan whereby (i) class A shares are purchased through payroll deductions or otherwise by a fiduciary or other person for the account of participants who are employees (or their spouses) of an employer, or of affiliated employers, and (ii) a separate investing account is maintained in the name of such fiduciary or other person for the account of each participant in the plan. The table of sales charges in the prospectus applies to sales to employer-sponsored retirement plans that are not class A qualified benefit plans, except that the fund may sell class A shares at net asset value to employee benefit plans, including individual account plans, of employers or of affiliated employers which have at least 750 employees to whom such plan is made available, in connection with a payroll deduction system of plan funding (or other system acceptable to Putnam Investor Services) by which contributions or account information for plan participation are transmitted to Putnam Investor Services by methods acceptable to Putnam Investor Services. The fund may also sell class A shares at net asset value to employer-sponsored retirement plans that initially invest at least $1 million in the fund or that have at least 200 eligible employees. In addition, the fund may sell class M shares at net asset value to class M qualified benefit plans. An employer-sponsored retirement plan participating in a "multi- fund" program approved by Putnam Mutual Funds may include amounts invested in the other mutual funds participating in such program for purposes of determining whether the plan may purchase class A shares at net asset value based on the size of the purchase as described in the prospectus. These investments will also be included for purposes of the discount privileges and programs described above. Additional information about qualified benefit plans and individual account plans is available from investment dealers or from Putnam Mutual Funds. CONTINGENT DEFERRED SALES CHARGES; COMMISSIONS CLASS A SHARES. Except as described below, a CDSC of 0.75% (1.00% in the case of plans for which Putnam Mutual Funds and its affiliates do not act as trustee or record-keeper) of the total amount redeemed is imposed on redemptions of shares purchased by class A qualified benefit plans if, within two years of a plan's initial purchase of class A shares, it redeems 90% or more of its cumulative purchases. Thereafter, such plan is no longer liable for any CDSC. The two-year CDSC applicable to class A qualified benefit plans for which Putnam Mutual Funds or its affiliates serve as trustee or recordkeeper ("full service plans") is 0.50% of the total amount redeemed, for full service plans that initially invest at least $5 million but less than $10 million in Putnam funds and other investments managed by Putnam Management or its affiliates ("Putnam Assets"), and is 0.25% of the total amount redeemed for full service plans that initially invest at least $10 million but less than $20 million in Putnam Assets. Class A qualified benefit plans that initially invest at least $20 million in Putnam Assets, or whose dealer of record has, with Putnam Mutual Funds' approval, waived its commission or agreed to refund its commission to Putnam Mutual Funds in the event a CDSC would otherwise be applicable, are not subject to any CDSC. Similarly, class A shares purchased at net asset value by any investor other than a class A qualified benefit plan, including purchases pursuant to any Combined Purchase Privilege, Right of Accumulation or Statement of Intention, are subject to a CDSC of 1.00% or 0.50%, respectively, if redeemed within the first or second year after purchase, unless the dealer of record waived its commission with Putnam Mutual Funds' approval. The class A CDSC is imposed on the lower of the cost and the current net asset value of the shares redeemed. Except as described below for sales to class A qualified benefit plans, Putnam Mutual Funds pays investment dealers of record commissions on sales of class A shares of $1 million or more and sales to employer-sponsored benefit plans that have at least 200 eligible employees and that are not class A qualified benefit plans based on cumulative purchases of such shares, including purchases pursuant to any Combined Purchase Privilege, Right of Accumulation or Statement of Intention, during the one-year period beginning with the date of the initial purchase at net asset value. Each subsequent one-year measuring period for these purposes will begin with the first net asset value purchase following the end of the prior period. Such commissions are paid at the rate of 1.00% of the amount under $3 million, 0.50% of the next $47 million and 0.25% thereafter. On sales at net asset value to a class A qualified benefit plan, Putnam Mutual Funds pays commissions to the dealer of record at the time of the sale on net monthly purchases at the following rates: 1.00% of the first $1 million, 0.75% of the next $1 million, 0.50% of the next $3 million, 0.20% of the next $5 million, 0.15% of the next $10 million, 0.10% of the next $10 million and 0.05% thereafter, except that commissions on sales to class A qualified benefit plans initially investing less than $20 million in Putnam funds and other investments managed by Putnam Management or its affiliates pursuant to a proposal made by Putnam Mutual Funds on or before April 15, 1997 are based on cumulative purchases over a one-year measuring period at the rate of 1.00% of the first $2 million, 0.80% of the next $1 million, and 0.50% thereafter. On sales at net asset value to all other class A qualified benefit plans receiving proposals from Putnam Mutual Funds on or before April 15, 1997, Putnam Mutual Funds pays commissions on the initial investment and on subsequent net quarterly sales (gross sales minus gross redemptions during the quarter) at the rate of 0.15%. Money market fund shares are excluded from all commission calculations, except for determining the amount initially invested by a qualified benefit plan. Commissions on sales at net asset value to such plans are subject to Putnam Mutual Funds' right to reclaim such commissions if the shares are redeemed within two years. Different CDSC and commission rates may apply to shares purchased prior to December 1, 1995. ALL SHARES. Investors who set up an Automatic Cash Withdrawal Plan ("ACWP") for a share account (see "Plans available to shareholders -- Automatic Cash Withdrawal Plan") may withdraw through the ACWP up to 12% of the net asset value of the account (calculated as set forth below) each year without incurring any CDSC. Shares not subject to a CDSC (such as shares representing reinvestment of distributions) will be redeemed first and will count toward the 12% limitation. If there are insufficient shares not subject to a CDSC, shares subject to the lowest CDSC liability will be redeemed next until the 12% limit is reached. The 12% figure is calculated on a pro rata basis at the time of the first payment made pursuant to an ACWP and recalculated thereafter on a pro rata basis at the time of each ACWP payment. Therefore, shareholders who have chosen an ACWP based on a percentage of the net asset value of their account of up to 12% will be able to receive ACWP payments without incurring a CDSC. However, shareholders who have chosen a specific dollar amount (for example, $100 per month from a fund that pays income distributions monthly) for their periodic ACWP payment should be aware that the amount of that payment not subject to a CDSC may vary over time depending on the net asset value of their account. For example, if the net asset value of the account is $10,000 at the time of payment, the shareholder will receive $100 free of the CDSC (12% of $10,000 divided by 12 monthly payments). However, if at the time of the next payment the net asset value of the account has fallen to $9,400, the shareholder will receive $94 free of any CDSC (12% of $9,400 divided by 12 monthly payments) and $6 subject to the lowest applicable CDSC. This ACWP privilege may be revised or terminated at any time. No CDSC is imposed on shares of any class subject to a CDSC ("CDSC Shares") to the extent that the CDSC Shares redeemed (i) are no longer subject to the holding period therefor, (ii) resulted from reinvestment of distributions on CDSC Shares, or (iii) were exchanged for shares of another Putnam fund, provided that the shares acquired in such exchange or subsequent exchanges (including shares of a Putnam money market fund) will continue to remain subject to the CDSC, if applicable, until the applicable holding period expires. In determining whether the CDSC applies to each redemption of CDSC Shares, CDSC Shares not subject to a CDSC are redeemed first. The fund will waive any CDSC on redemptions, in the case of individual, joint or Uniform Transfers to Minors Act accounts, in the event of death or post-purchase disability of a shareholder, for the purpose of paying benefits pursuant to tax-qualified retirement plans ("Benefit Payments"), or, in the case of living trust accounts, in the event of the death or post-purchase disability of the settlor of the trust). Benefit payments currently include, without limitation, (1) distributions from an IRA due to death or disability, (2) a return of excess contributions to an IRA or 401(k) plan, and (3) distributions from retirement plans qualified under Section 401(a) of the Code or from a 403(b) plan due to death, disability, retirement or separation from service. These waivers may be changed at any time. Additional waivers may apply to IRA accounts opened prior to February 1, 1994. DISTRIBUTION PLANS If the fund or a class of shares of the fund has adopted a distribution plan, the prospectus describes the principal features of the plan. This SAI contains additional information which may be of interest to investors. Continuance of a plan is subject to annual approval by a vote of the Trustees, including a majority of the Trustees who are not interested persons of the fund and who have no direct or indirect interest in the plan or related arrangements (the "Qualified Trustees"), cast in person at a meeting called for that purpose. All material amendments to a plan must be likewise approved by the Trustees and the Qualified Trustees. No plan may be amended in order to increase materially the costs which the fund may bear for distribution pursuant to such plan without also being approved by a majority of the outstanding voting securities of the fund or the relevant class of the fund, as the case may be. A plan terminates automatically in the event of its assignment and may be terminated without penalty, at any time, by a vote of a majority of the Qualified Trustees or by a vote of a majority of the outstanding voting securities of the fund or the relevant class of the fund, as the case may be. Putnam Mutual Funds pays service fees to qualifying dealers at the rates set forth in the Prospectus, except with respect to shares held by class A qualified benefit plans. Putnam Mutual Funds pays service fees to the dealer of record for plans for which Putnam Fiduciary Trust or its affiliates serve as trustee and recordkeeper at the following annual rates (expressed as a percentage of the average net asset value (as defined below) of the plan's class A shares): 0.25% of the first $5 million, 0.20% of the next $5 million, 0.15% of the next $10 million, 0.10% of the next $30 million, and 0.05% thereafter. For class A qualified benefit plans for which Putnam Fiduciary Trust Company or its affiliates provide some services but do not act as trustee and recordkeeper, Putnam Mutual Funds will pay service fees to the dealer of record of up to 0.25% of average net assets, depending on the level of service provided by Putnam Fiduciary Trust Company or its affiliates, by the dealer of record, and by third parties. Service fees are paid quarterly to the dealer of record for that quarter. Financial institutions receiving payments from Putnam Mutual Funds as described above may be required to comply with various state and federal regulatory requirements, including among others those regulating the activities of securities brokers or dealers. Except as otherwise agreed between Putnam Mutual Funds and a dealer, for purposes of determining the amounts payable to dealers for shareholder accounts for which such dealers are designated as the dealer of record, "average net asset value" means the product of (i) the average daily share balance in such account(s) and (ii) the average daily net asset value of the relevant class of shares over the quarter. Financial institutions receiving payments from Putnam Mutual Funds as described above may be required to comply with various state and federal regulatory requirements, including among others those regulating the activities of securities brokers or dealers. INVESTOR SERVICES SHAREHOLDER INFORMATION Each time shareholders buy or sell shares, they will receive a statement confirming the transaction and listing their current share balance. (Under certain investment plans, a statement may only be sent quarterly.) Shareholders will receive a statement confirming reinvestment of distributions in additional fund shares (or in shares of other Putnam funds for Dividends Plus accounts) promptly following the quarter in which the reinvestment occurs. To help shareholders take full advantage of their Putnam investment, they will receive a Welcome Kit and a periodic publication covering many topics of interest to investors. The fund also sends annual and semiannual reports that keep shareholders informed about its portfolio and performance, and year-end tax information to simplify their recordkeeping. Easy-to-read, free booklets on special subjects such as the Exchange Privilege and IRAs are available from Putnam Investor Services. Shareholders may call Putnam Investor Services toll-free weekdays at 1-800-225-1581 between 8:30 a.m. and 7:00 p.m. Boston time for more information, including account balances. YOUR INVESTING ACCOUNT The following information provides more detail concerning the operation of a Putnam Investing Account. For further information or assistance, investors should consult Putnam Investor Services. Shareholders who purchase shares through a defined contribution plan should note that not all of the services or features described below may be available to them, and they should contact their employer for details. A shareholder may reinvest a cash distribution without a front-end sales charge or without the reinvested shares being subject to a CDSC, as the case may be, by delivering to Putnam Investor Services the uncashed distribution check, endorsed to the order of the fund. Putnam Investor Services must receive the properly endorsed check within 1 year after the date of the check. The Investing Account also provides a way to accumulate shares of the fund. In most cases, after an initial investment of $500, a shareholder may send checks to Putnam Investor Services for $50 or more, made payable to the fund, to purchase additional shares at the applicable public offering price next determined after Putnam Investor Services receives the check. Checks must be drawn on a U.S. bank and must be payable in U.S. dollars. Putnam Investor Services acts as the shareholder's agent whenever it receives instructions to carry out a transaction on the shareholder's account. Upon receipt of instructions that shares are to be purchased for a shareholder's account, shares will be purchased through the investment dealer designated by the shareholder. Shareholders may change investment dealers at any time by written notice to Putnam Investor Services, provided the new dealer has a sales agreement with Putnam Mutual Funds. Shares credited to an account are transferable upon written instructions in good order to Putnam Investor Services and may be sold to the fund as described under "How to sell shares" in the prospectus. Money market funds and certain other funds will not issue share certificates. A shareholder may send to Putnam Investor Services any certificates which have been previously issued for safekeeping at no charge to the shareholder. Putnam Mutual Funds, at its expense, may provide certain additional reports and administrative material to qualifying institutional investors with fiduciary responsibilities to assist these investors in discharging their responsibilities. Institutions seeking further information about this service should contact Putnam Mutual Funds, which may modify or terminate this service at any time. Putnam Investor Services may make special services available to shareholders with investments exceeding $1,000,000. Contact Putnam Investor Services for details. The fund pays Putnam Investor Services' fees for maintaining Investing Accounts. REINSTATEMENT PRIVILEGE An investor who has redeemed shares of the fund may reinvest (within 1 year) the proceeds of such sale in shares of the same class of the fund, or may be able to reinvest (within 1 year) the proceeds in shares of the same class of one of the other continuously offered Putnam funds (through the Exchange Privilege described in the prospectus), including, in the case of shares subject to a CDSC, the amount of CDSC charged on the redemption. Any such reinvestment would be at the net asset value of the shares of the fund(s) the investor selects, next determined after Putnam Mutual Funds receives a Reinstatement Authorization. The time that the previous investment was held will be included in determining any applicable CDSC due upon redemptions and, in the case of class B shares, the eight-year period for conversion to class A shares. Shareholders will receive from Putnam Mutual Funds the amount of any CDSC paid at the time of redemption as part of the reinstated investment, which may be treated as capital gains to the shareholder for tax purposes. Exercise of the Reinstatement Privilege does not alter the federal income tax treatment of any capital gains realized on a sale of fund shares, but to the extent that any shares are sold at a loss and the proceeds are reinvested in shares of the fund, some or all of the loss may be disallowed as a deduction. Consult your tax adviser. Investors who desire to exercise the Reinstatement Privilege should contact their investment dealer or Putnam Investor Services. EXCHANGE PRIVILEGE Except as otherwise set forth in this section, by calling Putnam Investor Services, investors may exchange shares valued up to $500,000 between accounts with identical registrations, provided that no certificates are outstanding for such shares and no address change has been made within the preceding 15 days. During periods of unusual market changes and shareholder activity, shareholders may experience delays in contacting Putnam Investor Services by telephone to exercise the Telephone Exchange Privilege. Putnam Investor Services also makes exchanges promptly after receiving a properly completed Exchange Authorization Form and, if issued, share certificates. If the shareholder is a corporation, partnership, agent, or surviving joint owner, Putnam Investor Services will require additional documentation of a customary nature. Because an exchange of shares involves the redemption of fund shares and reinvestment of the proceeds in shares of another Putnam fund, completion of an exchange may be delayed under unusual circumstances if the fund were to suspend redemptions or postpone payment for the fund shares being exchanged, in accordance with federal securities laws. Exchange Authorization Forms and prospectuses of the other Putnam funds are available from Putnam Mutual Funds or investment dealers having sales contracts with Putnam Mutual Funds. The prospectus of each fund describes its investment objective(s) and policies, and shareholders should obtain a prospectus and consider these objectives and policies carefully before requesting an exchange. Shares of certain Putnam funds are not available to residents of all states. The fund reserves the right to change or suspend the Exchange Privilege at any time. Shareholders would be notified of any change or suspension. Additional information is available from Putnam Investor Services. Shareholders of other Putnam funds may also exchange their shares at net asset value for shares of the fund, as set forth in the current prospectus of each fund. For federal income tax purposes, an exchange is a sale on which the investor generally will realize a capital gain or loss depending on whether the net asset value at the time of the exchange is more or less than the investor's basis. The Exchange Privilege may be revised or terminated at any time. Shareholders would be notified of any such change or suspension. DIVIDENDS PLUS Shareholders may invest the fund's distributions of net investment income or distributions combining net investment income and short-term capital gains in shares of the same class of another continuously offered Putnam fund (the "receiving fund") using the net asset value per share of the receiving fund determined on the date the fund's distribution is payable. No sales charge or CDSC will apply to the purchased shares unless the fund paying the distribution is a money market fund. The prospectus of each fund describes its investment objective(s) and policies, and shareholders should obtain a prospectus and consider these objective(s) and policies carefully before investing their distributions in the receiving fund. Shares of certain Putnam funds are not available to residents of all states. The minimum account size requirement for the receiving fund will not apply if the current value of your account in the fund paying the distribution is more than $5,000. Shareholders of other Putnam funds (except for money market funds, whose shareholders must pay a sales charge or become subject to a CDSC) may also use their distributions to purchase shares of the fund at net asset value. For federal tax purposes, distributions from the fund which are reinvested in another fund are treated as paid by the fund to the shareholder and invested by the shareholder in the receiving fund and thus, to the extent comprised of taxable income and deemed paid to a taxable shareholder, are taxable. The Dividends PLUS program may be revised or terminated at any time. PLANS AVAILABLE TO SHAREHOLDERS The plans described below are fully voluntary and may be terminated at any time without the imposition by the fund or Putnam Investor Services of any penalty. All plans provide for automatic reinvestment of all distributions in additional shares of the fund at net asset value. The fund, Putnam Mutual Funds or Putnam Investor Services may modify or cease offering these plans at any time. AUTOMATIC CASH WITHDRAWAL PLAN ("ACWP"). An investor who owns or buys shares of the fund valued at $10,000 or more at the current public offering price may open an ACWP plan and have a designated sum of money ($50 or more) paid monthly, quarterly, semi-annually or annually to the investor or another person. (Payments from the fund can be combined with payments from other Putnam funds into a single check through a designated payment plan.) Shares are deposited in a plan account, and all distributions are reinvested in additional shares of the fund at net asset value (except where the plan is utilized in connection with a charitable remainder trust). Shares in a plan account are then redeemed at net asset value to make each withdrawal payment. Payment will be made to any person the investor designates; however, if shares are registered in the name of a trustee or other fiduciary, payment will be made only to the fiduciary, except in the case of a profit-sharing or pension plan where payment will be made to a designee. As withdrawal payments may include a return of principal, they cannot be considered a guaranteed annuity or actual yield of income to the investor. The redemption of shares in connection with a plan generally will result in a gain or loss for tax purposes. Some or all of the losses realized upon redemption may be disallowed pursuant to the so-called wash sale rules if shares of the same fund from which shares were redeemed are purchased (including through the reinvestment of fund distributions) within a period beginning 30 days before, and ending 30 days after, such redemption. In such a case, the basis of the replacement shares will be increased to reflect the disallowed loss. Continued withdrawals in excess of income will reduce and possibly exhaust invested principal, especially in the event of a market decline. The maintenance of a plan concurrently with purchases of additional shares of the fund would be disadvantageous to the investor because of the sales charge payable on such purchases. For this reason, the minimum investment accepted while a plan is in effect is $1,000, and an investor may not maintain a plan for the accumulation of shares of the fund (other than through reinvestment of distributions) and a plan at the same time. The cost of administering these plans for the benefit of those shareholders participating in them is borne by the fund as an expense of all shareholders. The fund, Putnam Mutual Funds or Putnam Investor Services may terminate or change the terms of the plan at any time. A plan will be terminated if communications mailed to the shareholder are returned as undeliverable. Investors should consider carefully with their own financial advisers whether the plan and the specified amounts to be withdrawn are appropriate in their circumstances. The fund and Putnam Investor Services make no recommendations or representations in this regard. TAX QUALIFIED RETIREMENT PLANS; 403(B) AND SEP PLANS. (NOT OFFERED BY FUNDS INVESTING PRIMARILY IN TAX-EXEMPT SECURITIES.) Investors may purchase shares of the fund through the following Tax Qualified Retirement Plans, available to qualified individuals or organizations: Standard and variable profit-sharing (including 401(k)) and money purchase pension plans; and Individual Retirement Account Plans (IRAs). Each of these Plans has been qualified as a prototype plan by the Internal Revenue Service. Putnam Investor Services will furnish services under each plan at a specified annual cost. Putnam Fiduciary Trust Company serves as trustee under each of these Plans. Forms and further information on these Plans are available from investment dealers or from Putnam Mutual Funds. In addition, specialized professional plan administration services are available on an optional basis; contact Putnam Defined Contribution Plan Services at 1-800-225-2465, extension 8600. A 403(b) Retirement Plan is available for employees of public school systems and organizations which meet the requirements of Section 501(c)(3) of the Internal Revenue Code. Forms and further information on the 403(b) Plan are also available from investment dealers or from Putnam Mutual Funds. Shares of the fund may also be used in simplified employee pension (SEP) plans. For further information on the Putnam prototype SEP plan, contact an investment dealer or Putnam Mutual Funds. Consultation with a competent financial and tax adviser regarding these Plans and consideration of the suitability of fund shares as an investment under the Employee Retirement Income Security Act of 1974, or otherwise, is recommended. SIGNATURE GUARANTEES Redemption requests for shares having a net asset value of $100,000 or more must be signed by the registered owners or their legal representatives and must be guaranteed by a bank, broker/dealer, municipal securities dealer or broker, government securities dealer or broker, credit union, national securities exchange, registered securities association, clearing agency, savings association or trust company, provided such institution is acceptable under and conforms with Putnam Fiduciary Trust Company's signature guarantee procedures. A copy of such procedures is available upon request. If you want your redemption proceeds sent to an address other than your address as it appears on Putnam's records, you must provide a signature guarantee. Putnam Investor Services usually requires additional documentation for the sale of shares by a corporation, partnership, agent or fiduciary, or a surviving joint owner. Contact Putnam Investor Services for details. SUSPENSION OF REDEMPTIONS The fund may not suspend shareholders' right of redemption, or postpone payment for more than seven days, unless the New York Stock Exchange is closed for other than customary weekends or holidays, or if permitted by the rules of the Securities and Exchange Commission during periods when trading on the Exchange is restricted or during any emergency which makes it impracticable for the fund to dispose of its securities or to determine fairly the value of its net assets, or during any other period permitted by order of the Commission for protection of investors. SHAREHOLDER LIABILITY Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the fund. However, the Agreement and Declaration of Trust disclaims shareholder liability for acts or obligations of the fund and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the fund or the Trustees. The Agreement and Declaration of Trust provides for indemnification out of fund property for all loss and expense of any shareholder held personally liable for the obligations of the fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the fund would be unable to meet its obligations. The likelihood of such circumstances is remote. STANDARD PERFORMANCE MEASURES Yield and total return data for the fund may from time to time be presented in Part I of this SAI and in advertisements. In the case of funds with more than one class of shares, all performance information is calculated separately for each class. The data is calculated as follows. Total return for one-, five- and ten-year periods (or for such shorter periods as the fund has been in operation or shares of the relevant class have been outstanding) is determined by calculating the actual dollar amount of investment return on a $1,000 investment in the fund made at the beginning of the period, at the maximum public offering price for class A shares and class M shares and net asset value for other classes of shares, and then calculating the annual compounded rate of return which would produce that amount. Total return for a period of one year is equal to the actual return of the fund during that period. Total return calculations assume deduction of the fund's maximum sales charge or CDSC, if applicable, and reinvestment of all fund distributions at net asset value on their respective reinvestment dates. The fund's yield is presented for a specified thirty-day period (the "base period"). Yield is based on the amount determined by (i) calculating the aggregate amount of dividends and interest earned by the fund during the base period less expenses for that period, and (ii) dividing that amount by the product of (A) the average daily number of shares of the fund outstanding during the base period and entitled to receive dividends and (B) the per share maximum public offering price for class A shares or class M shares, as appropriate, and net asset value for other classes of shares on the last day of the base period. The result is annualized on a compounding basis to determine the yield. For this calculation, interest earned on debt obligations held by the fund is generally calculated using the yield to maturity (or first expected call date) of such obligations based on their market values (or, in the case of receivables-backed securities such as the Government National Mortgage Association ("GNMAs"), based on cost). Dividends on equity securities are accrued daily at their stated dividend rates. The amount of expenses used in determining the fund's yield includes, in addition to expenses actually accrued by the fund, an estimate of the amount of expenses that the fund would have incurred if brokerage commissions had not been used to reduce such expenses. If the fund is a money market fund, yield is computed by determining the percentage net change, excluding capital changes, in the value of an investment in one share over the seven-day period for which yield is presented (the "base period"), and multiplying the net change by 365/7 (or approximately 52 weeks). Effective yield represents a compounding of the yield by adding 1 to the number representing the percentage change in value of the investment during the base period, raising that sum to a power equal to 365/7, and subtracting 1 from the result. If the fund is a tax-exempt fund, the tax-equivalent yield during the base period may be presented for shareholders in one or more stated tax brackets. Tax-equivalent yield is calculated by adjusting the tax-exempt yield by a factor designed to show the approximate yield that a taxable investment would have to earn to produce an after-tax yield equal, for that shareholder, to the tax-exempt yield. The tax-equivalent yield will differ for shareholders in other tax brackets. At times, Putnam Management may reduce its compensation or assume expenses of the fund in order to reduce the fund's expenses. The per share amount of any such fee reduction or assumption of expenses during the fund's past ten fiscal years (or for the life of the fund, if shorter) is set forth in the footnotes to the table in the section entitled "Financial highlights" in the prospectus. Any such fee reduction or assumption of expenses would increase the fund's yield and total return for periods including the period of the fee reduction or assumption of expenses. All data are based on past performance and do not predict future results. COMPARISON OF PORTFOLIO PERFORMANCE Independent statistical agencies measure the fund's investment performance and publish comparative information showing how the fund, and other investment companies, performed in specified time periods. Three agencies whose reports are commonly used for such comparisons are set forth below. From time to time, the fund may distribute these comparisons to its shareholders or to potential investors. THE AGENCIES LISTED BELOW MEASURE PERFORMANCE BASED ON THEIR OWN CRITERIA RATHER THAN ON THE STANDARDIZED PERFORMANCE MEASURES DESCRIBED IN THE PRECEDING SECTION. LIPPER ANALYTICAL SERVICES, INC. distributes mutual fund rankings monthly. The rankings are based on total return performance calculated by Lipper, generally reflecting changes in net asset value adjusted for reinvestment of capital gains and income dividends. They do not reflect deduction of any sales charges. Lipper rankings cover a variety of performance periods, including year-to-date, 1-year, 5-year, and 10-year performance. Lipper classifies mutual funds by investment objective and asset category. MORNINGSTAR, INC. distributes mutual fund ratings twice a month. The ratings are divided into five groups: highest, above average, neutral, below average and lowest. They represent a fund's historical risk/reward ratio relative to other funds in its broad investment class as determined by Morningstar, Inc. Morningstar ratings cover a variety of performance periods, including 1-year, 3- year, 5-year, 10-year and overall performance. The performance factor for the overall rating is a weighted-average assessment of the fund's 1-year, 3-year, 5-year, and 10-year total return performance (if available) reflecting deduction of expenses and sales charges. Performance is adjusted using quantitative techniques to reflect the risk profile of the fund. The ratings are derived from a purely quantitative system that does not utilize the subjective criteria customarily employed by rating agencies such as Standard & Poor's and Moody's Investor Service, Inc. CDA/WIESENBERGER'S MANAGEMENT RESULTS publishes mutual fund rankings and is distributed monthly. The rankings are based entirely on total return calculated by Weisenberger for periods such as year-to-date, 1-year, 3-year, 5-year and 10-year. Mutual funds are ranked in general categories (e.g., international bond, international equity, municipal bond, and maximum capital gain). Weisenberger rankings do not reflect deduction of sales charges or fees. Independent publications may also evaluate the fund's performance. The fund may from time to time refer to results published in various periodicals, including Barrons, Financial World, Forbes, Fortune, Investor's Business Daily, Kiplinger's Personal Finance Magazine, Money, U.S. News and World Report and The Wall Street Journal. Independent, unmanaged indexes, such as those listed below, may be used to present a comparative benchmark of fund performance. The performance figures of an index reflect changes in market prices, reinvestment of all dividend and interest payments and, where applicable, deduction of foreign withholding taxes, and do not take into account brokerage commissions or other costs. Because the fund is a managed portfolio, the securities it owns will not match those in an index. Securities in an index may change from time to time. THE CONSUMER PRICE INDEX, prepared by the U.S. Bureau of Labor Statistics, is a commonly used measure of the rate of inflation. The index shows the average change in the cost of selected consumer goods and services and does not represent a return on an investment vehicle. THE DOW JONES INDUSTRIAL AVERAGE is an index of 30 common stocks frequently used as a general measure of stock market performance. THE DOW JONES UTILITIES AVERAGE is an index of 15 utility stocks frequently used as a general measure of stock market performance. CS FIRST BOSTON HIGH YIELD INDEX is a market-weighted index including publicly traded bonds having a rating below BBB by Standard & Poor's and Baa by Moody's. THE LEHMAN BROTHERS AGGREGATE BOND INDEX is an index composed of securities from The Lehman Brothers Government/Corporate Bond Index, The Lehman Brothers Mortgage-Backed Securities Index and The Lehman Brothers Asset-Backed Securities Index and is frequently used as a broad market measure for fixed-income securities. THE LEHMAN BROTHERS ASSET-BACKED SECURITIES INDEX is an index composed of credit card, auto, and home equity loans. Included in the index are pass-through, bullet (noncallable), and controlled amortization structured debt securities; no subordinated debt is included. All securities have an average life of at least one year. THE LEHMAN BROTHERS CORPORATE BOND INDEX is an index of publicly issued, fixed-rate, non-convertible investment-grade domestic corporate debt securities frequently used as a general measure of the performance of fixed-income securities. THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is an index of publicly issued U.S. Treasury obligations, debt obligations of U.S. government agencies (excluding mortgage-backed securities), fixed-rate, non-convertible, investment-grade corporate debt securities and U.S. dollar-denominated, SEC-registered non-convertible debt issued by foreign governmental entities or international agencies used as a general measure of the performance of fixed-income securities. THE LEHMAN BROTHERS INTERMEDIATE TREASURY BOND INDEX is an index of publicly issued U.S. Treasury obligations with maturities of up to ten years and is used as a general gauge of the market for intermediate-term fixed-income securities. THE LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX is an index of publicly issued U.S. Treasury obligations (excluding flower bonds and foreign-targeted issues) that are U.S. dollar-denominated and have maturities of 10 years or greater. THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX includes 15- and 30-year fixed rate securities backed by mortgage pools of the Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an index of approximately 20,000 investment-grade, fixed-rate tax-exempt bonds. THE LEHMAN BROTHERS TREASURY BOND INDEX is an index of publicly issued U.S. Treasury obligations (excluding flower bonds and foreign-targeted issues) that are U.S. dollar denominated, have a minimum of one year to maturity, and are issued in amounts over $100 million. THE MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX is an index of approximately 1,482 equity securities listed on the stock exchanges of the United States, Europe, Canada, Australia, New Zealand and the Far East, with all values expressed in U.S. dollars. THE MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS INDEX is an index of approximately 1,100 securities representing 20 emerging markets, with all values expressed in U.S. dollars. THE MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX is an index of approximately 1,045 equity securities issued by companies located in 18 countries and listed on the stock exchanges of Europe, Australia, and the Far East. All values are expressed in U.S. dollars. THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE INDEX is an index of approximately 627 equity securities issued by companies located in one of 13 European countries, with all values expressed in U.S. dollars. THE MORGAN STANLEY CAPITAL INTERNATIONAL PACIFIC INDEX is an index of approximately 418 equity securities issued by companies located in 5 countries and listed on the exchanges of Australia, New Zealand, Japan, Hong Kong, Singapore/Malaysia. All values are expressed in U.S. dollars. THE NASDAQ INDUSTRIAL AVERAGE is an index of stocks traded in The Nasdaq Stock Market, Inc. National Market System. THE RUSSELL 2000 INDEX is composed of the 2,000 smallest securities in the Russell 3000 Index, representing approximately 7% of the Russell 3000 total market capitalization. The Russell 3000 Index is composed of 3,000 large U.S. companies ranked by market capitalization, representing approximately 98% of the U.S. equity market. THE SALOMON BROTHERS LONG-TERM HIGH-GRADE CORPORATE BOND INDEX is an index of publicly traded corporate bonds having a rating of at least AA by Standard & Poor's or Aa by Moody's and is frequently used as a general measure of the performance of fixed-income securities. THE SALOMON BROTHERS LONG-TERM TREASURY INDEX is an index of U.S. government securities with maturities greater than 10 years. THE SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX is an index that tracks the performance of the 14 government bond markets of Australia, Austria, Belgium Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, United Kingdom and the United States. Country eligibility is determined by market capitalization and investability criteria. THE SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX (non $U.S.) is an index of foreign government bonds calculated to provide a measure of performance in the government bond markets outside of the United States. STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX is an index of common stocks frequently used as a general measure of stock market performance. STANDARD & POOR'S 40 UTILITIES INDEX is an index of 40 utility stocks. STANDARD & POOR'S/BARRA VALUE INDEX is an index constructed by ranking the securities in the Standard & Poor's 500 Composite Stock Price Index by price-to-book ratio and including the securities with the lowest price- to-book ratios that represent approximately half of the market capitalization of the Standard & Poor's 500 Composite Stock Price Index. In addition, Putnam Mutual Funds may distribute to shareholders or prospective investors illustrations of the benefits of reinvesting tax-exempt or tax-deferred distributions over specified time periods, which may include comparisons to fully taxable distributions. These illustrations use hypothetical rates of tax-advantaged and taxable returns and are not intended to indicate the past or future performance of any fund. DEFINITIONS "Putnam Management" -- Putnam Investment Management, Inc., the fund's investment manager. "Putnam Mutual Funds" -- Putnam Mutual Funds Corp., the fund's principal underwriter. "Putnam Fiduciary Trust -- Putnam Fiduciary Trust Company, Company" the fund's custodian. "Putnam Investor Services" -- Putnam Investor Services, a division of Putnam Fiduciary Trust Company, the fund's investor servicing agent. PUTNAM ASSET ALLOCATION FUNDS FORM N-1A PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Index to Financial Statements and Supporting Schedules: (1) Financial Statements: Statements of assets and liabilities -- September 30, 1997 (a). Statement of operations -- Year ended September 30, 1997 (a). Statement of changes in net assets -- years ended September 30, 1997 and September 30, 1996 (a). Financial Highlights (a) (b). Notes to financial statements (a). (2) Supporting Schedules: Schedule I -- Portfolio of investments owned -- September 30, 1997 (a). Schedules II through IX omitted because the required matter is not present. (a) Incorporated by reference into Parts A and B. (b) Included in Part A. - -------------------------- (b) Exhibits: 1. Amended and Restated Agreement and Declaration of Trust dated December 2, 1993 -- Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement. 2. By-Laws -- Incorporated by reference to Registrant's Initial Registration Statement. 3. Not applicable. 4a .Portions of Agreement and Declaration of Trust Relating to Shareholders' Rights --Incorporated by reference to Registrant's Initial Registration Statement. 4b.Portions of By-Laws Relating to Shareholders' Rights -- Incorporated by reference to Registrant's Initial Registration Statement. 5. Management Contract dated January 20, 1997 -- Incorporated by reference to Post-Effective No. 4 to the Registrant's Registration Statement. 6a. Distributor's Contract dated May 6, 1994 --Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement. 6b. Form of Specimen Dealer Sales Contract --Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement. 6c. Form of Specimen Financial Institution Sales Contract -- Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement. 7. Trustee Retirement Plan dated October 4, 1996 -- Incorporated by reference to Post-Effective Amendment No. 4 to the Registrant's Registration Statement. 8. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3, 1991, as amended July 13, 1992 -- Incorporated by reference to Registrant's Initial Registration Statement. 9. Investor Servicing Agreement dated June 3, 1991 with Putnam Fiduciary Trust Company -- Incorporated by reference to Registrant's Initial Registration Statement. 10. Opinion of Ropes & Gray, including consent -- Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement. 11. Not applicable. 12. Not applicable. 13. Investment Letter from Putnam Investments, Inc. to the Registrant -- Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement. 14a. Form of Prototype Individual Retirement Account Plan -- Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement. 14b. Form of Prototype Basic Plan Documents and related Plan Agreements -- Incorporated by reference to Post-Effective Amendment No. 4 to the Registrant's Registration Statement. 15a. Class A Distribution Plan and Agreement dated November 8, 1993 --Incorporated by reference to Registrant's Initial Registration Statement. 15b. Class B Distribution Plan and Agreement dated November 8, 1993 -- Incorporated by reference to Registrant's Initial Registration Statement. 15c. Class C Distribution Plan and Agreement dated September 1, 1994 -- Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement. 15d. Class M Distribution Plan and Agreement dated January 30, 1995 -- Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement. 15e. Form of Specimen Dealer Service Agreement -- Exhibit 1. 15f. Form of Specimen Financial Institution Service Agreement -- Exhibit 2. 16a. Schedules for computation of performance quotations for the Balanced Portfolio --Exhibit 3. 16b. Schedules for computation of performance quotations for the Conservative Portfolio -- Exhibit 4. 16c. Schedules for computation of performance quotations for the Growth Portfolio -- Exhibit 5. 17a. Financial Data Schedules for Class A shares of the Balanced Portfolio -- Exhibit 6. Financial Data Schedules for Class A shares of the Conservative Portfolio -- Exhibit 7. Financial Data Schedules for Class A shares of the Growth Portfolio -- Exhibit 8. 17b. Financial Data Schedules for Class B shares of the Balanced Portfolio -- Exhibit 9. Financial Data Schedules for Class B shares of the Conservative Portfolio -- Exhibit 10. Financial Data Schedules for Class B shares of the Growth Portfolio -- Exhibit 11. 17c. Financial Data Schedules for Class C shares of the Balanced Portfolio -- Exhibit 12. Financial Data Schedules for Class C shares of the Conservative Portfolio -- Exhibit 13. Financial Data Schedules for Class C shares of the Growth Portfolio -- Exhibit 14. 17d. Financial Data Schedules for Class M shares of the Balanced Portfolio -- Exhibit 15. Financial Data Schedules for Class M shares of the Conservative Portfolio -- Exhibit 16. Financial Data Schedules for Class M shares of the Growth Portfolio -- Exhibit 17. 17e. Financial Data Schedules for Class Y shares of the Balanced Portfolio -- Exhibit 18. Financial Data Schedules for Class Y shares of the Conservative Portfolio -- Exhibit 19. Financial Data Schedules for Class Y shares of the Growth Portfolio -- Exhibit 20. 18. Rule 18f-3(d) Plan -- Incorporated by reference to Post-Effective Amendment No. 3 to the Registrant's Registration Statement. Item 25. Persons Controlled by or under Common Control with Registrant None. Item 26. Number of Holders of Securities As of January 1, 1998, the number of record holders of each class of securities of the Registrant was as follows: Number of record holders ----------------------------------------------- Class A Class B Class C Class M Class Y ------- ------- ------- ------- ------- Balanced Portfolio 11,868 23,488 2,571 1,722 13 Growth Portfolio 15,544 28,876 3,075 1,914 14 Conservative Portfolio 3,564 6,292 1,044 406 10 Item 27. Indemnification The information required by this item is incorporated herein by reference to the Registrant's Initial Registration Statement on Form N-1A under the Investment Company Act of 1940 (File No. 811-7121) Item 28. Business and Other Connections of Investment Adviser Except as set forth below, the directors and officers of the Registrant's investment adviser have been engaged during the past two fiscal years in no business, vocation or employment of a substantial nature other than as directors or officers of the investment adviser or certain of its corporate affiliates. Certain officers of the investment adviser serve as officers of some or all of the Putnam funds. The address of the investment adviser, its corporate affiliates and the Putnam Funds is One Post Office Square, Boston, Massachusetts 02109. Name Non-Putnam business and other connections Michael J. Abata Prior to May, 1997, Assistant Assistant Vice President Alliance Capital Management Corp., 1345 Avenue of the Americas, New York, NY 10020 Nikesh Arora Prior to April, 1997, Chief Financial Vice President Officer, Fidelity Investments, 82 Devonshire St., Boston, MA 02110 Michael Arends Prior to May, 1997, Managing Director, Senior Vice President Equities, Phoenix Duff & Phelps, 56 Prospect St., Hartford, CT 06101 Michael J. Atkin Prior to July, 1997, Director of Senior Vice President Latin America, Institute of International Finance, 2000 Pennsylvania Avenue, Washington, D.C. 20006 Rowland T. Bankes Prior to July, 1997, Senior Fixed- Vice President Income Trader, Jennison Associates Capital Corp., One Financial Center, Boston, MA 02110 Robert R. Beck Director, Charles Bridge Publishing, Senior Vice President 85 Main St., Watertown, MA 02172 Geoffrey C. Blaisdell Prior to October, 1997, Vice President Senior Vice President Blackrock Financial, 345 Park Avenue, New York, NY 10010 John A. Boselli Prior to April, 1996, Senior Manager, Vice President Price Waterhouse LLP, 200 E. Randolph Drive, Chicago, IL 60601 Jeffrey M. Bray Prior to October, 1997, Analyst, Vice President Lehman Brothers, 3 World Financial Center, New York, NY 10285 Ronald J. Bukovak Prior to October, 1997, Senior Manager Vice President Valuation, Price Waterhouse, 200 E. Randolph Drive, Chicago, IL 60601 Robert W. Burke Member-Executive Committee, The Ridge Senior Managing Director Club, Country Club Road, Sandwich, MA 02563; Member-Advisory Board, Cathedral High School, 74 Union Park St., So. Boston, MA 02118 Jack P. Chang Prior to July, 1997, Vice President Vice President Columbia Management Company, 1300 S.W. 6th Ave., Portland, OR 97207 Mary Claire Chase Prior to January, 1997, Director of Vice President Staff Development, Arthur D. Little Co., 25 Acorn Park, Cambridge, MA 02140 James E. Corning Prior to October, 1996, Assistant Vice Assistant Vice President President of Plan Investments at State Street Bank & Trust, 1776 Heritage Dr., Quincy, MA 02171 C. Beth Cotner Director, The Lyric Stage Theater, 140 Senior Vice President Clarendon St., Boston, MA; Prior to September, 1995, Executive Vice President, Director of U.S. Equity Funds, Kemper Financial Services, 120 S. LaSalle St., Chicago, IL 60603 Kevin M. Cronin Prior February, 1997, Vice President Senior Vice President and Portfolio Manager, MFS Investment Management, 500 Boylston St., Boston, MA 02117 Peter J. Curran Prior to January, 1996, Vice President Senior Vice President ITT Sheraton Director Worldwide Staffing, ITT Sheraton Corporation, 60 State St., Boston, MA 02109 William J. Curtin Prior to August, 1996, Managing Managing Director Director, Chief Global Fixed-Income Strategist, Lehman Brothers, 3 World Financial Center, New York, NY 10285 Sean G. Daly Prior to March, 1997, Assistant Assistant Vice President Vice President-Corporate Accounting, Fleet Financial Group, 111 Westminster St., Providence, RI 02903 Michael W. Davis Prior to August, 1997, Technical Vice President Finance Consultant, Bank of America Mortgage, 50 California St., San Francisco, CA 94111; Prior to January, 1996, Consultant, Martin Davis and Associates, 33215 Sandpiper Rd., Freemont, CA 94555 Michael G. Dolan Chairman-Finance Council, St. Mary's Assistant Vice President Parish, 44 Myrtle St., Melrose, MA 02176; Member, School Advisory Board, St. Mary's School, 44 Myrtle St., Melrose, MA 02176 Andrea Donnelly Prior to March, 1996, Equity Trader, Assistant Vice President Hellman Jordan Management Company, Inc., 75 State St., Suite 2420, Boston, MA 02109 Martha A. Donovan Prior to July, 1996, Assistant Vice President Treasurer, CBS Inc., 51 W. 52nd St., New York, NY 10020 Nathan Eigerman Prior to July, 1996, Quantitative Assistant Vice President Analyst, Fidelity Management & Research, 82 Devonshire St., Boston, MA 02110 Irene M. Esteves Prior to January, 1997, Vice Managing Director President, Miller Brewing Co., 3939 West Highland Blvd. Milwaukee, WI. 53201 Ian C. Ferguson Prior to April, 1996, Chief Senior Managing Director Executive Officer, HSBC Asset Management, Ltd., 6 Bevis Marks, London, England Brian J. Fullerton Prior to November, 1995, Vice Senior Vice President President, Pension and 401(k) Derivatives Marketing, J.P. Morgan, 60 Wall Street, New York, NY 10260 J. Peter Grant Trustee, The Dover Church, Dover, MA Senior Vice President 02030 Donnalee Guerin Prior to September, 1996, Corporate Assistant Vice President Service Manager, Haemonetics Corp., 400 Wood Rd., Braintree, MA 02184. Paul E. Haagensen Director, Haagensen Research Senior Vice President Foundation, 630 West 168th St., New York, NY 10032 James B. Haines Prior to February, 1997, Associate, Assistant Vice President Benefits Department, Ropes & Gray, One International Place, Boston, MA 02110 Matthew C. Halperin Prior to April, 1996, Portfolio Senior Vice President Manager, Allstate Insurance, 3075 Sanders Road, Northbrook, IL 60062 Mary S. Hapij Prior to March, 1997, Research Assistant Vice President Library Manager, Pioneering Management Corp., 60 State Street, Boston, MA 02109; Prior to January, 1996, Information Resource Center Manager, Copley Real Estate Advisers, 399 Boylston St., Boston, MA 02116 Nigel P. Hart Prior to October, 1997, Senior Vice Vice President President and Portfolio Manager, Investment Advisers, 3700 First Bank Place, Minneapolis, MN 55402 Thomas R. Haslett Prior to December, 1996, Managing Managing Director Director and Senior Portfolio Manager, Montgomery Asset Management, LTD, 101 California St., San Franscisco, CA 94111 Timothy E. Hawkins Prior to September, 1997, Investment Vice President Officer, Liberty Mutual, 175 Berkeley St., Boston, MA 02116 Daniel E. Herbert Prior to April, 1996, Vice President Vice President and Analyst, Keystone Group, Inc., 200 Berkeley St., Boston, MA 02116 Thomas J. Hoey Prior to April, 1996, Securities Vice President Analyst, Driehaus Capital Management, Inc., 25 East Erie St., Chicago, IL 60610 Jerome J. Jacobs Prior to September, 1996, Head of Managing Director Municipal Bond Group, Vanguard Group Investments, 100 Vanguard Blvd., Malvern, PA 19482 Omid Kamshad Prior to January, 1996, Investment Senior Vice President Director, Lombard Odier, 13 Southampton Place, London, England, WC1 Mary E. Kearney Trustee, Massachusetts Eye and Ear Managing Director Infirmary, 243 Charles St., Boston, MA 02114 Matthew W. Keenan Prior to December, 1996, Copy Editor, Vice President The Boston Globe, 135 Morrisey Blvd., Boston, MA 02107 Catherine Kennedy Prior to September, 1997, Principal Vice President Morgan Stanley, 1585 Broadway, New York, NY 10036 Jeffrey K. Kerrigan Prior to June, 1997, Vice President, Assistant Vice President Fleet Investments, 75 State St., Boston, MA 02109 David R. King Prior to October, 1997, Vice President Vice President Massachusetts Financial Services, 500 Boylston St., Boston, MA Deborah F. Kuenstner Prior to March, 1997, Senior Portfolio Senior Vice President Manager, DuPont Pension Fund Investment, 1 Right Parkway, Wilmington, DE 19850 Thomas J. Kurey Prior to August, 1997, Vice President Vice President Everen Securities, 77 W. Wacker, Chicago, IL 60601 Kenneth W. Lang Prior to April, 1997, Vice President, Vice President Montgomery Securities, 600 Montgomery St., San Francisco, CA 94111 Coleman N. Lannum, III Prior to June, 1997, Director- Vice President Investor Relations, Mallinckrodt, Inc., 7733 Forsyth Blvd., St. Louis, MO 63105 Lawrence J. Lasser Director, Marsh & McLennan Companies, President, Director Inc., 1221 Avenue of the Americas, and Chief Executive New York, NY 10020; Board Member, Artery Business Committee, One Beacon Street, Boston, MA 02108; Board of Managers, Investment and Finance Committees, Beth Israel Hospital, 330 Brookline Avenue, Boston, MA 02215; Board of Governors, Executive Committee, Investment Company Institute, 1401 H. St., N.W., Suite 1200, Washington, DC 20005; Board of Overseers, Museum of Fine Arts, 465 Huntington Ave., Boston, MA 02115; Board Member, Trust for City Hall Plaza, Three Center Plaza, Boston, MA 02108; Board Member, The Vault Coordinating Committee, c/o John Hancock Mutual Life Insurance Company, Law Sector, T-55, P.O. Box 111, Boston, MA 02117 Joan M. Leary Prior to January, 1997, Senior Tax Assistant Vice President Manager, KPMG, 99 High St., Boston, MA 02110 Julian W. Lim Prior to July, 1997, Manager, Fidelity Assistant Vice President Management & Research, 82 Devonshire St., Boston, MA 02110 Geirulv Lode Prior to July, 1997, Vice President Vice President Chancellor Lgt. Asset Management, 1166 Avenue of the Americas, New York, NY 10036 Diana R. Madonna Prior to January, 1997, Librarian, Assistant Vice President Lipper Analytical Services, Inc., 1380 Lawrence St., Denver CO 80204 Bruce D. Martin Prior to April, 1997, Vice President, Vice President Eaton Vance, 29 Federal St., Boston, MA 02110; Prior to August, 1996, Senior Research Officer, John Hancock Mutual Life Insurance Co., 101 Huntington Ave., Boston, MA 02190 Saba Malak Prior to October, 1997, Consultant, Vice President The Boston Consultant, Exchange Place, Boston, MA 02109 Kevin Maloney Trustee, Town of Hanover, NH, Trustee Managing Director of Trust Funds, Hanover, NH 03755; President and Board Member, Hampshire Cooperative Nursery School, Dartmouth College Highway, Hanover, NH 03755 Scott M. Maxwell Prior to March, 1997, Chief Financial Managing Director Officer-Equity Division, Lehman Brothers, 3 World Financial Center, New York, NY 10285 William F. McGue Member, Advisory Committee, Academy Managing Director of Finance, 2 Oliver St., Boston, MA 02109 Mary G. McNamee Prior to December, 1996, Recruitment Assistant Vice President Consultant, 171 Walnut St. Boston, MA 02110 Sandeep Mehta Prior to May, 1996, Vice President, Vice President Wellington Management Co., 100 Vanguard Blvd., Malvern, PA 19355 Carol H. Miller Board Member, The Lyric Stage Theater, Assistant Vice President 140 Clarendon St., Boston, MA 02116 William H. Miller Prior to October, 1997, Vice Senior Vice President President and Asset Portfolio Manager, Delawre Management, One Commerce Square, Philadelphia, PA; Prior to January, 1995, Vice President and Analyst, Janney, Montgomery, Scott, 1801 Market St., Philadelphia, PA 19104 Jeanne L. Mockard Trustee, The Bryn Mawr School, 109 Senior Vice President W. Melrose Avenue, Baltimore, MD 21210 Gerard I. Moore Prior to August, 1997, Vice Vice President President/Equity Research, Boston Company Asset Management, One Boston, Place, Boston, MA 02109 Kelly A. Morgan Prior to September, 1996, Senior Vice Senior Vice President President and International Portfolio Manager, Alliance Capital Management, 1345 Avenue of the Americas, New York, NY 10020 David D. Motill Prior to April, 1996, Indepdendent Vice President Consultant, 417 Valley Forge Rd., Wayne, PA 19087; Prior to July, 1995, Senior Investment Analyst, SEI Investments, One Freedom Valley Drive, Oaks, PA 19456 Lois O'Brien Prior to March, 1996, Director, Assistant Vice President Training and Development, J. Baker, Inc., 555 Turnpike St., Canton, MA 02021 Gayle M. O'Connell Prior to March, 1997, Assistant Assistant Vice President Director of Human Resources, ITT Sheraton Corporation, 60 State St., Boston, MA 02109 Stephen S. Oler Prior to June, 1997, Vice President, Senior Vice President Templeton Investment Counsel, 500 E. Broward Blvd., Ft. Lauderdale, FL 33394; Prior to February, 1996, Senior Vice President, Baring Asset Management, 125 High St., Boston, MA 02110 Carmel Peters Prior to April, 1997, Managing Senior Vice President Director/Chief Investment Officer, Asia Pacific, Wheelock NatWest Investment Management, Ltd, NatWest Tower, Times Square, Causeway Bay, Hong Kong, China; Prior to February, 1996, Chief Investment Officer, Asia Pacific, Rothschild Asset Management Asia Pacific, Hong Kong, Alexandra House, Central Hong Kong, China William Perry Prior to September, 1997, Senior Senior Vice President Trader, Fidelity Management & Research, 82 Devonshire St., Boston, MA 02110 Keith Plapinger Vice Chairman and Trustee, Advent Vice President School, 17 Brimmer St., Boston, MA 02108 Charles E. Porter Director, The Boston Fulbright Executive Vice President Committee, 99 Garden St., Cambridge, MA; Trustee, Anatolia College and The American College of Thessaloniki, 555 10 Pycea, Thessaloniki, Greece George Putnam Chairman and Director, Putnam Mutual Chairman and Director Funds Corp.; Director, The Boston Company, Inc., One Boston Place, Boston, MA 02108; Director, Boston Safe Deposit and Trust Company, One Boston Place, Boston, MA 02108; Director, Freeport-McMoRan, Inc., 200 Park Avenue, New York, NY 10166; Director, General Mills, Inc., 9200 Wayzata Boulevard, Minneapolis, MN 55440; Director, Houghton Mifflin Company, One Beacon Street, Boston, MA 02108; Director, Marsh & McLennan Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020; Director, Rockefeller Group, Inc., 1230 Avenue of the Americas, New York, NY 10020 Keith Quinton Director, Eleazar, Inc., West Wheelock Senior Vice President St., Hanover, NH 03755 Kimberly A. Raynor Prior to April, 1996, Principal, Vice President Principal, Scudder, Stevens & Clark, 2 International Place, Boston, MA 02110 Paul A. Rokosz Prior to November, 1996, Analyst, Vice President Kemper Financial Services, 120 S. Casalle St., Chicago, IL 60606 Michael V. Salm Prior to November, 1997, Mortgage Vice President Analyst, Blackrock Financial Management, 345 Park Ave., New York, NY 10010; Prior to May, 1996, Trader, Nomura Securities, 2 World Financial Center, New York, NY 10048 Robert J. Schoen Prior to June, 1997, Sole Proprietor, Assistant Vice President Schoen Timing Strategies, 315 E. 21st St., New York, NY 10010 Justin M. Scott Director, DSI Properties (Neja) Ltd. Managing Director Epping Rd., Reydon, Essex CM19 5RD; Director, DSI Management (Neja) Ltd., Epping Rd., Reydon, Essex CM19 5RD Max S. Senter General Partner, M.S. Senter & Sons Senior Vice President Partnership, 4900 Fayetteville, Rd., Raleigh, NC 27611 Mitchell D. Schultz Prior to September, 1996, Vice Senior Vice President President, Human Resources, The Walt Disney Co., 500 South Buena Vista St., Burbank, CA 91510 Edward Shadek, Jr. Prior to March, 1997, Portfolio Vice President Manager, Newhold Asset Management, 950 Haverford Rd., Bryn Mawr, PA 19010 Gordon H. Silver Trustee, Wang Center for the Managing Director Performing Arts, 270 Tremont St., Boston, MA 02116 Erin J. Spatz Prior to May, 1996, Vice Vice President President, Pioneering Management Organization, 60 State St., Boston, MA 02109 Steven Spiegel Director, Ultra Corp., 29 East Senior Managing Director Madison St., Chicago, IL 60602; Trustee, Babson College, One College Drive, Wellesley, MA 02157; Prior to December, 1994, Managing Director/Retirement, Lehman Brothers, Inc., 200 Vesey St., World Financial Center, New York, NY 10285 Christopher A. Spurlock Prior to May, 1997, Sales Trader, Vice President J.P. Morgan, 60 Wall St., New York, NY; Prior to March, 1996, Equity Trader, Pioneer Group, 60 State St., Boston, MA 02109 Michael P. Stack Prior to November, 1997, Senior Senior Vice President Vice President and Portfolio Manager, Independence Investment Associates, 53 State St., Boston, MA 02109 Casey Strumpf Prior to January, 1997, Director, Blue Senior Vice President Cross and Blue Shield, 100 Summer St., Boston, MA 02110 Maryann Sullivan Prior to August, 1996, Unit Manager, Assistant Vice President First Data Services, 4400 Computer Dr., Westboro, MA 01581 Heidi A. Tuchen Prior to December 1996, Vice President Assistant Vice President and Credit Officer, Fleet Financial Group, 75 State St., Boston, MA 02109 Scott G. Vierra Prior to September, 1997, Staffing Vice President Lead, Cisco Systems, 250 Apollo Drive, Chelmsford, MA 01824 David L. Waldman Prior to June, 1997, Senior Portfolio Managing Director Manager, Lazard Feres Asset Management, 30 Rockefeller Center, New York, NY 10112 Paul C. Warren Prior to May, 1997, Director Senior Vice President IDS Fund Management, LT, One Pacific Place, Squuensway, Hong Kong, China Eric Wetlaufer Prior to November, 1997, Managing Managing Director Director and Portfolio Manager, Cadence Capital Management, Exchange Place, Boston, MA 02109 Burton Wilson Prior to March, 1997, Associate Assistant Vice President Investments-Banking, Robertson Stephens & Co., 555 California St., Suite 2600, San Francisco, CA 94104 Michael R. Yogg Prior to November, 1996, Portfolio Senior Vice President Manager, State Street Research & Management, One Financial Center, Boston, MA 02111 Scott D. Zaleski Prior to May, 1997, Investment Officer Assistant Vice President State Street Bank & Trust, 1776 Heritage Dr., Quincy, MA 02171; Prior to September, 1996, Investment Associate Fidelity Investments, 82 Devonshire St., Boston, MA 02109 Michael P. Zeller Prior to July, 1997, Sales Manager, Vice President NYNEX Information Resources, 35 Village Rd., Middleton, MA 01949 William E. Zieff Prior to December, 1996, Global Asset Managing Director Allocation, Granthham, Mayo, Van Otterloo & Co., 40 Rowes Wharf, Boston, MA 02110 Item 29. Principal Underwriter (a) Putnam Mutual Funds Corp. is the principal underwriter for each of the following investment companies, including the Registrant: Putnam American Government Income Fund, Putnam Arizona Tax Exempt Income Fund, Putnam Asia Pacific Growth Fund, Putnam Asset Allocation Funds, Putnam Balanced Retirement Fund, Putnam California Tax Exempt Income Fund, Putnam California Tax Exempt Money Market Fund, Putnam Capital Appreciation Fund, Putnam Convertible Income-Growth Trust, Putnam Diversified Equity Trust, Putnam Diversified Income Trust, Putnam Diversified Income Trust II, Putnam Equity Income Fund, Putnam Europe Growth Fund, Putnam Federal Income Trust, Putnam Florida Tax Exempt Income Fund, Putnam Funds Trust, The George Putnam Fund of Boston, Putnam Global Governmental Income Trust, Putnam Global Growth Fund, Putnam Global Natural Resources Fund, The Putnam Fund for Growth and Income, Putnam Growth and Income Fund II, Putnam Health Sciences Trust, Putnam High Yield Trust, Putnam High Yield Advantage Fund, Putnam High Yield Municipal Trust, Putnam Income Fund, Putnam Intermediate U.S. Government Income Fund, Putnam Investment Funds, Putnam Investors Fund, Putnam Massachusetts Tax Exempt Income Fund, Putnam Michigan Tax Exempt Income Fund, Putnam Minnesota Tax Exempt Income Fund, Putnam Money Market Fund, Putnam Municipal Income Fund, Putnam New Jersey Tax Exempt Income Fund, Putnam New Opportunities Fund, Putnam New York Tax Exempt Income Fund, Putnam New York Tax Exempt Money Market Fund, Putnam New York Tax Exempt Opportunities Fund, Putnam Ohio Tax Exempt Income Fund, Putnam OTC & Emerging Growth Fund, Putnam Pennsylvania Tax Exempt Income Fund, Putnam Preferred Income Fund, Putnam Tax Exempt Income Fund, Putnam Tax Exempt Money Market Fund, Putnam Tax-Free Income Trust, Putnam U.S. Government Income Trust, Putnam Utilities Growth and Income Fund, Putnam Variable Trust, Putnam Vista Fund, Putnam Voyager Fund, Putnam Voyager Fund II.
(b) The directors and officers of the Registrant's principal underwriter are listed below. The principal business address of each person is One Post Office Square, Boston, MA 02109: Positions and Offices Positions and Offices Name with Underwriter with Registrant John V. Adduci Vice President None Frank Albanese Vice President None Christopher A. Alders Senior Vice President None Christopher S. Alpaugh Vice President None Paulette C. Amisano Vice President None Jeanne Antill Assistant Vice President None Margaret Andrews Vice President None Steven E. Asher Senior Vice President None Scott A. Avery Senior Vice President None Christian E. Aymond Vice President None Suzanne J. Battit Vice President None Steven M. Beatty Senior Vice President None John J. Bent Vice President None Thomas A. Beringer Vice President None Sharon A. Berka Vice President None Kathleen A. Blackman Assistant Vice President None John F. Boneparth Managing Director None Keith R. Bouchard Senior Vice President None Linwood E. Bradford, Jr. Vice President None Linda M. Brady Assistant Vice President None Mary Ann Brennan Assistant Vice President None Leslee R. Bresnahan Senior Vice President None James D. Brockelman Senior Vice President None Joel S. Brockman Vice President None Timothy K. Brown Senior Vice President None Gail D. Buckner Senior Vice President None Robert W. Burke Senior Managing Director None Susan D. Cabana Vice President None Thomas C. Callahan Assistant Vice President None Robert Capone Vice President None Patricia A. Cartwright Assistant Vice President None Janet Casale-Sweeney Senior Vice President None David M. Casey Vice President None James R. Castle, Jr. Vice President None Mary Clare Chase Vice President None Louis F. Chrostowski Vice President None Daniel J. Church Vice President None Richard B. Clark Senior Vice President None Mary Clermont Assistant Vice President None John C. Clinton Assistant Vice President None Kathleen M. Collman Managing Director None Mark L. Coneeny Senior Vice President None Clare D. Connelly Assistant Vice President None Donald A. Connelly Senior Vice President None Karen E. Connolly Assistant Vice President None Barry M. Conyers Assistant Vice President None F. Nicholas Corvinus Senior Vice President None Thomas A. Cosmer Senior Vice President None Michele A. Cranston Assistant Vice President None Chad H. Cristo Vice President None Peter J. Curran Senior Vice President None Jessica E. Dahill Vice President None Kenneth L. Daly Senior Vice President None Sean G. Daly Assistant Vice President None Edward H. Dane Vice President None Nancy M. Days Assistant Vice President None Pamela De Oliveira-Smith Assistant Vice President None Lisa M. DeMont Vice President None Teresa F. Dennehy Vice President None Karen E. DiStasio Vice President None Michael G. Dolan Assistant Vice President None Scott M. Donaldson Vice President None Deirdre E. Duffy Senior Vice President None Emily J. Durbin Vice President None David B. Edlin Managing Director None Gail A. Eisenkraft Managing Director None James M. English Senior Vice President None Vincent Esposito Managing Director None Irene M. Esteves Director and Managing Director None Mary K. Farrell Assistant Vice President None Michael J. Fechter Vice President None Susan H. Feldman Senior Vice President None C. Nancy Fisher Managing Director None Mitchell B. Fishman Senior Vice President None Joseph C. Fiumara Vice President None Patricia C. Flaherty Senior Vice President None Brian J. Fullerton Senior Vice President None Judy S. Gates Senior Vice President None Joseph P. Gennaco Senior Vice President None Mark P. Goodfellow Assistant Vice President None Robert Goodman Managing Director None Carol J. Gould Assistant Vice President None Anthony J. Grace Assistant Vice President None Linda K. Grace Vice President None Daniel W. Greenwood Vice President None Jill Grossberg Assistant Vice President None Denise Grove Assistant Vice President None Jeffrey P. Gubala Vice President None Donnalee Guerin Assistant Vice President None Salvatore P. Guerra Assistant Vice President None James B. Haines Assistant Vice President None Debra Hall Assistant Vice President None James E. Halloran Vice President None Thomas W. Halloran Senior Vice President None Meghan C. Hannigan Assistant Vice President None John D. Harbeck Vice President None Bruce D. Harrington Assistant Vice President None Craig W. Hartigan Vice President None Howard W. Hawkins, III Vice President None Deanna R. Hayes-Castro Vice President None Dennis P. Hearns Senior Vice President None Gayle A. Hedstrom Assistant Vice President None Paul P. Heffernan Vice President None Susan M. Heimanson Vice President None James Hickey Vice President None Bess J.M. Hochstein Senior Vice President None Jeremiah K. Holly, Sr. Vice President None Maureen A. Holmes Assistant Vice President None Paula J. Hoyt Assistant Vice President None William J. Hurley Managing Director and Controller None Dwight D. Jacobsen Managing Director None Kevin M. Joyce Senior Vice President None Karen R. Kay Senior Vice President None Mary E. Kearney Managing Director None John P. Keating Vice President None Brian J. Kelley Vice President None A. Siobahn Kelly Assistant Vice President None Anne Kinsman Assistant Vice President None Deborah H. Kirk Senior Vice President None Jill A. Koontz Senior Vice President None Linda G. Kraunelis Assistant Vice President None Howard H. Kreutzberg Senior Vice President None Marjorie B. Krieger Assistant Vice President None Charles Lacasia Vice President None James D. Lathrop Senior Vice President None Joan M. Leary Assistant Vice President None Charles C. Ledbetter Vice President None Margaret Leipsitz Assistant Vice President None Kevin Lemire Assistant Vice President None Anthony J. Leonard Vice President None Eric S. Levy Senior Vice President None Edward V. Lewandowski Senior Vice President None Edward V. Lewandowski, Jr. Vice President None Samuel L. Lieberman Vice President None David M. Lifsitz Vice President None David R. Lilien Vice President None Ann Marie Linehan Assistant Vice President None Lisa M. Litant Assistant Vice President None Thomas W. Littauer Managing Director None Maura A. Lockwood Vice President None Rufino R. Lomba Vice President None Gregory T. Long Vice President None Peter V. Lucas Senior Vice President None Kevin Lucey Assistant Vice President None Robert F. Lucey Director None Robert F. Lyons Assistant Vice President None Ann Malatos Assistant Vice President None Bonnie Mallin Vice President None Leslie Mannix Senior Vice President None Frederick S. Marius Vice President None Karen A. McCafferty Vice President None Anne B. McCarthy Assistant Vice President None Paul McConville Vice President None Brian McCracken Assistant Vice President None Bruce A. McCutcheon Vice President None Daniel E. McDermott Assistant Vice President None Mark J. McKenna Senior Vice President None Mary G. McNamee Assistant Vice President None Claye A. Metelmann Vice President None Eric D. Milgroom Assistant Vice President None Bart D. Miller Senior Vice President None Janis E. Miller Managing Director None Jeffery M. Miller Managing Director None Ronald K. Mills Vice President None Matthew P. Mintzer Senior Vice President None Kimberly A. Monahan Vice President None Paul R. Moody Vice President None Peter M. Moore Assistant Vice President None Mitchell Moret Senior Vice President None Jean Moses Senior Vice President None Barry L. Mosher Assistant Vice President None Donald E. Mullen Vice President None Paul G. Murphy Vice President None Brendan R. Murray Vice President None Robert Nadherny Vice President None Alexander L. Nelson Managing Director None Amy Jane Newell Vice President None John P. Nickodemus Vice President None Gail A. Nickse Assistant Vice President None Kristen P. O'Brien Senior Vice President None Lois C. O'Brien Vice President None Nancy E. O'Brien Vice President None Gayle M. O'Connell Assistant Vice President None Joseph R. Palombo Managing Director None Scott A. Papes Vice President None Cynthia O. Parr Vice President None Dale M. Pelletier Vice President None Samuel W. Perry Vice President None Jennifer H. Peterson Assistant Vice President None Kate Peterson Assistant Vice President None John G. Phoenix Vice President None Joseph Phoenix Senior Vice President None Keith Plapinger Vice President None Jeffrey P. Pollock Vice President None Margaret J. Portorski Assitant Vice President None Douglas H. Powell Vice President None Howard B. Present Senior Vice President None Jane E. Price Assistant Vice President None Scott M. Pulkrabek Vice President None George Putnam Director Chairman & President Kimberly Raynor Vice President None W. Frank Richardson Vice President None George A. Rio Senior Vice President None Kris Rodammer Vice President None Debra V. Rothman Vice President None Robert B. Rowe Vice President None Kevin A. Rowell Senior Vice President None Charles A. Ruys de Perez Senior Vice President None Deborah A. Ryan Vice President None Catherine A. Saunders Senior Vice President None Robbin L. Saunders Vice President None Karl W. Saur Vice President None Michael Scanlon Vice President None Shannon D. Schofield Vice President None Mitchell D. Schultz Managing Director None Curt A. Schultzberg Assistant Vice President None Christine A. Scordato Senior Vice President None Joseph W. Scott Assistant Vice President None Elizabeth R. Segers Senior Vice President None John B. Shamburg Vice President None Kathleen G. Sharpless Managing Director None Terence B. Shea Assistant Vice President None William N. Shiebler Director and President Vice President Robert J. Shull, II Vice President None Gordon H. Silver Senior Managing Director Vice President John Skistimas, Jr. Assistant Vice President None Stuart C. Smith Assistant Vice President None Peter J. Southard Vice President None Steven Spiegel Senior Managing Director None Nicholas T. Stanojev Senior Vice President None Paul R. Stickney Vice President None J. Bradely Stillwagon Vice President None Casey Strumpf Senior Vice President None Brian L. Sullivan Senior Vice President None Elaine M. Sullivan Vice President None Guy Sullivan Senior Vice President None Kevin J. Sullivan Vice President None Maryann Sullivan Assistant Vice President None Moira Sullivan Vice President None George C. Sutherland Vice President None Maureen C. Tallon Vice President None B. Iris Tanner Assistant Vice President None April M. Tavares Assistant Vice President None David S. Taylor Vice President None John R. Telling Vice President None Cynthia Tercha Vice President None Tracy A. Thomas Assistant Vice President None Richard B. Tibbetts Senior Vice President None Patrice M. Tirado Vice President None Janet E. Tosi Vice President None Bonnie L. Troped Vice President None Christine M. Twigg Assistant Vice President None Douglas J. Vander Linde Senior Vice President None John R. Verani Senior Vice President Vice President Rajeshiri Vora Vice President None Mitchell J. Waters Vice President None Karen Waystack Assistant Vice President None Dierdre West-Smith Assistant Vice President None Brian Whalen Vice President None Edward F. Whalen Senior Vice President None Peter R. Wheeler Senior Vice President None J. Gregg Whitaker Vice President None J. Bennett White Vice President None Robert A. Williams Vice President None Leigh T. Williamson Vice President None Jane Wolfson Senior Vice President None Benjamin I. Woloshin Vice President None William H. Woolverton Managing Director None Michael P. Zeller Vice President None Laura J. Zografos Vice President None
Item 30. Location of Accounts and Records Persons maintaining physical possession of accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are Registrant's Clerk, Beverly Marcus; Registrant's investment adviser, Putnam Investment Management, Inc.; Registrant's principal underwriter, Putnam Mutual Funds Corp.; Registrant's custodian, Putnam Fiduciary Trust Company ("PFTC"); and Registrant's transfer and dividend disbursing agent, Putnam Investor Services, a division of PFTC. The address of the Clerk, investment adviser, principal underwriter, custodian and transfer and dividend disbursing agent is One Post Office Square, Boston, Massachusetts 02109. Item 31. Management Services None. Item 32. Undertakings The Registrant undertakes to furnish to each person to whom a prospectus of the Registrant is delivered a copy of the Registrant's latest annual report to shareholders, upon request and without charge. ---------------------------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (File No. 33-51017) (the "Registration Statement") of our report dated November 17, 1997, relating to the financial statements and financial highlights appearing in the September 30, 1997 Annual Report of Putnam Asset Allocation Funds, which financial statements and financial highlights are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Independent Accountants and Financial Statements" in such Statement of Additional Information and under the headings "Financial highlights" in such Prospectuses. Price Waterhouse LLP Boston, Massachusetts January 28, 1998 -------------------------- NOTICE A copy of the Agreement and Declaration of Trust of Putnam Asset Allocation Funds is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the relevant series of the Registrant. POWER OF ATTORNEY I, the undersigned Trustee of Putnam Asset Allocation Funds, hereby severally constitute and appoint George Putnam, Charles E. Porter, Gordon H. Silver, Edward A. Benjamin, Timothy W. Diggins and John W. Gerstmayr, and each of them singly, my true and lawful attorneys, with full power to them and each of them, to sign for me, and in my name and in the capacity indicated below, the Registration Statement on Form N-1A of Putnam Asset Allocation Funds and any and all amendments (including post- effective amendments) to said Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto my said attorneys, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratify and confirm all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof. WITNESS my hand and seal on the date set forth below. Signature Title Date /s/W. THOMAS STEPHENS - --------------------- Trustee October 3, 1997 W. Thomas Stephens POWER OF ATTORNEY I, the undersigned Trustee of Putnam Asset Allocation Funds, hereby severally constitute and appoint George Putnam, Charles E. Porter, Gordon H. Silver, Edward A. Benjamin, Timothy W. Diggins and John W. Gerstmayr, and each of them singly, my true and lawful attorneys, with full power to them and each of them, to sign for me, and in my name and in the capacity indicated below, the Registration Statement on Form N-1A of the Putnam Asset Allocation Funds and any and all amendments (including post- effective amendments) to said Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto my said attorneys, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratify and confirm all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof. WITNESS my hand and seal on the date set forth below. Signature Title Date /s/JOHN H. MULLIN, III - --------------------- Trustee November 6, 1997 John H. Mullin, III POWER OF ATTORNEY I, the undersigned Trustee of Putnam Asset Allocation Funds, hereby severally constitute and appoint George Putnam, Charles E. Porter, Gordon H. Silver, Edward A. Benjamin, Timothy W. Diggins and John W. Gerstmayr, and each of them singly, my true and lawful attorneys, with full power to them and each of them, to sign for me, and in my name and in the capacity indicated below, the Registration Statement on Form N-1A of the Putnam Asset Allocation Funds and any and all amendments (including post- effective amendments) to said Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto my said attorneys, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratify and confirm all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof. WITNESS my hand and seal on the date set forth below. Signature Title Date /s/PAUL L. JOSKOW - --------------------- Trustee November 6, 1997 Paul L. Joskow SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and The Commonwealth of Massachusetts, on the 28th day of January, 1998. Putnam Asset Allocation Funds By: Gordon H. Silver, Vice President Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement of Putnam Asset Allocation Funds has been signed below by the following persons in the capacities and on the dates indicated: Signature Title George Putnam President and Chairman of the Board; Principal Executive Officer; Trustee John D. Hughes Senior Vice President; Treasurer and Principal Financial Officer Paul G. Bucuvalas Assistant Treasurer and Principal Accounting Officer Jameson A. Baxter Trustee Hans H. Estin Trustee John A. Hill Trustee Ronald J. Jackson Trustee Paul L. Joskow Trustee Elizabeth T. Kennan Trustee Lawrence J. Lasser Trustee John H. Mullin, III Trustee Robert E. Patterson Trustee Donald S. Perkins Trustee William F. Pounds Trustee George Putnam, III Trustee A.J.C. Smith Trustee W. Thomas Stephens Trustee W. Nicholas Thorndike Trustee By: Gordon H. Silver, as Attorney-in-Fact January 28, 1998 EXHIBIT INDEX 15e. Form of Specimen Dealer Service Agreement -- Exhibit 1. 15f. Form of Specimen Financial Institution Service Agreement - -- Exhibit 2. 16a. Schedules for computation of performance quotations for the Balanced Portfolio -- Exhibit 3. 16b. Schedules for computation of performance quotations for the Conservative Portfolio -- Exhibit 4. 16c. Schedules for computation of performance quotations for the Growth Portfolio -- Exhibit 5. 17a. Financial Data Schedule for Class A shares of the Balanced Portfolio --Exhibit 6. Financial Data Schedules for Class A shares of the Conservative Portfolio -- Exhibit 7. Financial Data Schedules for Class A shares of the Growth Portfolio -- Exhibit 8. 17b. Financial Data Schedules for Class B shares of the Balanced Portfolio -- Exhibit 9. Financial Data Schedules for Class B shares of the Conservative Portfolio -- Exhibit 10. Financial Data Schedules for Class B shares of the Growth Portfolio -- Exhibit 11. 17c. Financial Data Schedules for Class C shares of the Balanced Portfolio -- Exhibit 12. Financial Data Schedules for Class C shares of the Conservative Portfolio -- Exhibit 13. Financial Data Schedules for Class C shares of the Growth Portfolio -- Exhibit 14. 17d. Financial Data Schedules for Class M shares of the Balanced Portfolio -- Exhibit 15. Financial Data Schedules for Class M shares of the Conservative Portfolio -- Exhibit 16. Financial Data Schedules for Class M shares of the Growth Portfolio -- Exhibit 17. 17e. Financial Data Schedules for Class Y shares of the Balanced Portfolio -- Exhibit 18. Financial Data Schedules for Class Y shares of the Conservative Portfolio -- Exhibit 19. Financial Data Schedules for Class Y shares of the Growth Portfolio -- Exhibit 20. EX-99.B1512B1PLAN 2 FORM OF SPECIMEN DEALER SERVICE AGREEMENT DEALER SERVICE AGREEMENT Between: and Putnam Mutual Funds Corp. General Distributor of The Putnam Family of Mutual Funds One Post Office Square Boston, MA 02109 We are pleased to inform you that, pursuant to the terms of this Dealer Service Agreement, we are authorized to pay you service fees in connection with the accounts of your customers that hold shares of certain Putnam Funds listed in Schedule 1 that have adopted distribution plans pursuant to Rule 12b-1 (the "12b-1 Funds"). Payment of the service fees is subject to your initial and continuing satisfaction of the following terms and conditions which may be revised by us from time to time: 1. Qualification Requirements (a) You have entered into a Sales Contract with us with respect to the Putnam Family of Mutual Funds (the "Putnam Funds"). (b) You are the dealer of record for accounts in Putnam Funds having an aggregate average net asset value of at least the minimum amount set forth in Schedule 2 (Dealer Firm Requirements) during the period for which a service fee is to be paid. Putnam Fund accounts are accounts in any open-end Putnam Fund, but excluding any accounts for your firm's own retirement plans. (c) One or more of your current employees must be the designated registered representative(s) on accounts in Putnam Funds having an aggregate average net asset value of at least the minimum amount set forth in Schedule 2 (Registered Representative Requirements) during the period for which a service fee is to be paid. (d) You will provide the following information and agree that we will be entitled to rely on the accuracy of such information in updating our records for determining the levels of service fees payable to you under the terms of this Agreement. You understand that such payments will be based solely on Putnam's records. For each Putnam Fund account registered in the name of one of your customers, you will advise us, preferably by electronic means, before the end of the second month in each calendar quarter, of the registered representative's name, identification number, branch number, and telephone number. 2. Service Fees (a) If you meet the qualification requirements set forth above in Paragraph 1, you will be paid a service fee on assets in the 12b-1 Funds for which you are the dealer of record and which are serviced by a registered representative of your firm meeting the Registered Representative Requirements, if any, at the annual rates specified (excluding any accounts for your firm's own retirement plans). (b) You understand and agree that: (i) all service fee payments are subject to the limitations contained in each 12b-1 Fund's Distribution Plan, which may be varied or discontinued at any time; (ii) you shall waive the right to receive service fee payments to the extent any 12b-1 Fund fails to make payments to us under its distribution plan with us; (iii) your failure to provide the services described in Paragraph 4 below as may be amended by us from time to time, or otherwise comply with the terms of this Agreement, will render you ineligible to receive service fees; and (iv) failure of an assigned registered representative to provide services required by this Agreement will render that representative's accounts ineligible as accounts on which service fees are paid. 3. Payments and Communications to Registered Representatives (a) You will pass through to your registered representatives a significant share of the service fees paid to you pursuant to this Agreement. (b) You will assist us in distributing to your registered representatives periodic statements which we will have prepared showing the aggregate average net asset value of shares in Putnam Funds with which they are credited on our records. 4. Required Services (a) You will assign one of your registered representatives to each Putnam Fund account on your records and reassign the Putnam Fund account should that representative leave your firm. (b) You and your registered representatives will assist us and our affiliates in providing the following services to shareholders of the Putnam Funds: (i) Maintain regular contact with shareholders in assigned accounts and assist in answering inquiries concerning the Putnam Funds. (ii) Assist in distributing sales and service literature provided by us, particularly to the beneficial owners of accounts registered in your name (nominee name accounts). (iii)Assist us and our affiliates in the establishment and maintenance of shareholder accounts and records. (iv) Assist shareholders in effecting administrative changes, such as changing dividend options, account designations, address, automatic investment programs or systematic investment plans. (v) Assist in processing purchase and redemption transactions. (vi) Provide any other information or services as the customer or we may reasonably request. (c) You will support our marketing efforts by granting reasonable requests for visits to your offices by our wholesalers and by including all Putnam Funds on your "approved" list. (d) Your compliance with the service requirements set forth in this Agreement will be evaluated by us from time to time by surveying shareholder satisfaction with service, by monitoring redemption levels of shareholder accounts assigned to you and by such other methods as we deem appropriate. (e) The provisions of this Paragraph 4 may be amended by us from time to time upon notice to you. 5. Amendment This Agreement, including any Schedule hereto, shall be deemed amended as provided in any written notice delivered by us to you. 6. Effective Period and Termination The provisions of this Agreement shall remain in effect for not more than one year from the date of its execution or adoption and thereafter for successive annual periods only so long as such continuance is specifically approved at least annually by the Trustees of each of the 12b-1 Funds in conformity with Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). This Agreement shall automatically terminate in the event of its assignment (as defined by the 1940 Act). In addition, this Agreement may be terminated at any time, without the payment of any penalty, by either party upon written notice delivered or mailed by registered mail, postage prepaid, to the other party, or, as provided in Rule 12b-1 under the 1940 Act, by the Trustees of any 12b-1 Fund or by the vote of the holders of the outstanding voting securities of any 12b-1 Fund. 7. Written Reports Putnam Mutual Funds Corp. shall provide the Trustees of each of the 12b-1 Funds, and such Trustees shall review at least quarterly, a written report of the amounts paid to you under this Agreement and the purposes for which such expenditures were made. 8. Miscellaneous (a) All communications mailed to us should be sent to the address listed below. Any notice to you shall be duly given if mailed or delivered to you at the address specified by you below. (b) The provisions of this Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. Very truly yours, PUTNAM MUTUAL FUNDS CORP. By: ------------------------------ William N. Shiebler, President and Chief Executive Officer We accept and agree to the foregoing Agreement as of the date set forth below. Dealer: ------------------------- By: ---------------------------- Authorized Signature, Title ------------------------------ ------------------------------ Address Dated: ------------------------- Please return the signed Putnam copy of this Agreement to Putnam Mutual Funds Corp., P.O. Box 41203, Providence, RI 02940-1203. Schedule 1: The 12b-1 Funds Service fees will be paid on the following Putnam Funds at the rates set forth in the Prospectus of that Fund: Putnam Adjustable Rate U.S. Government Fund Putnam American Government Income Fund Putnam Arizona Tax Exempt Income Fund Putnam Asia Pacific Growth Fund Putnam Asset Allocation Funds -Putnam Asset Allocation: Growth Portfolio -Putnam Asset Allocation: Balanced Portfolio -Putnam Asset Allocation: Conservative Portfolio Putnam Balanced Retirement Fund Putnam California Tax Exempt Income Trust -Putnam California Intermediate Tax Exempt Fund -Putnam California Tax Exempt Income Fund Putnam Capital Appreciation Fund Putnam Convertible Income-Growth Trust Putnam Diversified Equity Trust Putnam Diversified Income Trust Putnam Equity Income Fund Putnam Europe Growth Fund Putnam Federal Income Trust Putnam Florida Tax Exempt Income Fund The George Putnam Fund of Boston Putnam Global Governmental Income Trust Putnam Global Growth Fund The Putnam Fund for Growth and Income Putnam Growth and Income Fund II Putnam Health Sciences Trust Putnam High Yield Advantage Fund Putnam High Yield Trust Putnam Income Fund Putnam Intermediate Tax Exempt Fund Putnam Intermediate U.S. Government Fund Putnam Investment Funds -Putnam International New Opportunities Fund Putnam Investors Fund Putnam Massachusetts Tax Exempt Income Fund Putnam Michigan Tax Exempt Income Fund Putnam Minnesota Tax Exempt Income Fund Putnam Money Market Fund Putnam Municipal Income Fund Putnam Natural Resources Fund Putnam New Jersey Tax Exempt Income Fund Putnam New Opportunities Fund Putnam New York Tax Exempt Income Trust -Putnam New York Intermediate Tax Exempt Fund -Putnam New York Tax Exempt Income Fund Putnam New York Tax Exempt Opportunities Fund Putnam Ohio Tax Exempt Income Fund Putnam OTC Emerging Growth Fund Putnam Overseas Growth Fund Putnam Pennsylvania Tax Exempt Income Fund Putnam Preferred Income Trust Putnam Tax Exempt Income Fund Putnam Tax-Free Income Trust -Putnam Tax-Free High Yield Fund -Putnam Tax-Free Insured Fund Putnam U.S. Government Income Trust Putnam Utilities Growth and Income Fund Putnam Vista Fund Putnam Voyager Fund Putnam Voyager Fund II Schedule 2: Minimum Assets Dealer Firm Requirements. The minimum aggregate average net asset value of all accounts in Putnam Funds specified by Paragraph 1(b) is $250,000. We will review this requirement prior to the start of each year and inform you of any changes. Registered Representative Requirements. With respect to Paragraph 1(c), there is no minimum asset qualification requirement in the Putnam Funds applicable to each of your representatives. We will review this requirement prior to the start of each year and inform you of any changes. NF-57 2/7/97 EX-99.1512B1PLAN 3 FORM OF FINANCIAL INST. SERVICE AGREEMENT FINANCIAL INSTITUTION SERVICE AGREEMENT Between: and Putnam Mutual Funds Corp. General Distributor of The Putnam Family of Mutual Funds One Post Office Square Boston, MA 02109 We are pleased to inform you that, pursuant to the terms of this Financial Institution Service Agreement, we are authorized to pay you service fees in connection with the accounts of your customers that hold shares of certain Putnam funds listed in Schedule 1 that have adopted distribution plans pursuant to Rule 12b-1 (the "12b-1 Funds"). Payment of the service fees is subject to your initial and continuing satisfaction of the following terms and conditions which may be revised by us from time to time: 1. Qualification Requirements (a) You have entered into a Financial Institution Sales Contract with us with respect to the Putnam Family of Mutual Funds (the "Putnam Funds"), whose shares you have agreed to make available to your customers on an agency basis. (b) You are the financial institution of record for accounts in Putnam Funds having an aggregate average net asset value of at least the minimum amount set forth in Schedule 2 (Financial Institution Requirements) during the period for which a service fee is to be paid. Putnam Fund accounts are accounts in any open-end Putnam Fund but excluding any accounts for your organization's own retirement plans. (c) One or more of your current employees must be the designated registered representative(s) in the case of a bank affiliated dealer, or agent representative(s) in the case of a bank (both referred to as "representatives"), on accounts in Putnam Funds having an aggregate average net asset value of at least the minimum amount set forth in Schedule 2 (Representative Requirements) during the period for which a service fee is to be paid. (d) You will provide the following information and agree that we will be entitled to rely on the accuracy of such information in updating our records for determining the levels of service fees payable to you under the terms of this Agreement. You understand that such payments will be based solely on Putnam's records: For each Putnam Fund account registered in the name of one of your customers, you will advise us, preferably by electronic means, before the end of the second month in each calendar quarter, of the representative's name, identification number, branch number, and telephone number. 2. Service Fees (a) If you meet the qualification requirements set forth above in Paragraph 1, you will be paid, at the end of each calendar quarter, a service fee on assets of your customers in the 12b-1 Funds for which you are the financial institution of record and which are serviced by a representative of your organization meeting the Representative Requirements, if any at the annual rates specified (excluding any accounts for your organization's own retirement plans), provided that you have evaluated such service fees and have concluded that it is consistent with applicable laws, rules, regulations and regulatory interpretations for you to receive such service fees. (b) You understand and agree that: (i) all service fee payments are subject to the limitations contained in each 12b-1 Fund's Distribution Plan, which may be varied or discontinued at any time; (ii) you shall waive the right to receive service fee payments to the extent any 12b-1 Fund fails to make payments to us under its distribution plan with us; (iii)your failure to provide the services described in Paragraph 4 below as may be amended by us from time to time, or otherwise comply with the terms of this Agreement, will render you ineligible to receive service fees; and (iv) failure of an assigned representative to provide services required by this Agreement will render that representative's accounts ineligible as accounts on which service fees are paid. 3. Payments and Communications to Representatives (a) Where consistent with applicable laws, rules, regulations and regulatory interpretations, you will pass through to your representatives a significant share of the service fees paid to you pursuant to this Agreement, or you will otherwise use the payments of service fees to advance the objective of providing and improving service to shareholders of the Putnam Funds in a manner specifically approved by Putnam Mutual Funds (for example, via training courses for representatives or shareholder seminars). (b) You will assist us in distributing to your representatives periodic statements which we will have prepared showing the aggregate average net asset value of shares in Putnam Funds with which they are credited on our records. 4. Required Services (a) You will assign one of your representatives to each Putnam Fund account on your records and reassign the Putnam Fund account should that representative leave your organization. (b) You and your representatives will assist us and our affiliates in providing the following services to shareholders of the Putnam Funds: (i) Maintain regular contact with shareholders in assigned accounts and assist in answering inquiries concerning the Putnam Funds. (ii) Assist in distributing sales and service literature provided by us, particularly to the beneficial owners of accounts registered in your name (nominee name accounts). (iii) Assist us and our affiliates in the establishment and maintenance of shareholder accounts and records. (iv) Assist shareholders in effecting administrative changes, such as changing dividend options, account designations, address, automatic investment programs or systematic investment plans. (v) Assist in processing purchase and redemption transactions. (vi) Provide any other information or services as the customer or we may reasonably request. (c) You will grant reasonable requests for visits to your offices by our wholesalers and include all Putnam Funds on your menu or list of investments made available by you to your customers. (d) Your compliance with the service requirements set forth in this Agreement will be evaluated by us from time to time by surveying shareholder satisfaction with service, by monitoring redemption levels of shareholder accounts assigned to you and by such other methods as we deem appropriate. (e) The provisions of this Paragraph 4 may be amended by us from time to time upon notice to you. 5. Amendment This Agreement, including any Schedule hereto, shall be deemed amended as provided in any written notice delivered by us to you. 6. Effective Period and Termination The provisions of this Agreement shall remain in effect for one year from the date of its execution or adoption and thereafter for successive annual periods only so long as such continuance is specifically approved at least annually by the Trustees of each of the 12b-1 Funds in conformity with Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). This Agreement shall automatically terminate in the event of its assignment (as defined by the 1940 Act). In addition, this Agreement may be terminated at any time, without the payment of any penalty, by either party upon written notice to the other party, or, as provided in Rule 12b-1 under the 1940 Act, by the Trustees of any 12b-1 Fund or by the vote of the holders of the outstanding voting securities of any 12b-1 Fund. 7. Written Reports Putnam Mutual Funds Corp. shall provide the Trustees of each of the 12b-1 Funds, and such Trustees shall review at least quarterly, a written report of the amounts paid to you under this Agreement and the purposes for which such expenditures were made. 8. Compliance with Laws With respect to the receipt of service fees under the terms of this Agreement, you will comply with all applicable federal and state laws and rules, and all applicable regulations and interpretations of regulatory agencies or authorities, which may affect your business practices, including any requirement of written authorization or consent by your customers to your receipt of service fees, and any requirement to provide disclosure to your customers of such service fees. 9. Miscellaneous (a) All communications mailed to us should be sent to the address listed below. Any notice to you shall be duly given if mailed or delivered to you at the address specified by you below. (b) The provisions of this Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. Very truly yours, PUTNAM MUTUAL FUNDS CORP. By: -------------------------- William N. Shiebler, President and Chief Executive Officer We accept and agree to the foregoing Agreement as of the date set forth below. Financial Institution: -------------------------- By: -------------------------- Authorized Signature, Title -------------------------- -------------------------- Address Dated: -------------------------- Please return the signed Putnam copy of this Agreement to Putnam Mutual Funds Corp., P.O. Box 41203, Providence, RI 02940-1203. Schedule 1: The 12b-1 Funds Service fees will be paid on the following Putnam Funds at the rates set forth in the Prospectus of that Fund: Putnam Adjustable Rate U.S. Government Fund Putnam American Government Income Fund Putnam Arizona Tax Exempt Income Fund Putnam Asia Pacific Growth Fund Putnam Asset Allocation Funds -Putnam Asset Allocation: Growth Portfolio -Putnam Asset Allocation: Balanced Portfolio -Putnam Asset Allocation: Conservative Portfolio Putnam Balanced Retirement Fund Putnam California Tax Exempt Income Trust -Putnam California Intermediate Tax Exempt Fund -Putnam California Tax Exempt Income Fund Putnam Capital Appreciation Fund Putnam Convertible Income-Growth Trust Putnam Diversified Equity Trust Putnam Diversified Income Trust Putnam Equity Income Fund Putnam Europe Growth Fund Putnam Federal Income Trust Putnam Florida Tax Exempt Income Fund The George Putnam Fund of Boston Putnam Global Governmental Income Trust Putnam Global Growth Fund The Putnam Fund for Growth and Income Putnam Growth and Income Fund II Putnam Health Sciences Trust Putnam High Yield Advantage Fund Putnam High Yield Trust Putnam Income Fund Putnam Intermediate Tax Exempt Fund Putnam Intermediate U.S. Government Fund Putnam Investment Funds -Putnam International New Opportunities Fund Putnam Investors Fund Putnam Massachusetts Tax Exempt Income Fund Putnam Michigan Tax Exempt Income Fund Putnam Minnesota Tax Exempt Income Fund Putnam Money Market Fund Putnam Municipal Income Fund Putnam Natural Resources Fund Putnam New Jersey Tax Exempt Income Fund Putnam New Opportunities Fund Putnam New York Tax Exempt Income Trust -Putnam New York Intermediate Tax Exempt Fund -Putnam New York Tax Exempt Income Fund Putnam New York Tax Exempt Opportunities Fund Putnam Ohio Tax Exempt Income Fund Putnam OTC Emerging Growth Fund Putnam Overseas Growth Fund Putnam Pennsylvania Tax Exempt Income Fund Putnam Preferred Income Trust Putnam Tax Exempt Income Fund Putnam Tax-Free Income Trust -Putnam Tax-Free High Yield Fund -Putnam Tax-Free Insured Fund Putnam U.S. Government Income Trust Putnam Utilities Growth and Income Fund Putnam Vista Fund Putnam Voyager Fund Putnam Voyager Fund II Schedule 2: Minimum Assets Financial Institution Requirements. The minimum aggregate average net asset value of all accounts in Putnam Funds specified by Paragraph 1(b) is $250,000. We will review this requirement prior to the start of each year and inform you of any changes. Representative Requirements. With respect to Paragraph 1(c), there is no minimum asset qualification requirement in the Putnam Funds applicable to each of your representatives. We will review this requirement prior to the start of each year and inform you of any changes. We reserve the right to set a minimum at any time. NF-58 2/7/97 EX-99.B16PERFQUOT 4 BALANCED SCHED FOR COMPUTATION OF PERF QUOT SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds - Balanced Portfolio -- Class A Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/7/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,167.37 $ $1,602.68 T = Average Annual Total Return 16.74% % 13.84%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $1,807,418 Expenses $863,924 Reimbursement $0 Average shares 55,337,498 NAV $12.28 Sales Charge 5.75% POP $13.03 Yield at POP 1.58% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Balanced Portfolio -- Class B Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/11/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,179.47 $ $1,626.22 T = Average Annual Total Return 17.95% % 14.29%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $1,161,076 Expenses $827,285 Reimbursement $0 Average shares 35,689,999 NAV $12.23 Maximum Contingent Deferred Sales Charge 5.0% Yield at NAV 0.92% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Balanced Portfolio-- Class C Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 9/1/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,218.58 $ $1,647.20 T = Average Annual Total Return 21.86% % 14.70%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $185,493 Expenses $136,054 Reimbursement $0 Average shares 5,728,057 NAV $12.18 Sales Charge % POP $ Yield at NAV 0.85% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Balanced Portfolio -- Class M Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/6/95 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,188.63 $ $1,616.73 T = Average Annual Total Return 18.86% % 14.11%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $115,233 Expenses $73,885 Reimbursement $0 Average shares 3,530,796 NAV $12.27 Sales Charge 3.50% POP $12.72 Yield at POP 1.11% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Balanced Portfolio -- Class Y Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 7/5/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,242.06 $ $1,715.34 T = Average Annual Total Return 24.21% % 15.98%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $617,890 Expenses $259,879 Reimbursement $0 Average shares 18,881,267 NAV $12.29 Yield at NAV 1.86% EX-99.B16PERFQUOT 5 CONSERVATIVE SCHED FOR COMPUTATION OF PERF QUOT SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds - Conservative Portfolio -- Class A Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/7/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,105.31 $ $1,388.07 T = Average Annual Total Return 10.53% % 9.43%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $954,337 Expenses $333,319 Reimbursement $0 Average shares 28,037,692 NAV $10.62 Sales Charge 5.75% POP $11.27 Yield at POP 2.37% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Conservative Portfolio -- Class B Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/18/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,113.56 $ $1,403.57 T = Average Annual Total Return 11.36% % 9.76%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $439,218 Expenses $233,768 Reimbursement $0 Average shares 12,966,949 NAV $10.58 Maximum Contingent Deferred Sales Charge 5.0% Yield at NAV 1.80% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Conservative Portfolio-- Class C Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 9/1/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,155.22 $ $1,430.07 T = Average Annual Total Return 15.52% % 10.33%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $92,153 Expenses $49,909 Reimbursement $0 Average shares 2,727,610 NAV $10.56 Sales Charge % POP $ Yield at NAV 1.77% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Conservative Portfolio -- Class M Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/7/95 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,127.15 $ $1,397.65 T = Average Annual Total Return 12.72% % 9.63%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $40,192 Expenses $19,071 Reimbursement $0 Average shares 1,182,120 NAV $10.59 Sales Charge 3.50% POP $10.97 Yield at POP 1.96% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Conservative Portfolio -- Class Y Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 7/14/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T) n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,176.20 $ $1,485.44 T = Average Annual Total Return 17.62% % 11.48%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $60,227 Expenses $18,153 Reimbursement $0 Average shares 1,771,403 NAV $10.62 Yield at NAV 2.70% EX-99.B16PERFQUOT 6 GROWTH SCHED FOR COMPUTATION OF PERF QUOT SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds - Growth Portfolio -- Class A Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/8/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T)^n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,189.50 $ $1,687.57 T = Average Annual Total Return 18.95% % 15.46%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $988,352 Expenses $526,086 Reimbursement $0 Average shares 35,848,007 NAV $13.64 Sales Charge 5.75% POP $14.47 Yield at POP 1.07% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Growth Portfolio -- Class B Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/16/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T)^n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,203.33 $ $1,716.14 T = Average Annual Total Return 20.33% % 15.99%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $712,022 Expenses $607,910 Reimbursement $0 Average shares 26,216,423 NAV $13.47 Maximum Contingent Deferred Sales Charge 5.0% Yield at NAV 0.35% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Growth Portfolio-- Class C Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 9/1/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T)^n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,243.13 $ $1,735.67 T = Average Annual Total Return 24.31% % 16.36%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $135,260 Expenses $111,799 Reimbursement $0 Average shares 5,017,597 NAV $13.38 Sales Charge % POP $ Yield at NAV 0.42% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Growth Portfolio -- Class M Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 2/3/95 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T)^n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,212.43 $ $1,695.44 T = Average Annual Total Return 21.24% % 15.61%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $67,825 Expenses $49,009 Reimbursement $0 Average shares 2,494,368 NAV $13.49 Sales Charge 3.50% POP $13.98 Yield at POP 0.65% SCHEDULES FOR COMPUTATION OF PERFORMANCE QUOTATIONS Fund name: Asset Allocation Funds: Growth Portfolio -- Class Y Shares Fiscal period ending: 9/31/97 Inception date (if less than 10 years of performance): 7/14/94 TOTAL RETURN Formula -- Average Annual Total Return: ERV = P(1+T)^n n = Number of Time Periods 1 Year 5 Years 10 Years* P = Initial Investment $1,000 $ $1,000 ERV = Ending Redeemable Value $1,265.35 $ $1,809.20 T = Average Annual Total Return 26.54% % 17.69%* *Life of fund, if less than 10 years YIELD Formula: Interest + Dividends - Expenses 2 (-------------------------------------------------- +1)(6) -1 POP x Average shares Interest and Dividends $467,281 Expenses $204,729 Reimbursement $0 Average shares 17,044,589 NAV $13.72 Yield at NAV 1.35% EX-27.CLASSA 7 FDS FOR BALANCED WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Balanced Fund 5 CLASS A YEAR SEP-30-1997 SEP-30-1997 1,247,002,649 1,460,609,834 88,298,230 39,221,240 0 1,588,129,304 18,279,175 0 99,677,959 117,957,134 0 1,176,541,439 55,429,195 30,562,789 0 (1,691,530) 82,481,851 0 212,840,411 1,470,172,171 11,868,329 28,586,248 0 16,161,810 24,292,767 82,193,569 136,953,355 243,439,691 0 (12,697,299) (17,400,957) 0 37,950,346 (15,849,240) 2,765,300 529,850,375 5,962,239 34,961,932 0 0 7,033,919 0 16,562,485 490,499,153 10.71 .28 2.13 (.31) (.53) 0 12.28 1.27 0 0
EX-27.CLASSA 8 FDS FOR CONSERVATIVE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Conservative Portfolio 5 CLASS A YEAR SEP-30-1997 SEP-30-1997 454,045,685 500,774,146 39,289,887 17,529,807 0 557,593,840 18,133,817 0 45,282,829 63,416,646 0 432,294,947 27,823,692 11,038,202 0 (253,640) 15,396,761 0 46,739,126 494,177,194 2,567,752 18,112,692 0 6,544,454 14,135,990 16,587,637 34,561,076 65,284,703 0 (8,805,780) (7,375,222) 0 26,085,641 (10,933,886) 1,633,735 265,316,607 2,258,348 7,323,170 0 0 2,847,969 0 6,649,288 247,488,595 9.69 .38 1.22 (.35) (.33) 10.61 1.38 0 0 0
EX-27.CLASSA 9 FDS FOR GROWTH WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Growth Portfolio 5 CLASS A YEAR SEP-30-1997 SEP-30-1997 965,873,423 1,165,934,455 42,331,431 19,253,608 0 1,227,519,494 9,340,315 0 38,148,954 47,489,269 0 911,993,882 35,639,571 18,450,959 4,753,670 0 64,278,386 0 199,004,287 1,180,030,225 10,329,486 13,258,104 0 13,449,648 10,137,942 64,007,920 135,037,077 209,182,939 0 (3,419,375) (9,736,876) 0 23,602,836 (7,562,808) 1,148,584 671,401,955 4,566,163 26,854,647 0 0 5,592,040 0 13,855,042 323,459,087 11.14 .17 2.69 (.16) (.47) 0 13.64 1.39 0 0
EX-27.CLASSB 10 FDS FOR BALANCED WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Balanced Fund 5 CLASS B YEAR SEP-30-1997 SEP-30-1997 1,247,002,649 1,460,609,834 88,298,230 39,221,240 0 1,588,129,304 18,279,175 0 99,677,959 117,957,134 0 1,176,541,439 36,191,885 24,821,055 0 (1,691,530) 82,481,851 0 212,840,411 1,470,172,171 11,868,329 28,586,248 0 16,161,810 24,292,767 82,193,569 136,953,355 243,439,691 0 (6,684,235) (14,022,870) 0 13,440,364 (3,887,593) 1,818,059 529,850,375 5,962,239 34,961,932 0 0 7,033,919 0 16,562,485 344,360,766 10.67 .19 2.13 (.23) (.53) 0 12.23 2.02 0 0
EX-27.CLASSB 11 FDS FOR CONSERVATIVE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Conservative Portfolio 5 CLASS B YEAR SEP-30-1997 SEP-30-1997 454,045,685 500,774,146 39,289,887 17,529,807 0 557,593,840 18,133,817 0 45,282,829 63,416,646 0 432,294,947 13,095,486 9,833,891 0 (253,640) 15,396,761 0 46,739,126 494,177,194 2,567,752 18,112,692 0 6,544,454 14,135,990 16,587,637 34,561,076 65,284,703 0 (3,124,303) (3,325,457) 0 4,642,547 (1,963,926) 582,974 265,316,607 2,258,348 7,323,170 0 0 2,847,969 0 6,649,288 114,535,019 9.66 .30 1.22 (.28) (.33) 0 10.57 2.13 0 0
EX-27.CLASSB 12 FDS FOR GROWTH WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Growth Portfolio 5 CLASS B YEAR SEP-30-1997 SEP-30-1997 965,873,423 1,165,934,455 42,331,431 19,253,608 0 1,227,519,494 9,340,315 0 38,148,954 47,489,269 0 911,993,882 26,547,875 17,703,575 4,753,670 0 64,278,386 0 199,004,287 1,180,030,225 10,329,486 13,258,104 0 13,449,648 10,137,942 64,007,920 135,037,077 209,182,939 0 (1,858,459) (8,947,425) 0 10,376,531 (2,447,143) 914,912 671,401,955 4,566,163 26,854,647 0 0 5,592,040 0 13,855,042 269,937,777 11.29 .08 2.67 (.10) (.47) 0 13.47 2.14 0 0
EX-27.CLASSC 13 FDS FOR BALANCED WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Balanced Fund 5 CLASS C YEAR SEP-30-1997 SEP-30-1997 1,247,002,649 1,460,609,834 88,298,230 39,221,240 0 1,588,129,304 18,279,175 0 99,677,959 117,957,134 0 1,176,541,439 5,818,382 2,794,696 0 (1,691,530) 82,481,851 0 212,840,411 1,470,172,171 11,868,329 28,586,248 0 16,161,810 24,292,767 82,193,569 136,953,355 243,439,691 0 (929,452) (1,750,679) 0 3,334,653 (541,054) 230,087 529,850,375 5,962,239 34,961,932 0 0 7,033,919 0 16,562,485 48,358,168 10.64 .19 2.11 (.23) (.53) 0 12.18 2.02 0 0
EX-27.CLASSC 14 FDS FOR CONSERVATIVE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Conservative Portfolio 5 CLASS C YEAR SEP-30-1997 SEP-30-1997 454,045,685 500,774,146 39,289,887 17,529,807 0 557,593,840 18,133,817 0 45,282,829 63,416,646 0 432,294,947 2,750,480 1,693,468 0 (253,640) 15,396,761 0 46,739,126 494,177,194 2,567,752 18,112,692 0 6,544,454 14,135,990 16,587,637 34,561,076 65,284,703 0 (624,813) (631,861) 0 1,406,045 (465,847) 116,814 265,316,607 2,258,348 7,323,170 0 0 2,847,969 0 6,649,288 22,750,130 9.64 .29 1.24 (.28) (.33) 0 10.56 2.13 0 0
EX-27.CLASSC 15 FDS FOR GROWTH WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Growth Portfolio 5 CLASS C YEAR SEP-30-1997 SEP-30-1997 965,873,423 1,165,934,455 42,331,431 19,253,608 0 1,227,519,494 9,340,315 0 38,148,954 47,489,269 0 911,993,882 5,139,280 2,452,249 4,753,670 0 64,278,386 0 199,004,287 1,180,030,225 10,329,486 13,258,104 0 13,449,648 10,137,942 64,007,920 135,037,077 209,182,939 0 (354,573) (1,403,269) 0 3,040,994 (492,759) 138,796 671,401,955 4,566,163 26,854,647 0 0 5,592,040 0 13,855,042 46,214,160 11.24 .08 2.65 (.12) (.47) 0 13.38 2.14 0 0
EX-27.CLASSM 16 FDS FOR BALANCED WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Balanced Fund 5 CLASS M YEAR SEP-30-1997 SEP-30-1997 1,247,002,649 1,460,609,834 88,298,230 39,221,240 0 1,588,129,304 18,279,175 0 99,677,959 117,957,134 0 1,176,541,439 3,595,164 1,397,303 0 (1,691,530) 82,481,851 0 212,840,411 1,470,172,171 11,868,329 28,586,248 0 16,161,810 24,292,767 82,193,569 136,953,355 243,439,691 0 (584,395) (891,021) 0 2,475,833 (405,927) 127,955 529,850,375 5,962,239 34,961,932 0 0 7,033,919 0 16,562,485 28,008,614 10.71 .22 2.13 (.26) (.53) 0 12.27 1.77 0 0
EX-27.CLASSM 17 FDS FOR CONSERVATIVE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Conservative Portfolio 5 CLASS M YEAR SEP-30-1997 SEP-30-1997 454,045,685 500,774,146 39,289,887 17,529,807 0 557,593,840 18,133,817 0 45,282,829 63,416,646 0 432,294,947 1,198,792 478,010 0 (253,640) 15,396,761 0 46,739,126 494,177,194 2,567,752 18,112,692 0 6,544,454 14,135,990 16,587,637 34,561,076 65,284,703 0 (241,373) (177,085) 0 888,082 (208,529) 41,229 265,316,607 2,258,348 7,323,170 0 0 2,847,969 0 6,649,288 8,308,528 9.67 .32 1.24 (.31) (.33) 0 10.59 1.88 0 0
EX-27.CLASSM 18 FDS FOR GROWTH WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Growth Portfolio 5 CLASS M YEAR SEP-30-1997 SEP-30-1997 965,873,423 1,165,934,455 42,331,431 19,253,608 0 1,227,519,494 9,340,315 0 38,148,954 47,489,269 0 911,993,882 2,548,864 1,092,639 4,753,670 0 64,278,386 0 199,004,287 1,180,030,225 10,329,486 13,258,104 0 13,449,648 10,137,942 64,007,920 135,037,077 209,182,939 0 (181,831) (610,900) 0 1,797,515 (409,741) 68,451 671,401,955 4,566,163 26,854,647 0 0 5,592,040 0 13,855,042 22,919,275 11.32 .11 2.67 (.14) (.47) 0 13.49 1.89 0 0
EX-27.CLASSY 19 FDS FOR BALANCED WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Balanced Fund 5 CLASS Y YEAR SEP-30-1997 SEP-30-1997 1,247,002,649 1,460,609,834 88,298,230 39,221,240 0 1,588,129,304 18,279,175 0 99,677,959 117,957,134 0 1,176,541,439 18,886,157 11,807,817 0 (1,691,530) 82,481,851 0 212,840,411 1,470,172,171 11,868,329 28,586,248 0 16,161,810 24,292,767 82,193,569 136,953,355 243,439,691 0 (5,162,787) (6,323,825) 0 10,743,301 (4,726,651) 1,070,690 529,850,375 5,962,239 34,961,932 0 0 7,033,919 0 16,562,485 189,214,693 10.71 .31 2.14 (.34) (.53) 0 12.297 1.02 0 0
EX-27.CLASSY 20 FDS FOR CONSERVATIVE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 Putnam Asset Allocation: Conservative Portfolio 5 CLASS Y YEAR SEP-30-1997 SEP-30-1997 454,045,685 500,774,146 39,289,887 17,529,807 0 557,593,840 18,133,817 0 45,282,829 63,416,646 0 432,294,947 1,766,695 621,763 0 (253,640) 15,396,761 0 46,739,126 494,177,194 2,567,752 18,112,692 0 6,544,454 14,135,990 16,587,637 34,561,076 65,284,703 0 (509,001) (342,603) 0 2,100,427 (1,042,532) 87,037 265,316,607 2,258,348 7,323,170 0 0 2,847,969 0 6,649,288 13,770,489 9.69 .40 1.23 (.37) (.33) 0 10.62 1.13 0 0
EX-27.CLASSY 21 FDS FOR GROWTH
6 Putnam Asset Allocation: Growth Portfolio 5 CLASS Y YEAR SEP-30-1997 SEP-30-1997 965,873,423 1,165,934,455 42,331,431 19,253,608 0 1,227,519,494 9,340,315 0 38,148,954 47,489,269 0 911,993,882 17,005,005 5,084,268 4,753,670 0 64,278,386 0 199,004,287 1,180,030,225 10,329,486 13,258,104 0 13,449,648 10,137,942 64,007,920 135,037,077 209,182,939 0 (2,813,692) (7,064,486) 0 15,043,228 (3,997,439) 874,948 671,401,955 4,566,163 26,854,647 0 0 5,592,040 0 13,855,042 186,491,013 11.47 .21 2.70 (.19) (.47) 0 13.72 1.14 0 0
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