Bonds or bond funds? August Key takeaways. Actively managed, highly diversified portfolios offer advantages for pursuing income

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1 August 2016 Bonds or bond funds? Key takeaways Properly managing a portfolio of bonds requires not only time, but a very specialized set of skills. A laddered portfolio can be inflexible, making it unable to take advantage of tactical, short-term opportunities in today s dynamic fixed-income market. Bond mutual funds offer broad diversification, professional management, and a high degree of liquidity. Putnam has been managing fixed-income portfolios since Actively managed, highly diversified portfolios offer advantages for pursuing income The bond markets have grown increasingly complex in recent decades, an evolution that suggests both new opportunities and new challenges for fixed-income investors. On the opportunity side, instruments such as high-yield bonds, emerging-market debt, and mortgage-backed securities have created ways for investors to broaden their fixed-income portfolios. However, as the credit crisis has taught us, these markets have added a layer of complexity that makes bond investing more difficult. Today, investors who want to manage a portfolio of individual bonds need years of experience, market savvy, and the time to invest in and monitor those holdings. One alternative to buying individual bonds is to invest in a bond mutual fund. Putnam Investments has been managing fixed-income assets since 1937, and today we offer funds that invest in a variety of bond market sectors, from government and municipal bonds to corporate debt and mortgage-backed securities. We take an independent view of risk and construct portfolios that offer alternatives to market indexes, providing the opportunity to maneuver in markets and establish portfolio diversification that meets investors goals.

2 August 2016 Bonds or bond funds? The benefits of bond funds Bond mutual funds offer several potential advantages over a strategy of investing in individual bonds. As a start, a bond fund benefits from professional management and the deep resources of a team of analysts who specialize in fixed-income investing, making active decisions and using the latest analytical tools to navigate changing market and economic conditions. Bond mutual funds also provide diversification benefits, as investors are able to reduce risk by spreading their bets among many bonds, as opposed to the concentrated risk of owning only a few. A single bond fund, for example, can provide investors with exposure to hundreds of individual bonds of varying issuers and maturities, in addition to exposure to a variety of bond sectors from U.S. Treasury bonds to corporate debt to emerging-market debt. A bond fund also may require less maintenance than a portfolio of individual bonds because recordkeeping is handled by the management team. Diversification does not assure a profit or protect against loss. It is possible to lose money in a diversified portfolio. Other benefits of bond funds include: Low minimum initial investment Some funds are available for an initial investment of $500 or less, compared with individual bonds whose denominations can range from $1,000 to $25,000 or more. Liquidity Investors in open-end mutual funds may redeem a portion or all of their accounts on daily basis, whereas individual bonds may be difficult to sell if conditions are not favorable.* Monthly income Distributions from bond funds are usually monthly, producing an income stream that tends to be smoother than holding individual bonds, which typically provide interest payments on a semiannual basis. 1Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. Bond mutual funds offer several advantages over individual bonds Bond funds Individual bonds Professional management Diversification Minimum investment $500 or less $1,000 to $25,000 or more Monthly income Fixed-interest payments Access to principal Principal stability If held to maturity Potential capital appreciation Dividend reinvestment 2

3 Putnam Investments putnam.com Laddering requires significant maintenance, with the need to constantly monitor individual holdings. Initial investment costs are also a potential issue: To build a diversified bond ladder frequently requires an investment of $100,000 or more. The shortcomings of bond ladders Fixed-income investors are faced with the challenge of seeking a solid and stable rate of return while protecting against the risk associated with fluctuating interest rates that affect bond prices and yields. The preferred solution is often a bond ladder a portfolio of bonds with staggered maturity dates designed to maintain a steady income stream while seeking to minimize risks. However, laddering requires significant maintenance, with the need to constantly monitor individual holdings. Initial investment costs also are a potential issue for many investors; building a diversified ladder of individual bonds can require an investment of $100,000 or more. Other drawbacks of laddering include: Loss of opportunistic buying and selling The ability to take advantage of periodic opportunities to either lock in gains or invest in attractive buys is lost when using a fixed laddering schedule. Loss of maturity and duration management opportunities Similar to sector-related opportunities, changes in interest rates along the yield curve present a number of opportunities to lock in higher yields by shifting out of areas where yields have fallen in favor of higher-yielding securities, or by developing strategies to take advantage of multiple areas of the curve. By contrast, laddering establishes a schedule of steady maturation, which limits investors opportunities and does not allow for flexibility in responding to changes along the yield curve. Higher trading costs Not only are trading costs incurred as each individual bond matures, but certain bond portfolios are subject to unfavorable price points unless invested on the scale of a large institutional investor. Loss of sector rotation opportunities With the evolution of bond markets and security structures, there is now a wide variety of fixed-income opportunities around the world. At any given time, certain areas of the fixed-income market can appear relatively inexpensive to a professional bond investor. An actively managed bond portfolio can take advantage of these perceived mispricings in search of attractive riskadjusted returns. However, a laddered portfolio is passive in this regard and can only respond to sector-related opportunities as bonds mature and capital becomes available for reinvestment. 3

4 August 2016 Bonds or bond funds? Why Putnam for fixed-income investing? Putnam has managed bond portfolios since the company s founding in Today, Putnam offers more than 20 bond funds, including open-end funds and closed-end funds that trade on the New York Stock Exchange. Within this lineup is a broad range of investment options, from conservative money market funds and municipal bond funds to high-yield funds and multisector offerings. Our strategies reflect our independent view of risk and fundamental insights on investment opportunities. Putnam fixed-income funds cover all bond sectors Putnam fund U.S. government securities Investmentgrade corporates International bonds Global high-yield bonds Tax-free investmentgrade bonds Tax-free high-yield bonds Floating - rate loans Mortgagebacked securities American Government Income Fund Diversified Income Trust Emerging Markets Income Fund Floating Rate Income Fund Global Income Trust High Yield Advantage Fund High Yield Trust Income Fund Short Duration Income Fund Tax Exempt Income Fund 3 3 Tax-Free High Yield Fund 3 3 U.S. Government Income Trust 3 3 Putnam income funds Taxable American Government Income Fund Diversified Income Trust Emerging Markets Income Fund Floating Rate Income Fund Global Income Trust Goverment Money Market Fund* High Yield Advantage Fund High Yield Trust Income Fund Short Duration Income Fund U.S. Government Income Trust Money Market Fund* Tax free AMT-Free Municipal Fund Arizona Tax Exempt Income Fund California Tax Exempt Income Fund Intermediate-Term Municipal Income Fund Massachusetts Tax Exempt Income Fund Michigan Tax Exempt Income Fund Minnesota Tax Exempt Income Fund New Jersey Tax Exempt Income Fund New York Tax Exempt Income Fund Ohio Tax Exempt Income Fund Pennsylvania Tax Exempt Income Fund Tax Exempt Income Fund Tax-Free High Yield Fund 1Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in this fund. 4

5 Putnam Investments putnam.com The team thinks about fixed-income markets with a 360-degree view Successful investing in today s markets requires a broad-based approach, the flexibility to exploit a range of sectors and investment opportunities, and a keen understanding of the complex global interrelationships that drive the markets. That s why Putnam has over 90 fixed-income professionals focusing on key areas such as global rates, securitized vehicles, corporate credit, emerging markets, currency, and portfolio construction. Together, our team offers comprehensive coverage of every aspect of the fixed-income world, based not only on sectors, but also on the broad sources of risk and opportunities most likely to drive returns. Integrated approach to diversification and portfolio construction SECTOR SPECIALISTS research investment opportunities while sharing ideas and information, and implement trades, pursuing specific investment opportunities within their budgeted strategy allocations SECTOR SPECIALISTS SENIOR TEAM PORTFOLIO CONSTRUCTION SENIOR TEAM MEMBERS evaluate opportunities, formulating investment strategies that offer attractive risk/return profiles PORTFOLIO CONSTRUCTION TEAM determines appropriate strategy weightings based on risk composition and specific objectives 5

6 August 2016 Bonds or bond funds? Three strategies for pursuing a wide range of income opportunities 1. A nimble, core portfolio focused on capturing a range of opportunities: Putnam Income Fund The goal of generating consistently solid relative returns in today s bond market requires a commitment to seeking out opportunities in every corner of the fixed-income universe. By using rigorous fundamental research, Putnam Income Fund seeks to capture investment opportunities in a range of sectors, including areas beyond those in the benchmark index that the team believes offer the most compelling risk/return profiles areas of the market that bigger bond funds cannot typically invest in efficiently. Putnam Income Fund as of 6/30/16 Portfolio composition** Agency pass-through 58% Commercial MBS 25 Investment-grade corporate bonds 25 Agency CMO 16 Residential MBS (non-agency) 9 High-yield corporate bonds 1 Emerging-market bonds 1 Asset-backed securities (ABS) 1 Net cash 13 Life-of-fund return at NAV*: day SEC yield : 3.33 Average effective duration : 5.51 years See last page for fund performance. Allocations will vary over time. International investments compose 6.74% of the portfolio. 2. A broadly diversified portfolio designed to capture multiple sources of returns: Putnam Diversified Income Trust This fund applies a go anywhere strategy to uncover the most attractive opportunities in the fixed-income markets, including the mortgage-backed, foreign-bond, emerging-market, and corporate-debt sectors. The investment team seeks to diversify the portfolio to benefit from multiple sources of return, avoiding reliance on declining interest rates to generate performance. Putnam Diversified Income Trust as of 6/30/16 Portfolio composition** Agency pass-through 38% Commercial MBS 29 High-yield corporate bonds 24 Agency CMO 16 Residential MBS (non-agency) 12 Emerging-market bonds 11 International Treasury/agency 4 Investment-grade corporate bonds 3 Bank loans 2 Net cash 9 Life-of-fund return at NAV*: day SEC yield : 5.76 Average effective duration : See last page for fund performance years Allocations will vary over time. International investments compose 19.34% of the portfolio. 1Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares is shown at NAV and does not reflect the 4.00%. Had the been reflected, returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. 2Based only on investment income, calculated using the maximum offering price in accordance with SEC guidelines. 3Average effective duration provides a measure of a fund s interest-rate sensitivity. The longer a fund s duration, the more sensitive the fund is to shifts in interest rates. 5Allocations may not total 100% of net assets because the table includes the notional value of derivatives (the economic value for purposes of calculating periodic payment obligations), in addition to the market value of securities. 6

7 Putnam Investments putnam.com 3. A focus on generating tax-free income: Putnam Tax Exempt Income Fund With a soaring federal debt and significant budget gaps at the state level, investors tax burdens are not likely to get any smaller over the long term. For investors who seek to generate a stream of income free from federal and state income taxes, Putnam Tax Exempt Income Fund is worth considering. Putnam Tax Exempt Income Fund as of 6/30/16 Life-of-fund return at NAV*: 6.59% Option-adjusted duration: 6.54 years 30-day SEC yield : 1.26% See last page for fund performance. Protecting investors principal, the fund s NAV has remained stable Feb 89 Federal government bails out savings and loan industry Dec 94 Orange County, CA, declares bankruptcy Sept 01 Terrorists attack World Trade Center and Pentagon Sept 98 Long-Term Capital Management collapses June 08 Credit ratings cut for municipal bond insurers Summer 07 Subprime mortgage crisis Aug 11 S&P cuts ratings on Treasuries and 11,000 munis with ties to federal government June 13 S&P revises its outlook on Treasuries to stable from negative /30/16 On 10/30/89, this fund experienced a three-for-one split. The price before the split was $25.83 and after the split was $8.61. Prices prior to this have been adjusted to reflect the split. 1Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, yield, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares is shown at NAV and does not reflect the 4.00%. Had the been reflected, returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. 2Based only on investment income, calculated using the maximum offering price in accordance with SEC guidelines. 3Option-adjusted duration provides a measure of a fund s interest-rate sensitivity. The longer a fund s duration, the more sensitive the fund is to shifts in interest rates. Conclusion Bond mutual funds hold several advantages over a portfolio of individual bonds. They are managed by professionals, provide a diversified solution, and offer low minimum investments when compared with individual bonds. A portfolio of bond funds can replace the labor-intensive strategy of managing bond ladders, as well as the drawbacks associated with ladders, such as higher trading costs, the loss of opportunistic buying and selling, and limited flexibility to implement sector rotation or yield curve strategies. Putnam has over 90 fixed-income professionals focusing on key areas such as global rates, securitized vehicles, credit, emerging markets, currency, risk management, and portfolio construction. 7

8 August 2016 Bonds or bond funds? Annualized total return for class A shares as of 6/30/16 Income Fund (PINCX) Inception: 11/1/54 Before After Barclays U.S. Aggregate Bond Index 1 year -0.83% -4.80% 6.00% 3 years years years Life of fund Total expense ratio 0.86% Diversified Income Trust (PDINX) Inception: 10/3/88 Before After Barclays U.S. Aggregate Bond Index 1 year -5.33% -9.12% 6.00% 3 years years years Life of fund Total expense ratio 0.98% Tax Exempt Income Fund (PTAEX) Inception: 12/31/76 Before After Barclays Municipal Bond Index 1 year 7.06% 2.77% 7.65% 3 years years years Life of fund Total expense ratio 0.75% Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares after assumes reinvestment of distributions and does not account for taxes. After-- returns reflect a maximum 4.00% load. For a portion of the periods, the funds had expense limitations, without which returns would have been lower. To obtain the most recent month-end performance, visit putnam.com. Consider these risks before investing: Mutual funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging-market securities, including illiquidity and volatility. Lower-rated bonds may offer higher yields in return for more risk. Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. Since the funds invest in tax-exempt bonds, which, to be treated as tax-exempt under the Internal Revenue Code, may be issued only by limited types of issuers for limited types of projects, the funds investments may be focused in certain market segments. Consequently, the funds may be more vulnerable to fluctuations in the values of the securities they hold than a fund that invests more broadly. Tax-free funds may not be suitable for IRAs and other non-taxable accounts. Derivatives also involve the risk, in the case of many over-the-counter instruments, of the potential inability to terminate or sell derivatives positions and the potential failure of the other party to the instrument to meet its obligations. Bond investments are subject to interest-rate risk, which means the prices of the fund s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Bond prices may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions of the risk of default, changes in government intervention, and factors related to a specific issuer or industry. You may lose money by investing in these funds. Investors should carefully consider the investment objectives, risks, s, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at Please read the prospectus carefully before investing. Putnam Retail Management Putnam Investments One Post Office Square Boston, MA putnam.com II /16