EDGAR Filing Documents for 0000898745-14-001321

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PRINCIPAL FUNDS, INC. (“PFI”)

Class A Shares

Class C Shares

Class J Shares

Class P Shares

Class Institutional Shares

Class R-1 Shares

Class R-2 Shares

Class R-3 Shares

Class R-4 Shares

Class R-5 Shares

Class R-6 Shares

The date of this Prospectus is __________________ .

The ticker symbols for series and share classes are on the next page.

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



Ticker Symbols by Share Class
Fund	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Bond & Mortgage Securities	PRBDX	PBMCX	PBMJX		PMSIX	PBOMX	PBMNX	PBMMX	PBMSX	PBMPX
California Municipal	SRCMX	SRCCX			Pending
Core Plus Bond I					PCBZX	PCBRX	PCBBX	PCIRX	PCBDX	PCBEX
Diversified International	PRWLX	PDNCX	PIIJX	PDIPX	PIIIX	PDVIX	PINNX	PINRX	PINLX	PINPX
Equity Income	PQIAX	PEUCX		PEQPX	PEIIX	PIEMX	PEINX	PEIOX	PEIPX	PEIQX
Global Diversified Income	PGBAX	PGDCX		PGDPX	PGDIX
Global Real Estate Securities	POSAX	POSCX		POSPX	POSIX						PGRSX
Government & High Quality Bond	CMPGX	CCUGX	PMRJX	PGSPX	PMRIX	PMGRX	PFMRX	PRCMX	PMRDX	PMREX
High Yield	CPHYX	CCHIX		PYHPX	PHYTX
High Yield I	PYHAX				PYHIX
Income	CMPIX	CNMCX	PIOJX	PIMPX	PIOIX	PIOMX	PIONX	PIOOX	PIOPX	PIOQX	PICNX
Inflation Protection	PITAX	PPOCX	PIPJX		PIPIX	PISPX	PBSAX	PIFPX	PIFSX	PBPPX
International Emerging Markets	PRIAX	PMKCX	PIEJX	PIEPX	PIEIX	PIXEX	PEASX	PEAPX	PESSX	PEPSX
International I	PFAFX			PTRPX	PINIX	PPISX	PSPPX	PRPPX	PUPPX	PTPPX
LargeCap Blend II			PLBJX		PLBIX	PLBSX	PPZNX	PPZMX	PPZSX	PPZPX
LargeCap Growth	PRGWX	PLGCX	PGLJX	PGLPX	PGLIX	PLSGX	PCPPX	PLGPX	PEPPX	PDPPX
LargeCap Growth I	PLGAX		PLGJX	PVCPX	PLGIX	PCRSX	PPUNX	PPUMX	PPUSX	PPUPX	PLCGX
LargeCap Growth II			PPLJX		PPIIX	PDASX	PPTNX	PPTMX	PPTSX	PPTPX
LargeCap S&P 500 Index	PLSAX	PLICX	PSPJX		PLFIX	PLPIX	PLFNX	PLFMX	PLFSX	PLFPX
LargeCap Value	PCACX	PLUCX	PVLJX	PVFPX	PVLIX	PLSVX	PLVNX	PLVMX	PLVSX	PLVPX
LargeCap Value III			PLVJX		PLVIX	PESAX	PPSNX	PPSFX	PPSSX	PPSRX
MidCap	PEMGX	PMBCX	PMBJX	PMCPX	PCBIX	PMSBX	PMBNX	PMBMX	PMBSX	PMBPX
MidCap Growth			PMGJX		PGWIX	PMSGX	PGPPX	PFPPX	PIPPX	PHPPX
MidCap Growth III			PPQJX		PPIMX	PHASX	PPQNX	PPQMX	PPQSX	PPQPX
MidCap S&P 400 Index			PMFJX		MPSIX	PMSSX	PMFNX	PMFMX	PMFSX	PMFPX
MidCap Value I			PVEJX		PVMIX	PLASX	PABUX	PMPRX	PABWX	PABVX
MidCap Value III	PVCAX		PMCJX	PMVPX	PVUIX	PMSVX	PKPPX	PJPPX	PMPPX	PLPPX	PCMIX
Money Market	PCSXX	PPCXX	PMJXX		PVMXX
Overseas					PINZX	PINQX	PINSX	PINTX	PINUX	PINGX
Principal Capital Appreciation	CMNWX	CMNCX		PCFPX	PWCIX	PCAMX	PCANX	PCAOX	PCAPX	PCAQX
Principal LifeTime Strategic Income	PALTX		PLSJX		PLSIX	PLAIX	PLSNX	PLSMX	PLSSX	PLSPX
Principal LifeTime 2010	PENAX		PTAJX		PTTIX	PVASX	PTANX	PTAMX	PTASX	PTAPX
Principal LifeTime 2015					LTINX	LTSGX	LTASX	LTAPX	LTSLX	LTPFX
Principal LifeTime 2020	PTBAX		PLFJX		PLWIX	PWASX	PTBNX	PTBMX	PTBSX	PTBPX
Principal LifeTime 2025					LTSTX	LTSNX	LTADX	LTVPX	LTEEX	LTPDX
Principal LifeTime 2030	PTCAX		PLTJX		PMTIX	PXASX	PTCNX	PTCMX	PTCSX	PTCPX
Principal LifeTime 2035					LTIUX	LTANX	LTVIX	LTAOX	LTSEX	LTPEX
Principal LifeTime 2040	PTDAX		PTDJX		PTDIX	PYASX	PTDNX	PTDMX	PTDSX	PTDPX
Principal LifeTime 2045					LTRIX	LTRGX	LTRSX	LTRVX	LTRLX	LTRDX
Principal LifeTime 2050	PPEAX		PFLJX		PPLIX	PZASX	PTENX	PTERX	PTESX	PTEFX
Principal LifeTime 2055					LTFIX	LTFGX	LTFSX	LTFDX	LTFLX	LTFPX
Principal LifeTime 2060			PLTAX		PLTZX	PLTRX	PLTBX	PLTCX	PLTMX	PLTOX
Principal LifeTime Hybrid Income					PHTFX			PHTEX		PHTDX
Principal LifeTime Hybrid 2015					PHTMX			PHTCX		PHTRX
Principal LifeTime Hybrid 2020					PHTTX			PHWIX		PHTIX
Principal LifeTime Hybrid 2025					PHTQX			PHTPX		PHTOX
Principal LifeTime Hybrid 2030					PHTNX			PHTLX		PHTKX
Principal LifeTime Hybrid 2035					PHTJX			PHTHX		PHTGX
Principal LifeTime Hybrid 2040					PLTQX			PLTGX		PHTZX
Principal LifeTime Hybrid 2045					PHTYX			PHTWX		PHTVX
Principal LifeTime Hybrid 2050					PHTUX			PHTSX		PLRJX
Principal LifeTime Hybrid 2055					PLTNX			PLTLX		PLTKX
Principal LifeTime Hybrid 2060					PLTHX			PLTEX		PLTDX
Real Estate Securities	PRRAX	PRCEX	PREJX	PIRPX	PIREX	PRAEX	PRENX	PRERX	PRETX	PREPX
SAM Balanced	SABPX	SCBPX	PSAJX		PSBIX	PSBGX	PSBVX	PBAPX	PSBLX	PSBFX
SAM Conservative Balanced	SAIPX	SCIPX	PCBJX		PCCIX	PCSSX	PCNSX	PCBPX	PCBLX	PCBFX
SAM Conservative Growth	SAGPX	SCGPX	PCGJX		PCWIX	PCGGX	PCGVX	PCGPX	PCWSX	PCWPX
SAM Flexible Income	SAUPX	SCUPX	PFIJX		PIFIX	PFIGX	PFIVX	PFIPX	PFILX	PFIFX
SAM Strategic Growth	SACAX	SWHCX	PSWJX		PSWIX	PSGGX	PSGVX	PSGPX	PSGLX	PSGFX
Short-Term Income	SRHQX	STCCX	PSJIX	PSTPX	PSHIX	PSIMX	PSINX	PSIOX	PSIPX	PSIQX
SmallCap Blend	PLLAX	PSMCX	PSBJX	PSFPX	PSLIX	PSABX	PSBNX	PSBMX	PSBSX	PSBPX
SmallCap Growth I			PSIJX		PGRTX	PNASX	PPNNX	PPNMX	PPNSX	PPNPX	PCSMX
SmallCap S&P 600 Index			PSSJX		PSSIX	PSAPX	PSSNX	PSSMX	PSSSX	PSSPX
SmallCap Value II	PSVAX		PSMJX	PSCPX	PPVIX	PCPTX	PKARX	PJARX	PSTWX	PLARX	PSMVX
Tax-Exempt Bond	PTEAX	PTBCX

TABLE OF CONTENTS



FUND SUMMARIES	4
BOND & MORTGAGE SECURITIES FUND	4
CALIFORNIA MUNICIPAL	10
CORE PLUS BOND FUND I	14
DIVERSIFIED INTERNATIONAL FUND	19
EQUITY INCOME FUND	24
GLOBAL DIVERSIFIED INCOME FUND	29
GLOBAL REAL ESTATE SECURITIES FUND	36
GOVERNMENT & HIGH QUALITY BOND FUND	42
HIGH YIELD FUND	47
HIGH YIELD FUND I	51
INCOME FUND	55
INFLATION PROTECTION FUND	61
INTERNATIONAL EMERGING MARKETS FUND	66
INTERNATIONAL FUND I	71
LARGECAP BLEND FUND II	76
LARGECAP GROWTH FUND	80
LARGECAP GROWTH FUND I	85
LARGECAP GROWTH FUND II	90
LARGECAP S&P 500 INDEX FUND	94
LARGECAP VALUE FUND	99
LARGECAP VALUE FUND III	104
MIDCAP FUND	108
MIDCAP GROWTH FUND	113
MIDCAP GROWTH FUND III	117
MIDCAP S&P 400 INDEX FUND	121
MIDCAP VALUE FUND I	125
MIDCAP VALUE FUND III	129
MONEY MARKET FUND	135
OVERSEAS FUND	139
PRINCIPAL CAPITAL APPRECIATION FUND	143
PRINCIPAL LIFETIME STRATEGIC INCOME FUND	148
PRINCIPAL LIFETIME 2010 FUND	155
PRINCIPAL LIFETIME 2015 FUND	162
PRINCIPAL LIFETIME 2020 FUND	168
PRINCIPAL LIFETIME 2025 FUND	175
PRINCIPAL LIFETIME 2030 FUND	181
PRINCIPAL LIFETIME 2035 FUND	188
PRINCIPAL LIFETIME 2040 FUND	193
PRINCIPAL LIFETIME 2045 FUND	199
PRINCIPAL LIFETIME 2050 FUND	204
PRINCIPAL LIFETIME 2055 FUND	210



PRINCIPAL LIFETIME 2060 FUND	216
PRINCIPAL LIFETIME HYBRID INCOME	221
PRINCIPAL LIFETIME HYBRID 2015	225
PRINCIPAL LIFETIME HYBRID 2020	230
PRINCIPAL LIFETIME HYBRID 2025	235
PRINCIPAL LIFETIME HYBRID 2030	240
PRINCIPAL LIFETIME HYBRID 2035	245
PRINCIPAL LIFETIME HYBRID 2040	250
PRINCIPAL LIFETIME HYBRID 2045	254
PRINCIPAL LIFETIME HYBRID 2050	258
PRINCIPAL LIFETIME HYBRID 2055	262
PRINCIPAL LIFETIME HYBRID 2060	266
REAL ESTATE SECURITIES FUND	270
SAM (STRATEGIC ASSET MANAGEMENT) BALANCED PORTFOLIO	275
SAM (STRATEGIC ASSET MANAGEMENT) CONSERVATIVE BALANCED PORTFOLIO	281
SAM (STRATEGIC ASSET MANAGEMENT) CONSERVATIVE GROWTH PORTFOLIO	287
SAM (STRATEGIC ASSET MANAGEMENT) FLEXIBLE INCOME PORTFOLIO	293
SAM (STRATEGIC ASSET MANAGEMENT) STRATEGIC GROWTH PORTFOLIO	299
SHORT-TERM INCOME FUND	304
SMALLCAP BLEND FUND	309
SMALLCAP GROWTH FUND I	314
SMALLCAP S&P 600 INDEX FUND	318
SMALLCAP VALUE FUND II	322
TAX-EXEMPT BOND FUND	327
ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS	331
PORTFOLIO HOLDINGS INFORMATION	360
MANAGEMENT OF THE FUNDS	361
PRICING OF FUND SHARES	374
CONTACT PRINCIPAL FUNDS, INC.	375
PURCHASE OF FUND SHARES	375
REDEMPTION OF FUND SHARES	379
EXCHANGE OF FUND SHARES	382
DIVIDENDS AND DISTRIBUTIONS	383
FREQUENT PURCHASES AND REDEMPTIONS	385
TAX CONSIDERATIONS	385
CHOOSING A SHARE CLASS AND THE COSTS OF INVESTING	387
DISTRIBUTION PLANS AND INTERMEDIARY COMPENSATION	392
FUND ACCOUNT INFORMATION	395
FINANCIAL HIGHLIGHTS	397
APPENDIX A - DESCRIPTION OF BOND RATINGS	398
APPENDIX B- RELATED PERFORMANCE OF ORIGIN ASSET MANAGEMENT LLP	403
ADDITIONAL INFORMATION	405

BOND & MORTGAGE SECURITIES FUND


Objective:	The Fund seeks to provide current income.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.52%	0.52%	0.52%	0.52%	0.52%	0.52%	0.52%	0.52%	0.52%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.25%	0.51%	0.17%	—%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	1.02%	2.03%	0.94%	0.52%	1.40%	1.27%	1.09%	0.90%	0.78%
Fee Waiver and Expense Reimbursement (2)(3)	(0.14)%	(0.28)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.88%	1.75%	0.93%	0.52%	1.40%	1.27%	1.09%	0.90%	0.78%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.88% for Class A and 1.75% for Class C shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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

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



	1 year	3 years	5 years	10 years
Class A	$461	$672	$902	$1,562
Class C	278	605	1,063	2,332
Class J	195	298	519	1,154
Institutional Class	53	167	291	653
Class R-1	143	443	766	1,680
Class R-2	129	403	697	1,534
Class R-3	111	347	601	1,329
Class R-4	92	287	498	1,108
Class R-5	80	249	433	966

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	178	605	1,063	2,332
Class J	95	298	519	1,154

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 205.6% of the average value of its portfolio.

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in intermediate maturity fixed-income securities rated BBB- or higher by Standard & Poor's Rating Service ("S&P") or Baa3 or higher by Moody's Investors Service, Inc. ("Moody's") at the time of each purchase. The fixed-income securities in which the Fund invests include securities issued or guaranteed by the U.S. government or its agencies or instrumentalities; asset-backed securities or mortgage-backed securities representing an interest in a pool of mortgage loans or other assets; corporate bonds; and securities issued or guaranteed by foreign governments payable in U.S. dollars. The Fund also invests in foreign securities, and up to 20% of its assets in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). Under normal circumstances, the Fund maintains an average portfolio duration that is within ±25% of the duration of the Barclays U.S. Aggregate Bond Index, which as of December 31, 2013 was 5.55 years.

The Fund actively trades portfolio securities and enters into dollar roll transactions which may involve leverage. The Fund utilizes derivative strategies for hedging or managing fixed income exposure. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. Specifically, the Fund invests in Treasury futures or interest rate swaps to manage the fixed-income exposure (including for hedging purposes) and credit default swaps to increase or decrease, in an efficient manner, exposures to certain sectors or individual issuers. The Fund uses forwards to manage its foreign currency exposure.

During the fiscal year ended October 31, 2013, the average ratings of the Fund’s fixed-income assets, based on market value at each month-end, were as follows (all ratings are by Moody’s):



54.50% in securities rated Aaa	19.52% in securities rated Baa	1.46% in securities rated Caa	0.00% in securities rated D
2.76% in securities rated Aa	5.08% in securities rated Ba	0.00% in securities rated Ca	1.02% in securities not rated
10.58% in securities rated A	5.06% in securities rated B	0.02% in securities rated C

Principal Risks

The value of your investment in the Fund changes with the value of the Fund's investments. Many factors affect that value, and it is possible to lose money by investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund, in alphabetical order, are:

Active Trading Risk. A fund that has a portfolio turnover rate over 100% is considered actively traded. Actively trading portfolio securities may accelerate realization of taxable gains and losses, lower fund performance and may result in high portfolio turnover rates and increased brokerage costs.

Basis Risk. A hedge using derivatives and/or securities could expose the fund to basis risk. Basis risk can arise when a change in the value of a hedge does not match a change in the value of the asset it hedges. In other words, the change in value of the hedge could move in a direction that does not match the change in value of the underlying asset resulting in a risk of loss to the fund.

Counterparty Risk. Counterparty risk is the risk that the counterparty to a derivatives contract or repurchase agreement, the borrower of a portfolio’s securities, or other obligation, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise to honor its obligations.

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Fixed-Income Securities Risk. Fixed-income securities are subject to interest rate risk and credit quality risk. The market value of fixed-income securities generally declines when interest rates rise, and an issuer of fixed-income securities could default on its payment obligations.

Foreign Securities Risk. The risks of foreign securities include loss of value as a result of: political or economic instability; nationalization, expropriation or confiscatory taxation; settlement delays; and limited government regulation (including less stringent reporting, accounting, and disclosure standards than are required of U.S. companies).

High Yield Securities Risk. High yield fixed-income securities (commonly referred to as "junk bonds") are subject to greater credit quality risk than higher rated fixed-income securities and should be considered speculative.

Leverage Risk. Leverage created by borrowing or certain types of transactions or investments may impair the fund's liquidity, cause it to liquidate positions at an unfavorable time, increase volatility of the fund's net asset value, or diminish the fund's performance.

Portfolio Duration Risk. Portfolio duration is a measure of the expected life of a fixed-income security and its sensitivity to changes in interest rates. The longer a fund's average portfolio duration, the more sensitive the fund will be to changes in interest rates.

Prepayment Risk. Unscheduled prepayments on mortgage-backed and asset-backed securities may have to be reinvested at lower rates. A reduction in prepayments may increase the effective maturities of these securities, exposing them to the risk of decline in market value over time (extension risk).

Real Estate Securities Risk. Real estate securities are subject to the risks associated with direct ownership of real estate, including declines in value, adverse economic conditions, increases in expenses, regulatory changes and environmental problems. Investing in securities of companies in the real estate industry, subjects a fund to the special risks associated with the real estate market including factors such as loss to casualty or condemnation, changes in real estate values, property taxes, interest rates, cash flow of underlying real estate assets, occupancy rates, government regulations affecting zoning, land use and rents, and the management skill and creditworthiness of the issuer.

Risk of Being an Underlying Fund. A fund is subject to the risk of being an underlying fund to the extent that a fund of funds invests in the fund. An underlying fund of a fund of funds may experience relatively large redemptions or investments as the fund of funds periodically reallocates or rebalances its assets. These transactions may cause the underlying fund to sell portfolio securities to meet such redemptions, or to invest cash from such investments, at times it would not otherwise do so, and may as a result increase transaction costs and adversely affect underlying fund performance.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

U.S. Government Sponsored Securities Risk. Securities issued by U.S. government-sponsored or -chartered enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Federal Home Loan Banks are not issued or guaranteed by the U.S. Treasury.

Performance

The following information provides some indication of the risks of investing in the Fund. Past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. You may get updated performance information by calling 1-800-222-5852 or online at:


•	For Classes A, C, and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each share class of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

For periods prior to the inception date of Class A shares (June 28, 2005) and Class C shares (January 16, 2007), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares, adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	9.08	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(6.25	)%

⁽¹⁾The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	(5.11)%	7.40%	3.33%
Class A Return After Taxes on Distributions	(5.99)%	6.18%	1.98%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(2.89)%	5.32%	2.05%
Class C Return Before Taxes	(3.20)%	7.36%	2.91%
Class J Return Before Taxes	(2.48)%	8.12%	3.56%
Institutional Class Return Before Taxes	(1.03)%	8.66%	4.16%
Class R-1 Return Before Taxes	(1.90)%	7.71%	3.24%
Class R-2 Return Before Taxes	(1.78)%	7.85%	3.38%
Class R-3 Return Before Taxes	(1.69)%	8.04%	3.56%
Class R-4 Return Before Taxes	(1.48)%	8.26%	3.76%
Class R-5 Return Before Taxes	(1.38)%	8.37%	3.89%
Barclays U.S. Aggregate Bond Index (reflects no deduction for fees, expenses, or taxes)	(2.02)%	4.44%	4.55%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

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

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC

• William C. Armstrong (since 2000), Portfolio Manager

• Timothy R. Warrick (since 2000), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading), through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

The Fund’s distributions you receive are generally subject to federal income tax as ordinary income or capital gain and may also be subject to state and local taxes, unless you are tax-exempt or your account is tax-deferred in which case your distributions would be taxed when withdrawn from the tax-deferred account.

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank, insurance company, investment adviser, etc.), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment, or to recommend one share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary's website for more information.

CALIFORNIA MUNICIPAL FUND


Objective:	The Fund seeks to provide as high a level of current income that is exempt from federal and state personal income tax as is consistent with prudent investment management and preservation of capital.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	Institutional
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	Institutional
Management Fees	0.45%	0.45%	0.45%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A
Other Expenses
Interest Expense	0.04%	0.04%	0.04%
Remainder of Other Expenses⁽¹⁾	0.07%	0.35%	0.11%
Total Annual Fund Operating Expenses	0.81%	1.84%	0.60%
Expense Reimbursement⁽²⁾	N/A	N/A	—%
Total Annual Fund Operating Expenses after Expense Reimbursement	0.81%	1.84%	0.60%
(1) Based on estimated amounts for the current fiscal year. (Institutional Class)

(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.60% for Institutional Class shares. It is expected that the expense limit will continue through the period ending February 29, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year		3 years	5 years	10 years
Class A		$455	$624	$808	$1,339
Class C	287		579	995	2,159
Institutional Class	57		179

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	187	579	995	2,159

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in California municipal obligations (securities issued by or on behalf of state or local governments and other public authorities) at the time of each purchase. Generally, these municipal obligations pay interest that is exempt from State personal income tax and federal income tax. These obligations may include bonds that generate interest payments that are subject to the alternative minimum tax. Under normal circumstances, the Fund maintains an average portfolio duration that is within ±50% of the duration of the Barclays California Municipal Bond Index, which as of December 31, 2013 was 8.89 years . The Fund may invest up to 20% of its assets in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). The Fund also invests in inverse floating rate obligations, which are generally more volatile than other types of municipal obligations and may involve leverage.

Principal Risks

Geographic Concentration Risk. A fund that invests significant portions of its assets in particular geographic areas (a particular state, such as California or Illinois, or a particular country or region) has greater exposure than other funds to economic conditions and developments in those areas.

Inverse Floating Rate Investments. Inverse floating rate investments are extremely sensitive to changes in interest rates and in some cases their market value may be extremely volatile.

Municipal Securities Risk. Principal and interest payments on municipal securities may not be guaranteed by the issuing body and may be payable only from a particular source. That source may not perform as expected and payment obligations may not be made or made on time.

Performance


•	For Classes A and C shares - www.principalfunds.com.


•	For Institutional Class shares - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). These annual returns do not reflect sales charges; if they did, results would be lower. The table shows, for each share class of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

The Fund commenced operations after succeeding to the operations of another fund on January 12, 2007. Performance for periods prior to that date is based on the performance of the predecessor fund, which commenced operations on July 25, 1989.

For periods prior to the inception date of Institutional Class shares (____________, 2015), performance shown in the table for Institutional Class is based on the performance of the Fund's Class A shares adjusted to reflect the fees and expenses of the Institutional Class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class A shares.

Total Returns as of December 31 (Class A shares)



Highest return for a quarter during the period of the bar chart above:	Q3 '09	11.85	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(10.08	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	(7.30)%	7.12%	2.75%
Class A Return After Taxes on Distributions	(7.30)%	7.12%	2.71%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(2.32)%	6.70%	3.11%
Class C Return Before Taxes	(5.50)%	6.91%	2.26%
Institutional Class Return Before Taxes	(3.36)%	7.93%	3.14%
Barclays California Municipal Index (reflects no deduction for fees, expenses, or taxes)	(1.76)%	6.63%	4.61%

differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A shares only and would be different for the other share classes.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	James Noble (since 2013), Portfolio Manager


•	James Welch (since 2014), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

While the Fund intends to distribute income that is exempt from regular federal and California income taxes, a portion of the Fund’s distributions may be subject to California or federal income taxes or to the federal alternative minimum tax.

Payments to Broker-Dealers and Other Financial Intermediaries

CORE PLUS BOND FUND I

On November 10, 2014, the Board of Directors of Principal Funds, Inc. approved the acquisition of the assets of the Core Plus Bond Fund I by the Bond and Mortgage Securities Fund (the “Proposed Merger”). The Proposed Merger will be submitted for shareholder vote at a Special Meeting of Shareholders of Core Plus Bond Fund I tentatively scheduled for February 13, 2015. Additional information about the Proposed Merger will be provided in the Proxy Statement/Prospectus that is expected to be mailed to record date shareholders of Core Plus Bond Fund I (the “Fund”) in December 2014. If shareholders approve, the Proposed Merger is expected to occur on or about February 20, 2015.

Due to a planned series of large redemptions by investors affiliated with Principal Management Corporation (“PMC”), the Fund’s assets will decline significantly before the Proposed Merger. On November 7, 2014, PMC imposed voluntarily caps on Fund expense ratios at their then current levels; these will remain in place until the Proposed Merger is completed.


Objective:	The Fund seeks maximum total return, consistent with preservation of capital and prudent investment management.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.55%	0.55%	0.55%	0.55%	0.55%	0.55%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.56%	1.43%	1.30%	1.12%	0.93%	0.81%

Example

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

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



	1 year	3 years	5 years	10 years
Institutional Class	$57	$179	$313	$701
Class R-1	146	452	782	1,713
Class R-2	132	412	713	1,568
Class R-3	114	356	617	1,363
Class R-4	95	296	515	1,143
Class R-5	83	259	450	1,002

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in a diversified portfolio of fixed-income instruments of varying maturities, represented by forwards or

derivatives such as options, futures contracts, or swap agreements, at the time of each purchase. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The Fund invests in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, asset-backed securities or mortgage-backed securities representing an interest in a pool of mortgage loans or other assets, and debt securities and taxable municipal bonds. The average portfolio duration of this Fund normally varies within ±2 years of the duration of the Barclays U.S. Aggregate Bond Index, which as of December 31, 2013 was 5.27 years, as calculated by PIMCO. The Fund invests primarily in investment grade debt securities, but may invest up to 20% of its total assets in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). The Fund invests in securities denominated in foreign currencies and in securities of foreign issuers, including securities tied to emerging market countries.

The Fund actively trades portfolio securities. The Fund takes short positions. The Fund may also, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls); this may involve leverage.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Emerging Market Risk. Investments in emerging market countries may have more risk than those in developed market countries because the emerging markets are less developed and more illiquid. Emerging market countries can also be subject to increased social, economic, regulatory, and political uncertainties and can be extremely volatile.

Short Sale Risk. A short sale involves the sale by the fund of a security that it does not own with the hope of purchasing the same security at a later date at a lower price. A fund may also enter into a short derivative position through a futures contract or swap agreement. If the price of the security or derivative has increased during this time, then the fund will incur a loss equal to the increase in price from the time that the short sale was entered into plus any premiums and interest paid to the third party. Therefore, short sales involve the risk that losses may be exaggerated, potentially losing more money than the actual cost of the investment. Also, there is the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the fund.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Performance

The bar chart shows the investment returns of the Fund’s Institutional Class shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each share class of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

Life of Fund results are measured from the date the Fund's shares were first sold (September 30, 2008).

Total Returns as of December 31 (Institutional Class shares)



Highest return for a quarter during the period of the bar chart above:	Q3 '09	4.06	%
Lowest return for a quarter during the period of the bar chart above:	Q2 '13	(3.34	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Institutional Class Return Before Taxes	(1.78)%	4.85%	5.77%
Institutional Class Return After Taxes on Distributions	(2.81)%	3.35%	4.30%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	(1.01)%	3.24%	3.99%
Class R-1 Return Before Taxes	(2.69)%	3.93%	4.86%
Class R-2 Return Before Taxes	(2.48)%	4.09%	5.02%
Class R-3 Return Before Taxes	(2.28)%	4.26%	5.19%
Class R-4 Return Before Taxes	(2.15)%	4.50%	5.42%
Class R-5 Return Before Taxes	(2.02)%	4.58%	5.51%
Barclays U.S. Aggregate Bond Index (reflects no deduction for fees, expenses, or taxes)	(2.02)%	4.44%	5.12%

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

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Pacific Investment Management Company LLC


•	Mark R. Kiesel (since 2014), CIO Global Credit and Managing Director


•	Scott A. Mather (since 2014), CIO U.S. Core Strategies and Managing Director


•	Mihir P. Worah (since 2014), CIO Return and Asset Allocation and Managing Director

Purchase and Sale of Fund Shares

There are no minimum initial or subsequent investment requirements for an eligible purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

DIVERSIFIED INTERNATIONAL FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.84%	0.84%	0.84%	0.84%	0.84%	0.84%	0.84%	0.84%	0.84%	0.84%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.31%	0.51%	0.21%	1.45%	0.03%	0.55%	0.47%	0.34%	0.30%	0.28%
Total Annual Fund Operating Expenses	1.40%	2.35%	1.30%	2.29%	0.87%	1.74%	1.61%	1.43%	1.24%	1.12%
Fee Waiver and Expense Reimbursement(2) (3)	N/A	(0.27)%	(0.01)%	(1.25)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.40%	2.08%	1.29%	1.04%	0.87%	1.74%	1.61%	1.43%	1.24%	1.12%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 2.08% for Class C shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$685	$969	$1,274	$2,137
Class C	311	703	1,227	2,662
Class J	231	411	712	1,567
Class P	106	575	1,092	2,512
Institutional Class	89	278	482	1,073
Class R-1	177	548	944	2,052
Class R-2	164	508	876	1,911
Class R-3	146	452	782	1,713
Class R-4	126	393	681	1,500
Class R-5	114	356	617	1,363

With respect to Class C, and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	211	703	1,227	2,662
Class J	131	411	712	1,567

Portfolio Turnover

Principal Investment Strategies

The Fund invests primarily in foreign equity securities. The Fund has no limitation on the percentage of assets that are invested in any one country or denominated in any one currency, but the Fund typically invests in foreign securities of at least 30 countries. Primary consideration is given to securities of corporations of developed areas, such as Japan, Western Europe, Canada, Australia, and New Zealand; however, the Fund also invests in emerging market securities. The Fund invests in equity securities of small, medium, and large market capitalization companies.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

whole. Investments in smaller companies and mid-size companies may involve greater risk and price volatility than investments in larger, more mature companies.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class R-1 shares (November 1, 2004), Class A shares (June 28, 2005), Class C shares (January 16, 2007) and Class P shares (September 27, 2010), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

During 2010, the R-5 Class experienced a significant one-time gain approximately $0.08/share as the result of a settlement in an SEC administrative proceeding. If such a gain had not been recognized, the total return amounts expressed herein would have been lower.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	21.03	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '08	(24.17	)%

⁽¹⁾The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years			10 Years
Class A Return Before Taxes	11.54%	10.58	%		6.65	%
Class A Return After Taxes on Distributions	11.30%	10.57	%		6.12	%
Class A Return After Taxes on Distribution and Sale of Fund Shares	6.99%	8.68	%		5.72	%
Class C Return Before Taxes	16.22%	11.16	%		6.59	%
Class J Return Before Taxes	17.27%	11.91	%		7.21	%
Class P Return Before Taxes	18.51%	12.13	%		7.38	%
Institutional Class Return Before Taxes	18.73%	12.48	%		7.85	%
Class R-1 Return Before Taxes	17.68%	11.51	%		6.92	%
Class R-2 Return Before Taxes	17.78%	11.65	%		7.07	%
Class R-3 Return Before Taxes	18.07%	11.84	%		7.25	%
Class R-4 Return Before Taxes	18.26%	12.07	%		7.43	%
Class R-5 Return Before Taxes	18.45%	12.41	%	⁽²⁾	7.67	%	⁽²⁾
MSCI ACWI Ex-U.S. Index (reflects no deduction for fees, expenses, or taxes)	15.29%	12.81	%		7.57	%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.


^{(2 )}	During 2010, the Class experienced a significant one-time gain of approximately $0.08/share as the result of a settlement in an SEC administrative proceeding. If such gain had not been recognized, the total return amounts expressed herein would have been lower.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Paul H. Blankenhagen (since 2003), Portfolio Manager


•	Juliet Cohn (since 2004), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

EQUITY INCOME FUND


Objective:	The Fund seeks to provide a relatively high level of current income and long-term growth of income and capital.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.51%	0.51%	0.51%	0.51%	0.51%	0.51%	0.51%	0.51%	0.51%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.17%	0.15%	0.12%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.93%	1.66%	0.63%	0.52%	1.39%	1.26%	1.08%	0.89%	0.77%
Expense Reimbursement(1)	N/A	N/A	0	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	0.93%	1.66%	0.63%	0.52%	1.39%	1.26%	1.08%	0.89%	0.77%
(1) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% for Class P shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$640	$830	$1,036	$1,630
Class C	269	523	902	1,965
Class P	64	202	351	786
Institutional Class	53	167	291	653
Class R-1	142	440	761	1,669
Class R-2	128	400	692	1,523
Class R-3	110	343	595	1,317
Class R-4	91	284	493	1,096
Class R-5	79	246	428	954

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	169	523	902	1,965

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying equity securities at the time of each purchase. The Fund usually invests in equity securities of companies with large market capitalizations. For this Fund, companies with large market capitalizations are those with market capitalizations within the range of companies comprising the Russell 1000^® Value Index (as of December 31, 2013, this range was between approximately $1.126 billion and $526.685 billion). The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund also invests in real estate investment trusts and securities of foreign issuers.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Equity Securities Risk. The value of equity securities could decline if the issuer's financial condition declines or in response to overall market and economic conditions. A fund's principal market segment(s), such as large cap, mid cap or small cap stocks, or growth or value stocks, may underperform other market segments or the equity markets as a whole. Investments in smaller companies and mid-size companies may involve greater risk and price volatility than investments in larger, more mature companies.

regulation (including less stringent reporting, accounting, and disclosure standards than are required of U.S. companies).

Real Estate Investment Trusts (“REITs”) Risk. A REIT could fail to qualify for tax-free pass-through of income under the Internal Revenue Code, and fund shareholders will indirectly bear their proportionate share of the expenses of REITs in which the fund invests.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, C, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Classes R-1, R-2, R-3, R-4, and R-5 shares (March 1, 2010) and Class P shares (September 27, 2010), performance shown in the table for these classes is based on the performance of the Fund's Class A shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of Class A shares, which were first sold on May 31, 1939.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	13.97	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(19.82	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	19.69%	14.46%	7.54%
Class A Return After Taxes on Distributions	19.08%	13.98%	6.84%
Class A Return After Taxes on Distribution and Sale of Fund Shares	11.58%	11.68%	6.16%
Class C Return Before Taxes	24.81%	14.91%	7.34%
Class P Return Before Taxes	27.06%	15.97%	8.25%
Institutional Class Return Before Taxes	27.21%	16.27%	8.58%
Class R-1 Return Before Taxes	26.08%	15.28%	7.66%
Class R-2 Return Before Taxes	26.27%	15.43%	7.80%
Class R-3 Return Before Taxes	26.53%	15.62%	7.99%
Class R-4 Return Before Taxes	26.76%	15.82%	8.17%
Class R-5 Return Before Taxes	26.87%	15.93%	8.23%
Russell 1000 Value Index (reflects no deduction for fees, expenses, or taxes)	32.53%	16.67%	7.58%

⁽¹⁾The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Edge Asset Management, Inc.


•	Daniel R. Coleman (since 2010), Head of Equities, Portfolio Manager


•	David W. Simpson (since 2008), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

GLOBAL DIVERSIFIED INCOME FUND


Objective:	The Fund seeks income.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information .

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	P	Inst.
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	P	Inst.
Management Fees	0.72%	0.72%	0.72%	0.72%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A	N/A
Other Expenses:
Dividend and Interest Expense on Short Sales	0.05%	0.05%	0.05%	0.05%
Remainder of Other Expenses	0.13%	0.14%	0.12%	0.06%
Total Annual Fund Operating Expenses	1.15%	1.91%	0.89%	0.83%
Expense Reimbursement(1)	N/A	N/A	—%	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	1.15%	1.91%	0.89%	0.83%
(1) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% for Class P shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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

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



	1 year	3 years	5 years	10 years
Class A	$488	$727	$984	$1,720
Class C	294	600	1,032	2,233
Class P	91	284	493	1,096
Institutional Class	85	265	460	1,025

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	$194	$600	$1,032	$2,233

Portfolio Turnover

Principal Investment Strategies

The Fund generally invests a majority of its assets in fixed income securities, such as high yield bonds (also known as "junk" bonds), preferred securities, commercial mortgage-backed securities, and emerging market debt securities, in an effort to provide incremental yields over a portfolio of government securities. In addition, the Fund invests in equity securities to provide incremental dividend yields and diversify fixed-income related risks in the Fund. The Fund generally invests a portion of its assets in equity securities of global companies principally engaged in the real estate industry, equity securities of global infrastructure companies, value equities of global companies, and master limited partnerships (“MLPs”) and other entities in the energy infrastructure sector. As described below, the Fund will use some derivative strategies. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index.

Some of the Fund's strategies involve investing in foreign securities. The Fund typically invests in foreign securities of at least 10 countries and at least 30% of its assets in foreign securities.

In managing the Fund, Principal Management Corporation ("Principal"), the Fund’s investment advisor, determines the Fund's strategic asset allocation among the following general investment categories, which are executed by multiple sub-advisors: high yield, preferred securities, emerging market debt, global real estate, commercial mortgage-backed securities, MLPs, global value equity, and publicly-traded infrastructure. The Fund may add additional investment categories. The Fund seeks to provide yield by having each sub-advisor focus on those securities offering the best potential for yield, taking risk into consideration, within their respective investment categories.

The Fund also writes (or sells) call options by using equity index/exchange traded fund (“ETF”) call options on the indices represented by certain asset categories of the Fund, including global real estate, global value equity, MLPs, and publicly-traded infrastructure. Call option overwriting is an investment strategy that is used to generate income through receipt of the call option premium and reduce portfolio volatility.

A portion of the Fund's assets is invested in high yield and other income-producing securities including bank loans and corporate bonds. These include foreign securities issued in both USD and non-USD. "High yield" securities are below investment grade bonds (sometimes called "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative with respect to the issuer's ability to pay interest and to repay principal. This portion of the Fund also invests in currency forwards and currency options to hedge currency risk.

A portion of the Fund's assets is invested primarily in preferred securities of U.S. and non-U.S. companies primarily rated BBB- or higher by S&P or Baa3 or higher by Moody's or, if unrated, of comparable quality in the opinion of the Sub-Advisor. This portion of the Fund focuses primarily on the financial services, real estate investment trust "(REIT"), and utility industries.

A portion of the Fund's assets is invested in a diversified portfolio of fixed income securities issued primarily by governments, their agencies, local authorities and instrumentalities, and corporate entities domiciled in or exercising the predominant part of their economic activities in emerging markets. This portion of the Fund also invests in interest rate swaps or Treasury futures to manage fixed income exposure; credit default swaps to increase or decrease in an

efficient manner exposures to certain sectors or individual issuers; total return swaps to increase or decrease in an efficient manner exposures to certain sectors; and currency forwards and currency options to hedge currency risk and express views on the direction of currency. Here, "emerging market country" means any country which is considered to be an emerging country by the international financial community (including the International Bank for Reconstruction and Development (also known as the World Bank) and MSCI Emerging Markets Index) and any country included in any J.P. Morgan Emerging Market Bond Index. These countries generally include every nation in the world except the U.S., Canada, Japan, Australia, and New Zealand, and most nations located in Western Europe.

A portion of the Fund's assets is invested in equity securities of global real estate companies. A real estate company has at least 50% of its assets, income or profits derived from products or services related to the real estate industry. Real estate companies include real estate investment trusts ("REITs"), REIT-like entities, and companies with substantial real estate holdings such as paper, lumber, hotel and entertainment companies as well as building supply manufacturers, mortgage lenders, and mortgage servicing companies.

A portion of the Fund’s assets is invested in commercial mortgage-backed securities, which are bonds that are secured by first mortgages on commercial real estate.

A portion of the Fund's assets is invested in MLPs and companies that are organized as corporations, limited liability companies or limited partnerships in the energy infrastructure sector. Energy infrastructure companies are engaged in the transportation, storage, processing, refining, marketing, exploration, production, or mining of any mineral or natural resource. This portion of the Fund invests primarily in the mid-stream energy infrastructure market, which is comprised mostly of the following: crude oil and refined products pipeline, storage, and terminal assets; natural gas gathering and transportation pipelines, processing, and storage facilities; propane distributors; energy commodity marine transportation (including liquefied natural gas transportation and processing); and other energy infrastructure assets. Most pipelines do not own the energy products they transport and, as a result, are not directly exposed to commodity price risk.

A portion of the Fund's assets is invested in a diversified portfolio of value equity securities of companies located or operating in the U.S. and foreign countries, including emerging markets. Investing in value equity securities, is an investment strategy that emphasizes buying equity securities that appear to be undervalued.

A portion of the Fund's assets is invested in publicly-listed infrastructure companies (domestic and foreign public utility, energy, and transportation companies). Publicly-listed infrastructure equity securities trade on an exchange and include companies involved to a significant extent in providing products, services or equipment for: transportation (including toll roads, airports, railways, and ports); the generation, transmission or distribution of electricity, gas or water (utilities); or telecommunications activities as well as in companies involved in the discovery, development, production, generation, transmission, refinement, measurement, trading, marketing or distribution of energy.

During the fiscal year ended October 31, 2013, the average ratings of the Fund’s fixed-income assets, based on market value at each month-end, were as follows (all ratings are by Moody’s):



1.54% in securities rated Aaa	25.62% in securities rated Baa	10.41% in securities rated Caa	0.00% in securities rated D
1.60% in securities rated Aa	15.75% in securities rated Ba	0.12% in securities rated Ca	5.26% in securities not rated
5.22% in securities rated A	34.48% in securities rated B	0.00% in securities rated C

Principal Risks

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

Bank Loans Risk. Changes in economic conditions are likely to cause issuers of bank loans (also known as senior floating rate interests) to be unable to meet their obligations. In addition, the value of the collateral securing the loan may decline, causing a loan to be substantially unsecured. Underlying credit agreements governing the bank loans, reliance on market makers, priority of repayment and overall market volatility may harm the liquidity of loans.

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Equity Index/Exchange-traded Fund (“ETF”) Call Option Risk. As the writer of an equity index/exchange-traded fund (“ETF”) call option, a fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the index on which the call option has been written above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price of the underlying index decline (net of premiums received). In addition, a fund bears the risk that the index/ETF on which the call option has been written behaves differently than the underlying stocks in the portfolio which would limit the ability of the call option overwriting strategy to reduce portfolio volatility.

Master Limited Partnership ("MLP") Risk. MLPs are publicly-traded limited partnership interests or units. An MLP that invests in a particular industry (e.g., oil and gas) will be harmed by detrimental economic events within that industry. As partnerships, MLPs may be subject to less regulation (and less protection for investors) under state laws than corporations. In addition, MLPs may be subject to state taxation in certain jurisdictions, which may reduce the amount of income an MLP pays to its investors.

Preferred Securities Risk. Preferred securities are securities with a lower priority claim on assets or earnings than bonds and other debt instruments in a company's capital structure, and therefore can be subject to greater credit and liquidation risk than more senior debt instruments. In addition, preferred securities are subject to other risks, such as limited or no voting rights, deferring or skipping distributions, interest rate risk, and redeeming the security prior to the stated maturity date.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, C, and P - www.principalfunds.com.


•	For Institutional Class - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each class of shares of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

Life of Fund results are measured from the date the Fund's shares were first sold (December 15, 2008).

For periods prior to the inception date of Class P shares (September 27, 2010), performance shown in the table for Class P shares is based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and expenses of Class P shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on December 15, 2008.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	20.93	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '11	(8.15	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Class A Return Before Taxes	1.85%	14.59%	14.77%
Class A Return After Taxes on Distributions	0.07%	11.70%	11.88%
Class A Return After Taxes on Distribution and Sale of Fund Shares	1.21%	10.51%	10.66%
Class C Return Before Taxes	3.97%	14.61%	14.76%
Class P Return Before Taxes	6.10%	15.59%	15.76%
Institutional Class Return Before Taxes	6.14%	15.75%	15.93%
Barclays U.S. Corporate High Yield 2% Issuer Capped Index (reflects no deduction for fees, expenses, or taxes)	7.44%	18.96%	21.10%
Barclays Global Credit Index (reflects no deduction for fees, expenses, or taxes)	1.08%	8.84%	9.34%
Barclays Global High Yield Index (reflects no deduction for fees, expenses, or taxes)	7.33%	19.36%	21.15%
MSCI ACWI Value Index (reflects no deduction for fees, expenses, or taxes)	22.43%	13.73%	14.25%
Global Diversified Income Blended Index (reflects no deduction for fees, expenses, or taxes)	9.07%	13.62%	14.50%

⁽¹⁾The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Performance of a blended index shows how the Fund’s performance compares to a blend of indices with similar investment objectives. Performance of each component of the blended index is also shown. Effective December 31, 2014, the components of the Global Diversified Income Blended Index changed to the following: 40% Barclays Global Credit Index; 30% Barclays Global High Yield Index; and 30% MSCI ACWI Value Index.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	Jake S. Anonson (since 2014), Portfolio Manager


•	Jessica S. Bush (since 2014), Portfolio Manager


•	Marcus W. Dummer (since 2014), Portfolio Manager


•	James W. Fennessey (since 2014), Portfolio Manager


•	Kelly A. Grossman (since 2010), Portfolio Manager


•	Benjamin E. Rotenberg (since 2014), Portfolio Manager

Sub-Advisors:

Colonial First State Asset Management (Australia) Limited

DDJ Capital Management, LLC

Guggenheim Partners Investment Management, LLC

Post Advisory Group, LLC

Principal Global Investors, LLC

Principal Real Estate Investors, LLC

Spectrum Asset Management, Inc.

Stone Harbor Investment Partners LP

Tortoise Capital Advisors, L.L.C.

W. H. Reaves & Co., Inc. (doing business as Reaves Asset Management)

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
P and Institutional	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

GLOBAL REAL ESTATE SECURITIES FUND


Objective:	The Fund seeks to generate a total return.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	P	Inst.	R-6
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	P	Inst.	R-6
Management Fees	0.88%	0.88%	0.88%	0.88%	0.88%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A	N/A	N/A
Other Expenses (1)	0.24%	0.39%	0.24%	0.04%	0.08%
Total Annual Fund Operating Expenses	1.37%	2.27%	1.12%	0.92%	0.96%
Expense Reimbursement(2)(3)	—%	(0.07)%	(0.04)%	—%	(0.02)%
Total Annual Fund Operating Expenses after Expense Reimbursement	1.37%	2.20%	1.08%	0.92%	0.94%
(1) Based on estimated expenses for the current fiscal year. (Class R-6)
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.45% for Class A, 2.20% for Class C shares, and 1.00% for Institutional class shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.94% for Class R-6 shares. It is expected that the expense limit will continue through the period ending February 29, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$682	$960	$1,259	$2,106
Class C	323	701	1,208	2,599
Class P	110	351	612	1,359
Institutional Class	94	293	509	1,131
Class R-6	96	304

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example)



	1 year		3 years	5 years	10 years
Class C		$223	$701	$1,208	$2,599

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of U.S. and non-U.S. companies principally engaged in the real estate industry at the time of each purchase. For the Fund's investment policies, a real estate company has at least 50% of its assets, income or profits derived from products or services related to the real estate industry. Real estate companies include real estate investment trusts ("REITS") and companies with substantial real estate holdings such as paper, lumber, hotel and entertainment companies as well as those whose products and services relate to the real estate industry such as building supply manufacturers, mortgage lenders, and mortgage servicing companies. The Fund invests in equity securities of small, medium, and large market capitalization companies.

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

Some foreign countries have adopted REIT structures that are very similar to those in the United States. Similarities include pass through tax treatment and portfolio diversification. Other countries may have REIT structures that are significantly different than the U.S. or may not have adopted a REIT like structure at all. The Fund invests a significant percentage of its portfolio in REITs and foreign REIT-like entities.

The Fund typically invests in foreign securities of at least three countries and at least 30% of its assets in foreign securities.

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

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

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Industry Concentration Risk (Real Estate). A fund that concentrates investments in a particular industry or group of industries has greater exposure than other funds to market, economic and other factors affecting that industry or group of industries. A fund concentrating in the real estate industry can be subject to the risks associated with direct ownership of real estate, securities of companies in the real estate industry, and/or real estate investment trusts.

Non-Diversification Risk. A non-diversified fund may invest a high percentage of its assets in the securities of a small number of issuers and is more likely than diversified funds to be significantly affected by a specific security’s poor performance.

Performance


•	For Classes A, C, and P - www.principalfunds.com.


•	For Institutional Class and Class R-6 - www.principal.com.

The bar chart shows the investment returns of the Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each class of shares of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

Life of Fund results are measured from the date the Fund's shares were first sold (October 1, 2007).

For periods prior to the inception date of Class P shares (December 29, 2010) and Class R-6 shares (November 25, 2014), performance shown in the table for these classes is based on the performance of the Fund's Institutional Class shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on October 1, 2007.

During 2007, the Fund processed a significant (relative to Class A) "As Of" transaction that resulted in a gain to the remaining shareholders of Class A. “As-of” transaction processing occurs when a fund transaction is processed after its receipt date but “as of” the date required by SEC rule. In accordance with the Fund's shareholder processing policies, this benefit inures all shareholders of Class A. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.

During 2010, the Institutional Class experienced a significant withdrawal of monies by an affiliate. As the remaining shareholders held relatively small positions, the total return amounts expressed herein are greater than those that would have been experienced without the withdrawal.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	30.77	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(29.65	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years			Since Inception
Class A Return Before Taxes	(0.41)%	14.95	%		(0.53	)%	⁽²⁾
Class A Return After Taxes on Distributions	(2.58)%	13.08	%		(2.00	)%	⁽²⁾
Class A Return After Taxes on Distribution and Sale of Fund Shares	0.13%	11.26	%		(0.95	)%
Class C Return Before Taxes	3.42%	15.35	%		(0.52	)%
Class P Return Before Taxes	5.61%	17.66	%		1.26	%
Institutional Class Return Before Taxes	5.85%	17.86	%	⁽³⁾	1.44	%	⁽³⁾
Class R-6 Return Before Taxes	5.81%	17.85	%	⁽³⁾	1.42	%	⁽³⁾
FTSE EPRA/NAREIT Developed Index NR (reflects no deduction for fees, expenses or taxes)	3.67%	15.24	%		-1.02	%
FTSE EPRA/NAREIT Developed Index (reflects no deduction for fees, expenses, or taxes)	4.39%	16.06	%		-0.30	%
⁽¹⁾The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.
⁽²⁾ During 2007, the Fund processed a significant (relative to Class A) "As Of" transaction that resulted in a gain to the remaining shareholders of Class A. “As-of” transaction processing occurs when a fund transaction is processed after its receipt date but “as of” the date required by SEC rule. In accordance with the Fund's shareholder processing policies, this benefit inures all shareholders of Class A. Had such a gain not been recognized, the total return amounts expressed herein would have been smaller.
⁽³⁾ During 2010, the Institutional Class experienced a significant withdrawal of monies by an affiliate. As the remaining shareholders held relatively small positions, the total return amounts expressed herein are greater than those that would have been experienced without the withdrawal.

Effective December 31, 2014, the Fund’s primary benchmark changed from the FTSE EPRA/NAREIT Developed Index to the FTSE EPRA NAREIT Developed Index NR because the FTSE EPRA NAREIT Developed Index NR is net of tax and therefore more appropriate for investors in a taxable mutual fund.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Real Estate Investors, LLC


•	Simon Hedger (since 2007), Portfolio Manager


•	Anthony Kenkel (since 2010), Portfolio Manager


•	Kelly D. Rush (since 2007), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional and R-6	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

For Class R-6 shares, the Fund and its related companies do not pay broker-dealers or other financial intermediaries (such as a bank, insurance company, investment adviser, etc.) for the sale of Fund shares or related services.

For the other share classes, if you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank, insurance company, investment adviser, etc.), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment, or to recommend one share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary's website for more information.

GOVERNMENT & HIGH QUALITY BOND FUND


Objective:	The Fund seeks to provide a high level of current income consistent with safety and liquidity.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	2.25%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.50%	0.50%	0.50%	0.50%	0.50%	0.50%	0.50%	0.50%	0.50%	0.50%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.14%	0.13%	0.19%	0.20%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.89%	1.63%	0.94%	0.70%	0.51%	1.38%	1.25%	1.07%	0.88%	0.76%
Fee Waiver and Expense Reimbursement(2) (3)	—%	—%	(0.01)%	—%	N/A	(0.09)%	(0.09)%	(0.09)%	(0.09)%	(0.09)%
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.89%	1.63%	0.93%	0.70%	0.51%	1.29%	1.16%	0.98%	0.79%	0.67%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.88% for Class A, 1.63% for Class C, and 1.00% for Class J, 1.29% for Class R-1, 1.16% for Class R-2, 0.98% for Class R-3, 0.79% for Class R-4, and 0.67% for Class R-5 shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$314	$502	$707	$1,296
Class C	266	514	887	1,933
Class J	195	298	519	1,154
Class P	72	224	390	871
Institutional Class	52	164	285	640
Class R-1	131	427	745	1,648
Class R-2	118	386	676	1,502
Class R-3	100	330	580	1,296
Class R-4	81	270	477	1,075
Class R-5	68	232	412	932

With respect to Class C, and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	166	514	887	1,933
Class J	95	298	519	1,154

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in securities issued by the U.S. government, its agencies or instrumentalities or securities that are rated AAA by S&P or Aaa by Moody's , including but not limited to mortgage securities such as agency and non-agency collateralized mortgage obligations, and other obligations that are secured by mortgages or mortgage-backed securities at the time of each purchase. Under normal circumstances, the Fund maintains an average portfolio duration that is within ±25% of the duration of the Barclays Fixed-Rate MBS Index, which as of December 31, 2013 was 5.70 years. The Fund also invests in mortgage-backed securities that are not issued by the U.S. government, its agencies or instrumentalities or rated AAA by S&P, AAA by Fitch, or Aaa by Moody's, including collateralized mortgage obligations, and in other obligations that are secured by mortgages or mortgage-backed securities.

Principal Risks

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Classes J, R-1, R-2, R-3, R-4, and R-5 shares (December 15, 2008) and Class P shares (September 27, 2010), performance shown in the table for these classes is based on the performance of the Fund's Class A shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of Class A shares, which were first sold on May 4, 1984.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '06	3.41	%
Lowest return for a quarter during the period of the bar chart above:	Q2 '13	(2.13	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	(3.89)%	3.81%	3.84%
Class A Return After Taxes on Distributions	(5.09)%	2.45%	2.35%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(2.20)%	2.44%	2.41%
Class C Return Before Taxes	(3.55)%	3.45%	3.29%
Class J Return Before Taxes	(2.86)%	4.11%	3.95%
Class P Return Before Taxes	(1.59)%	4.38%	4.12%
Institutional Class Return Before Taxes	(1.49)%	4.61%	4.43%
Class R-1 Return Before Taxes	(2.17)%	3.80%	3.64%
Class R-2 Return Before Taxes	(2.04)%	3.93%	3.78%
Class R-3 Return Before Taxes	(1.86)%	4.12%	3.96%
Class R-4 Return Before Taxes	(1.68)%	4.32%	4.09%
Class R-5 Return Before Taxes	(1.65)%	4.44%	4.15%
Barclays MBS Fixed Rate Index (reflects no deduction for fees, expenses or taxes)	(1.45)%	3.70%	4.64%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Edge Asset Management, Inc.


•	John R. Friedl (since 2010), Portfolio Manager


•	Ryan P. McCann (since 2010), Portfolio Manager


•	Scott J. Peterson (since 2010), Portfolio Manager


•	Greg L. Tornga (since 2011), Head of Fixed Income and Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

HIGH YIELD FUND


Objective:	The Fund seeks to provide a relatively high level of current income.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	P	Inst.
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	P	Inst.
Management Fees	0.51%	0.51%	0.51%	0.51%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A	N/A
Other Expenses	0.16%	0.12%	0.16%	0.08%
Total Annual Fund Operating Expenses	0.92%	1.63%	0.67%	0.59%
Expense Reimbursement(1)	N/A	N/A	—%	(0.01)%
Total Annual Fund Operating Expenses after Expense Reimbursement	0.92%	1.63%	0.67%	0.58%
(1) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.61% for Institutional Class shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$465	$657	$865	$1,464
Class C	266	514	887	1,933
Class P	68	214	373	835
Institutional Class	59	188	328	737

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	166	514	887	1,933

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of each purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). The Fund also invests in bank loans (also known as senior floating rate interests) and securities of foreign issuers, including those located in developing or emerging countries. Under normal circumstances, the Fund maintains an average portfolio duration that is within ±20% of the duration of the Barclays US High Yield 2% Issuer Capped Index, which as of December 31, 2013 was 4.15 years.

During the fiscal year ended October 31, 2013, the average ratings of the Fund’s fixed-income assets, based on market value at each month-end, were as follows (all ratings are by Moody’s):



0.00% in securities rated Aaa	7.81% in securities rated Baa	15.27% in securities rated Caa	0.00% in securities rated D
0.00% in securities rated Aa	33.72% in securities rated Ba	0.04% in securities rated Ca	4.65% in securities not rated
0.07% in securities rated A	38.44% in securities rated B	0.00% in securities rated C

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Performance


•	For Classes A, C, and P - www.principalfunds.com.


•	For Institutional Class - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, each class of shares of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

For periods prior to the inception date of Class P shares (September 27, 2010), performance shown in the bar chart and the table for Class P shares is based on the performance of the Fund's Class A shares adjusted to reflect the fees and expenses of the Class P shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Class A shares, which were first sold on April 8, 1998.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	18.88	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(11.89	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	2.94%	14.72%	8.41%
Class A Return After Taxes on Distributions	(0.34)%	11.14%	5.26%
Class A Return After Taxes on Distribution and Sale of Fund Shares	1.91%	10.36%	5.39%
Class C Return Before Taxes	5.19%	14.77%	8.03%
Class P Return Before Taxes	7.14%	15.85%	8.96%
Institutional Class Return Before Taxes	7.25%	16.00%	9.20%
Barclays U.S. Corporate High Yield 2% Issuer Capped Index (reflects no deduction for fees, expenses, or taxes)	7.44%	18.96%	8.61%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Mark P. Denkinger (since 2009), Portfolio Manager


•	Darrin E. Smith (since 2009), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	For accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
P and Institutional	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading), through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809)(overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

HIGH YIELD FUND I


Objective:	The Fund seeks high current income.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	Inst.
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None

Annual Fund Operating Expenses

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



	Share Class
	A	Inst.
Management Fees	0.63%	0.63%
Distribution and/or Service (12b-1) Fees	0.25%	N/A
Other Expenses	2.53%	0.02%
Total Annual Fund Operating Expenses	3.41%	0.65%
Expense Reimbursement(1)	(2.36)%	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	1.05%	0.65%
(1) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.05% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$478	$1,135	$1,853	$3,751
Institutional Class	66	208	362	810

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of each purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). The Fund also invests in bank loans (also known as senior floating rate interests) and securities of foreign issuers. Under normal circumstances, the Fund maintains an average portfolio duration that is within ±25% of the duration of the Barclays US High Yield 2% Issuer Capped Index, which as of December 31, 2013 was 4.15 years.

During the fiscal year ended October 31, 2013, the average ratings of the Fund’s fixed-income assets, based on market value at each month-end, were as follows (all ratings are by Moody’s):



0.00% in securities rated Aaa	7.92% in securities rated Baa	10.73% in securities rated Caa	0.05% in securities rated D
0.00% in securities rated Aa	38.38% in securities rated Ba	0.06% in securities rated Ca	0.87% in securities not rated
0.30% in securities rated A	41.69% in securities rated B	0.00% in securities rated C

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Performance


•	For Class A - www.principalfunds.com.


•	For Institutional Class - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for each class of shares of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

Life of Fund results are measured from the date the Fund's shares were first sold (December 29, 2004).

For periods prior to the inception date of Class A shares (March 1, 2013), performance shown in the table for Class A shares is based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and expenses of the Class A shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold December 29, 2004.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	18.91	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(14.49	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	Life of Fund
Class A Return Before Taxes	2.67%	16.13%	7.51%
Class A Return After Taxes on Distributions	(0.23)%	12.81%	4.83%
Class A Return After Taxes on Distribution and Sale of Fund Shares	1.75%	11.72%	4.83%
Institutional Class Return Before Taxes	7.06%	17.47%	8.47%
Barclays U.S. Corporate High Yield 2% Issuer Capped Index(reflects no deduction for fees, expenses, or taxes)	7.44%	18.96%	8.34%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisors and Portfolio Managers:

J.P. Morgan Investment Management, Inc.


•	James Gibson (since 2007), Managing Director, Head High Yield Trader and Co-Portfolio Manager


•	William J. Morgan (since 2007), Managing Director, Senior Portfolio Manager and High Yield Team Leader


•	James P. Shanahan, Jr. (since 2007), Managing Director, Portfolio Manager

Neuberger Berman Fixed Income LLC


•	Ann H. Benjamin (since 2007), Managing Director


•	William (Russ) Covode (since 2011), Managing Director


•	Daniel Doyle (since 2014), Managing Director


•	Thomas P. O’Reilly (since 2007), Managing Director

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A	Initial Investment	$1,000⁽¹⁾
A	For accounts with an Automatic Investment Plan (AIP)	$100
A	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading), through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809)(overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

INCOME FUND


Objective:	The Fund seeks to provide a high level of current income consistent with preservation of capital.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	2.25%	None	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Management Fees	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%	0.49%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A	N/A
Other Expenses (2)	0.15%	0.18%	0.22%	0.20%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%	0.07%
Total Annual Fund Operating Expenses	0.89%	1.67%	0.96%	0.69%	0.50%	1.37%	1.24%	1.06%	0.87%	0.75%	0.56%
Fee Waiver and Expense Reimbursement(3) (4) (5)	N/A	N/A	(0.01)%	—%	N/A	N/A	N/A	N/A	N/A	N/A	(0.01)%
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.89%	1.67%	0.95%	0.69%	0.50%	1.37%	1.24%	1.06%	0.87%	0.75%	0.55%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Based on estimated expenses for the current fiscal year. (Class R-6)
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(4) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.10% for Class J shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(5) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.55% for Class R-6 shares. It is expected that the expense limit will continue through the period ending February 29, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$314	$502	$707	$1,296
Class C	270	526	907	1,976
Class J	197	305	530	1,177
Class P	70	221	384	859
Institutional Class	51	160	280	628
Class R-1	139	434	750	1,646
Class R-2	126	393	681	1,500
Class R-3	108	337	585	1,294
Class R-4	89	278	482	1,073
Class R-5	77	240	417	930
Class R-6	56	178

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	170	526	907	1,976
Class J	97	305	530	1,177

Portfolio Turnover

Principal Investment Strategies

The Fund invests primarily in a diversified pool of fixed-income securities including corporate securities, U.S. government securities, and mortgage-backed securities (including collateralized mortgage obligations), up to 35% of which may be in below investment grade bonds (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (if the bond has been rated by only one of those agencies, that rating will determine whether the bond is below investment grade; if the bond has not been rated by either of those agencies, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). Under normal circumstances, the Fund maintains an average portfolio duration that is within ±25% of the duration of the Barclays U.S. Aggregate Bond Index, which as of December 31, 2013 was 5.55 years. The Fund also invests in foreign securities and real estate investment trust ("REIT") securities.

During the fiscal year ended October 31, 2013, the average ratings of the Fund’s fixed-income assets, based on market value at each month-end, were as follows (all ratings are by Moody’s):



27.97% in securities rated Aaa	37.35% in securities rated Baa	1.97% in securities rated Caa	0.00% in securities rated D
2.00% in securities rated Aa	3.62% in securities rated Ba	0.00% in securities rated Ca	0.93% in securities not rated
18.93% in securities rated A	7.23% in securities rated B	0.00% in securities rated C

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, R-5, and R-6 - www.principal.com.

The Fund commenced operations after succeeding to the operations of another fund on January 12, 2007. The predecessor fund commenced operations on December 15, 1975.

For periods prior to the inception date of Class J shares (September 30, 2009), Classes R-1, R-2, R-3, R-4, and R-5 shares (March 1, 2010), Class P shares (September 27, 2010) and Class R-6 shares (November 25, 2014), performance shown in the table for these classes is based on the performance of the Fund's Class A shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class A shares, which were first sold on December 15, 1975.

Total Returns as of December 31 (Class A Shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	10.26	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '08	(4.74	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	(2.48)%	8.00%	5.16%
Class A Return After Taxes on Distributions	(4.02)%	6.10%	3.26%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(1.41)%	5.52%	3.25%
Class C Return Before Taxes	(1.97)%	7.70%	4.62%
Class J Return Before Taxes	(1.25)%	8.31%	5.22%
Class P Return Before Taxes	(0.02)%	8.63%	5.47%
Institutional Class Return Before Taxes	0.06%	8.92%	5.80%
Class R-1 Return Before Taxes	(0.80)%	7.97%	4.90%
Class R-2 Return Before Taxes	(0.67)%	8.13%	5.05%
Class R-3 Return Before Taxes	(0.39)%	8.34%	5.25%
Class R-4 Return Before Taxes	(0.30)%	8.52%	5.42%
Class R-5 Return Before Taxes	(0.08)%	8.61%	5.46%
Class R-6 Return Before Taxes	(0.23)%	8.50%	5.40%
Barclays U.S. Aggregate Bond Index (reflects no deduction for fees, expenses, or taxes)	(2.02)%	4.44%	4.55%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Edge Asset Management, Inc.


•	John R. Friedl (since 2005), Portfolio Manager


•	Ryan P. McCann (since 2010), Portfolio Manager


•	Scott J. Peterson (since 2010), Portfolio Manager


•	Greg L. Tornga (since 2011), Head of Fixed Income and Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, R-5, and R-6	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

INFLATION PROTECTION FUND


Objective:	The Fund seeks to provide current income and real (after inflation) total returns.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.39%	0.39%	0.39%	0.39%	0.39%	0.39%	0.39%	0.39%	0.39%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.28%	0.51%	0.22%	0.01%	0.54%	0.46%	0.33%	0.29%	0.27%
Total Annual Fund Operating Expenses	0.92%	1.90%	0.86%	0.40%	1.28%	1.15%	0.97%	0.78%	0.66%
Fee Waiver and Expense Reimbursement(2)(3)	(0.02)%	(0.25)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.90%	1.65%	0.85%	0.40%	1.28%	1.15%	0.97%	0.78%	0.66%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.90% for Class A, 1.65% for Class C, and 1.15% for Class J shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$463	$655	$863	$1,462
Class C	268	569	999	2,198
Class J	187	273	476	1,060
Institutional Class	41	128	224	505
Class R-1	130	406	702	1,545
Class R-2	117	365	633	1,398
Class R-3	99	309	536	1,190
Class R-4	80	249	433	966
Class R-5	67	211	368	822

With respect to Class C and Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	$168	$569	$999	$2,198
Class J	87	273	476	1,060

Portfolio Turnover

Principal Investment Strategies

The Fund invests primarily in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and U.S. and non-U.S. corporations. Inflation-indexed bonds are fixed income securities that are structured to provide protection against inflation. The value of the bond's principal or the interest income paid on the bond is adjusted to track changes in an official inflation measure. The U.S. Treasury uses the Consumer Price Index for Urban Consumers as the inflation measure. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. Under normal circumstances, the Fund maintains an average portfolio duration that is within ±20% of the duration of the Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index. The Fund also invests in foreign securities, U.S. Treasuries and agency securities. The Fund utilizes derivative strategies, specifically futures, swaps, and options for purposes of managing the risk profile of the Fund. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The Fund actively trades portfolio securities.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Performance


•	For Classes A, C, and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Life of Fund results are measured from the date the Fund's shares were first sold (December 29, 2004).

For periods prior to the inception date of Class A shares (June 28, 2005) and Class C shares (January 16, 2007), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Institutional Class shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold December 29, 2004.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '11	4.35	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(10.39	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	Life of Fund
Class A Return Before Taxes	(12.26)%	3.48%	0.63%
Class A Return After Taxes on Distributions	(12.69)%	3.04%	(0.45)%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(6.66)%	2.56%	0.14%
Class C Return Before Taxes	(10.44)%	3.42%	0.27%
Class J Return Before Taxes	(9.59)%	4.03%	0.85%
Institutional Class Return Before Taxes	(8.37)%	4.72%	1.37%
Class R-1 Return Before Taxes	(9.09)%	3.85%	0.52%
Class R-2 Return Before Taxes	(8.96)%	3.97%	0.63%
Class R-3 Return Before Taxes	(8.81)%	4.15%	0.81%
Class R-4 Return Before Taxes	(8.67)%	4.34%	0.98%
Class R-5 Return Before Taxes	(8.62)%	4.46%	1.12%
Barclays U.S. Treasury TIPS Index (reflects no deduction for fees, expenses, or taxes)	(8.61)%	5.63%	4.51%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

BlackRock Financial Management, Inc.


•	Gargi Chaudhuri (since 2014), Director


•	Martin Hegarty (since 2010), Managing Director

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

INTERNATIONAL EMERGING MARKETS FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	1.18%	1.18%	1.18%	1.18%	1.18%	1.18%	1.18%	1.18%	1.18%	1.18%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.39%	0.63%	0.26%	0.83%	0.06%	0.58%	0.50%	0.37%	0.33%	0.31%
Total Annual Fund Operating Expenses	1.82%	2.81%	1.69%	2.01%	1.24%	2.11%	1.98%	1.80%	1.61%	1.49%
Fee Waiver and Expense Reimbursement(2) (3)	(0.04)%	(0.01)%	(0.01)%	(0.63)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.78%	2.80%	1.68%	1.38%	1.24%	2.11%	1.98%	1.80%	1.61%	1.49%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.78% for Class A and 2.80% for Class C shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$721	$1,087	$1,477	$2,566
Class C	383	870	1,483	3,137
Class J	271	531	917	1,997
Class P	140	559	1,015	2,278
Institutional Class	126	393	681	1,500
Class R-1	214	661	1,134	2,441
Class R-2	201	621	1,068	2,306
Class R-3	183	566	975	2,116
Class R-4	164	508	876	1,911
Class R-5	152	471	813	1,779

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	$283	$870	$1,483	$3,137
Class J	171	531	917	1,997

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of emerging market companies at the time of each purchase. Emerging market companies are:


•	companies with their principal place of business or principal office in emerging market countries or


•	companies whose principal securities trading market is an emerging market country.

Here, "emerging market country" means any country which is considered to be an emerging country by the international financial community (including the MSCI Emerging Markets Index or Barclays Emerging Markets USD Aggregate Bond Index ). These countries generally include every nation in the world except the United States, Canada, Japan, Australia, and New Zealand, and most nations located in Western Europe. The Fund invests in equity securities of small, medium, and large market capitalization companies. The Fund actively trades portfolio securities.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), Class C shares (January 16, 2007) and Class P shares (September 27, 2010), performance shown in the bar chart and the table for these classes is based on the performance of the Fund’s Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold December 6, 2000.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	28.76	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '08	(29.21	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	(10.38)%	11.74%	9.85%
Class A Return After Taxes on Distributions	(10.21)%	11.92%	8.89%
Class A Return After Taxes on Distribution and Sale of Fund Shares	(5.62)%	9.70%	8.14%
Class C Return Before Taxes	(7.04)%	11.97%	9.54%
Class J Return Before Taxes	(6.00)%	13.10%	10.47%
Class P Return Before Taxes	(4.74)%	13.38%	10.70%
Institutional Class Return Before Taxes	(4.60)%	13.68%	11.16%
Class R-1 Return Before Taxes	(5.42)%	12.70%	10.19%
Class R-2 Return Before Taxes	(5.32)%	12.85%	10.34%
Class R-3 Return Before Taxes	(5.14)%	13.06%	10.54%
Class R-4 Return Before Taxes	(4.97)%	13.26%	10.76%
Class R-5 Return Before Taxes	(4.83)%	13.40%	10.88%
MSCI Emerging Markets NDTR D Index (reflects no deduction for fees, expenses, or taxes)	(2.60)%	14.79%	11.17%

⁽¹⁾The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Mihail Dobrinov (since 2007), Portfolio Manager


•	Alan Wang (since 2014), Portfolio Manager


•	Mohammed Zaidi (since 2012), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

INTERNATIONAL FUND I


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees (1)	0.89%	0.89%	0.89%	0.89%	0.89%	0.89%	0.89%	0.89%
Distribution and/or Service (12b-1) Fees	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses (2)	0.44%	0.31%	0.06%	0.57%	0.49%	0.36%	0.32%	0.30%
Total Annual Fund Operating Expenses	1.58%	1.20%	0.95%	1.81%	1.68%	1.50%	1.31%	1.19%
Expense Reimbursement(3)	(0.13)%	(0.11)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	1.45%	1.09%	0.95%	1.81%	1.68%	1.50%	1.31%	1.19%
(1) Management Fees in the table have been restated to reflect current fees. Effective June 3, 2014, the Management Fees were reduced.
(2) Based on estimated amounts for the current fiscal year. (Classes A and P)
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.45% for Class A shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$689	$995
Class P	111	357
Institutional Class	97	303	$525	$1,166
Class R-1	184	569	980	2,127
Class R-2	171	530	913	1,987
Class R-3	153	474	818	1,791
Class R-4	133	415	718	1,579
Class R-5	121	378	654	1,443

Portfolio Turnover

Principal Investment Strategies

The Fund invests primarily in foreign equity securities. Usually, the Fund's investments are diversified across many different countries and regions, including countries with emerging markets. The Fund typically invests in foreign securities of at least ten countries. The Fund invests in equity securities of small, medium, and large market capitalization companies.

The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund also invests in growth equity securities; growth orientation emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Growth Stock Risk. If growth companies do not increase their earnings at a rate expected by investors, the market price of the stock may decline significantly, even if earnings show an absolute increase. Growth company stocks also typically lack the dividend yield that can lessen price declines in market downturns.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Classes A and P shares (June 3, 2014), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Institutional Class shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, were first sold on December 29, 2003.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	22.51	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '11	(22.90	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	12.96%	9.18%	5.42%
Class A Return After Taxes on Distributions	12.74%	9.10%	4.91%
Class A Return After Taxes on Distribution and Sale of Fund Shares	7.89%	7.55%	4.61%
Class P Return Before Taxes	19.93%	10.80%	6.39%
Institutional Class Return Before Taxes	20.08%	10.84%	6.41%
Class R-1 Return Before Taxes	19.01%	9.90%	5.50%
Class R-2 Return Before Taxes	19.15%	10.02%	5.63%
Class R-3 Return Before Taxes	19.36%	10.24%	5.81%
Class R-4 Return Before Taxes	19.67%	10.45%	6.02%
Class R-5 Return Before Taxes	19.76%	10.59%	6.15%
MSCI EAFE Index NDTR D (reflects no deduction for fees, expenses, or taxes)	22.78%	12.44%	6.91%
MSCI ACWI Ex-U.S. (reflects no deduction for fees, expenses, or taxes)	15.29%	12.81%	7.57%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Effective June 30, 2014, the Fund’s primary benchmark will change from the MSCI EAFE Index NDTR D to the MSCI ACWI Ex-U.S. because the MSCI ACWI Ex-U.S. more closely aligns with the Fund’s investments in developed and emerging markets than the MSCI EAFE Index NDTR D.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Origin Asset Management LLP


•	John Birkhold (since 2014), Partner


•	Chris Carter (since 2014), Partner


•	Nigel Dutson (since 2014), Partner


•	Tarlock Randhawa (since 2014), Partner


•	Nerys Weir (since 2014), Investment Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A	Initial Investment	$1,000⁽¹⁾
A	For accounts with an Automatic Investment Plan (AIP)	$100
A	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

LARGECAP BLEND FUND II

On December 9, 2014, the Board of Directors of Principal Funds, Inc. approved the acquisition of the assets of the LargeCap Blend Fund II by the Principal Capital Appreciation Fund (the “Proposed Merger”). The Proposed Merger will be submitted for shareholder vote at a Special Meeting of Shareholders of LargeCap Blend Fund II tentatively scheduled for April 17, 2015. Additional information about the Proposed Merger will be provided in the Proxy Statement/Prospectus that is expected to be mailed to record date shareholders of LargeCap Blend Fund II in February 2015. If shareholders approve, the Proposed Merger is expected to occur on or about April 24, 2015.


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.15%	0.02%	0.54%	0.46%	0.33%	0.29%	0.27%
Total Annual Fund Operating Expenses	1.14%	0.76%	1.63%	1.50%	1.32%	1.13%	1.01%
Fee Waiver(2)(3)	(0.03)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%
Total Annual Fund Operating Expenses after Fee Waiver	1.11%	0.74%	1.61%	1.48%	1.30%	1.11%	0.99%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.018% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$213	$359	$624	$1,383
Institutional Class	76	241	420	940
Class R-1	164	512	884	1,931
Class R-2	151	472	816	1,789
Class R-3	132	416	721	1,588
Class R-4	113	357	620	1,373
Class R-5	101	319	556	1,234

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$113	$359	$624	$1,383

Portfolio Turnover

Principal Investment Strategies

Employing a "blend" strategy, the Fund's assets are invested in equity securities with both growth and/or value characteristics. Investing in value equity securities is an investment strategy that emphasizes buying equity securities that appear to be undervalued. The growth orientation selection emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average. The Fund does not have a policy of preferring one of these categories over the other.

Principal Management Corporation invests between 10% and 35% of the Fund's assets in equity securities in an attempt to match or exceed the performance of the Fund's benchmark index (listed in the Average Annual Total Returns table) by purchasing securities in the index while slightly overweighting and underweighting certain individual equity securities relative to their weight in the index.

Principal Risks

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Class J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	16.89	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(21.93	)%


⁽¹⁾	The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	30.95%	17.18%	7.13%
Institutional Class Return After Taxes on Distributions	22.83%	15.52%	5.82%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	23.96%	13.95%	5.74%
Class J Return Before Taxes	29.53%	16.66%	6.53%
Class R-1 Return Before Taxes	29.98%	16.23%	6.22%
Class R-2 Return Before Taxes	30.04%	16.35%	6.33%
Class R-3 Return Before Taxes	30.22%	16.56%	6.53%
Class R-4 Return Before Taxes	30.59%	16.80%	6.74%
Class R-5 Return Before Taxes	30.73%	16.91%	6.86%
S&P 500 Index (reflects no deduction for fees, expenses, or taxes)	32.39%	17.94%	7.41%


⁽¹⁾	The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

ClearBridge Investments, LLC

T. Rowe Price Associates, Inc.

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	For accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

LARGECAP GROWTH FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.31%	0.42%	0.21%	0.27%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	1.19%	2.05%	1.09%	0.90%	0.64%	1.51%	1.38%	1.20%	1.01%	0.89%
Fee Waiver and Expense Reimbursement(2) (3)	N/A	N/A	(0.01)%	(0.07)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.19%	2.05%	1.08%	0.83%	0.64%	1.51%	1.38%	1.20%	1.01%	0.89%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% for Class P shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$665	$907	$1,168	$1,914
Class C	308	643	1,103	2,379
Class J	210	345	600	1,328
Class P	85	279	490	1,100
Institutional Class	65	205	357	798
Class R-1	154	477	824	1,802
Class R-2	140	437	755	1,657
Class R-3	122	381	660	1,455
Class R-4	103	322	558	1,236
Class R-5	91	284	493	1,096

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	208	643	1,103	2,379
Class J	110	345	600	1,328

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with large market capitalizations at the time of each purchase. For this Fund, companies with large market capitalizations are those with market capitalizations within the range of companies comprising the Russell 1000^® Growth Index (as of December 31, 2013, this range was between approximately $1.26 billion and $526.685 billion). The Fund invests in growth equity securities; growth orientation emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average.

Principal Risks

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), Class C shares (January 16, 2007) and Class P shares (September 27, 2010), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

During 2010, the R-3 Class experienced a significant one-time gain of approximately $0.06/shares as the result of a settlement in an SEC administrative proceeding. If such gain had not been recognized, the total amounts expressed herein would have been lower.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q1 '12	17.04	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(25.99	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	26.11%	15.54%	6.57%
Class A Return After Taxes on Distributions	22.98%	14.96%	6.24%
Class A Return After Taxes on Distribution and Sale of Fund Shares	17.29%	12.55%	5.31%
Class C Return Before Taxes	31.22%	15.90%	6.28%
Class J Return Before Taxes	32.48%	16.91%	7.09%
Class P Return Before Taxes	33.91%	17.41%	7.44%
Institutional Class Return Before Taxes	34.11%	17.57%	7.83%
Class R-1 Return Before Taxes	32.82%	16.58%	6.90%
Class R-2 Return Before Taxes	32.97%	16.69%	7.04%
Class R-3 Return Before Taxes	33.26%	17.10%	7.30%
Class R-4 Return Before Taxes	33.55%	17.16%	7.42%
Class R-5 Return Before Taxes	33.70%	17.29%	7.55%
Russell 1000 Growth Index (reflects no deduction for fees, expenses, or taxes)	33.48%	20.39%	7.83%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Columbus Circle Investors


•	Thomas J. Bisighini (since 2009), Managing Director/Co-Portfolio Manager


•	Anthony Rizza (since 2005), Senior Managing Director/Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	For accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment, or to recommend one share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary's website for more information.

LARGECAP GROWTH FUND I


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Management Fees	0.61%	0.61%	0.61%	0.61%	0.61%	0.61%	0.61%	0.61%	0.61%	0.61%
Distribution and/or Service (12b-1) Fees (1)	0.25%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A	N/A
Other Expenses (2)	6.02%	0.22%	0.26%	0.02%	0.53%	0.45%	0.32%	0.28%	0.26%	0.07%
Total Annual Fund Operating Expenses	6.88%	1.08%	0.87%	0.63%	1.49%	1.36%	1.18%	0.99%	0.87%	0.68%
Fee Waiver and Expense Reimbursement (3) (4) (5) (6) (7)	(5.63)%	(0.03)%	(0.08)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.03)%
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.25%	1.05%	0.79%	0.61%	1.47%	1.34%	1.16%	0.97%	0.85%	0.65%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Based on estimated expenses for the current fiscal year (Class P and R-6).
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.016% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(4) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 29, 2016. The fee waiver will reduce the Fund's Management Fees by 0.016% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(5) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(6) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.25% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(7) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.65% for Class R-6 shares. In addition for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 29, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$670	$1,915	$3,201	$6,211
Class J	207	340	592	1,314
Class P	81	260
Institutional Class	62	199	349	784
Class R-1	150	469	811	1,777
Class R-2	136	428	742	1,633
Class R-3	118	372	647	1,430
Class R-4	99	313	545	1,211
Class R-5	87	275	480	1,070
Class R-6	66	214

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$107	$340	$592	$1,314

Portfolio Turnover

Principal Investment Strategies

Principal Risks

Performance


•	For Classes A, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, R-5 and R-6 - www.principal.com.

For periods prior to the inception date of Class A shares (March 1, 2013), Class P shares (June 3, 2014), and Class R-6 shares (November 25, 2014), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Institutional Class shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on December 6, 2000.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	19.69	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(22.85	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	28.42%	21.57%	7.60%
Class A Return After Taxes on Distributions	26.62%	20.91%	7.06%
Class A Return After Taxes on Distribution and Sale of Fund Shares	17.51%	17.77%	6.18%
Class J Return Before Taxes	35.10%	22.96%	8.05%
Class P Return Before Taxes	36.44%	23.53%	8.70%
Institutional Class Return Before Taxes	36.68%	23.71%	8.81%
Class R-1 Return Before Taxes	35.42%	22.61%	7.85%
Class R-2 Return Before Taxes	35.65%	22.76%	8.00%
Class R-3 Return Before Taxes	35.80%	23.01%	8.20%
Class R-4 Return Before Taxes	36.11%	23.23%	8.39%
Class R-5 Return Before Taxes	36.37%	23.41%	8.53%
Class R-6 Return Before Taxes	36.63%	23.68%	8.79%
Russell 1000 Growth Index (reflects no deduction for fees, expenses, or taxes)	33.48%	20.39%	7.83%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

Brown Advisory, LLC

T. Rowe Price Associates, Inc.

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	For accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, R-5, and R-6	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

LARGECAP GROWTH FUND II


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.87%	0.87%	0.87%	0.87%	0.87%	0.87%	0.87%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.21%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	1.33%	0.88%	1.75%	1.62%	1.44%	1.25%	1.13%
Fee Waiver(2)(3)	(0.02)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%
Total Annual Fund Operating Expenses after Fee Waiver	1.31%	0.87%	1.74%	1.61%	1.43%	1.24%	1.12%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.014% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$233	$419	$727	$1,599
Institutional Class	89	280	486	1,083
Class R-1	177	550	948	2,061
Class R-2	164	510	880	1,921
Class R-3	146	454	786	1,723
Class R-4	126	395	685	1,510
Class R-5	114	358	621	1,374

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$133	$419	$727	$1,599

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with large market capitalizations at the time of each purchase. For this Fund, companies with large market capitalizations are those with market capitalizations within the range of companies comprising the Russell 1000^® Growth Index (as of December 31, 2013, the range was between approximately $1.26 billion and $526.685 billion). The Fund invests in growth equity securities; growth orientation emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average.

Principal Risks

Performance


•	For Class J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	15.82	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(22.90	)%


⁽¹⁾	The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	30.07%	17.99%	7.57%
Institutional Class Return After Taxes on Distributions	27.42%	17.04%	6.63%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	19.12%	14.71%	6.06%
Class J Return Before Taxes	28.52%	17.31%	6.86%
Class R-1 Return Before Taxes	28.97%	16.97%	6.63%
Class R-2 Return Before Taxes	29.03%	17.09%	6.77%
Class R-3 Return Before Taxes	29.30%	17.32%	6.96%
Class R-4 Return Before Taxes	29.60%	17.57%	7.17%
Class R-5 Return Before Taxes	29.86%	17.70%	7.28%
Russell 1000 Growth Index (reflects no deduction for fees, expenses, or taxes)	33.48%	20.39%	7.83%

⁽¹⁾ The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

American Century Investment Management, Inc.

Sawgrass Asset Management, LLC

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

LARGECAP S&P 500 INDEX FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	1.50%	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	0.25%	1.00%	1.00%	None	None	None	None	None	None

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



	Share Class
	A	C	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%
Distribution and/or Service (12b-1) Fees (1)	0.15%	1.00%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.26%	0.36%	0.14%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.56%	1.51%	0.54%	0.16%	1.03%	0.90%	0.72%	0.53%	0.41%
Fee Waiver and Expense Reimbursement(2) (3)	N/A	(0.21)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.56%	1.30%	0.53%	0.16%	1.03%	0.90%	0.72%	0.53%	0.41%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.30% for Class C shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$206	$327	$458	$841
Class C	232	453	800	1,781
Class J	154	172	301	676
Institutional Class	16	52	90	205
Class R-1	105	328	569	1,259
Class R-2	92	287	498	1,108
Class R-3	74	230	401	894
Class R-4	54	170	296	665
Class R-5	42	132	230	518

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	$132	$453	$800	$1,781
Class J	54	172	301	676

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the S&P 500 Index at the time of each purchase. The Index is designed to represent U.S. equities with risk/return characteristics of the large cap universe. As of December 31, 2013 , the market capitalization range of the companies comprising the Index was between approximately $3.353 billion and $504.852 billion . The Fund employs a passive investment approach designed to attempt to track the performance of the Index. The Fund utilizes derivative strategies and exchange-traded funds ("ETFs"). A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. Specifically, the Fund invests in index futures and equity ETFs on a daily basis to gain exposure to the Index in an effort to minimize tracking error relative to the benchmark.


Note:	“Standard & Poor's 500" and "S&P 500^®" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed by Principal. The Fund is not sponsored, endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.

Principal Risks

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Exchange-Traded Funds ("ETFs") Risk. An ETF is subject to the risks associated with direct ownership of the securities comprising the index on which the ETF is based. Fund shareholders indirectly bear their proportionate share of the expenses of the ETFs in which the fund invests.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Performance


•	For Classes A, C, and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005) and Class C shares (January 16, 2007), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold December 6, 2000.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	15.77	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(22.13	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	29.71%	16.81%	6.50%
Class A Return After Taxes on Distributions	29.30%	16.55%	6.14%
Class A Return After Taxes on Distribution and Sale of Fund Shares	17.14%	13.66%	5.28%
Class C Return Before Taxes	29.66%	16.38%	5.97%
Class J Return Before Taxes	30.65%	17.20%	6.62%
Institutional Class Return Before Taxes	32.06%	17.73%	7.21%
Class R-1 Return Before Taxes	30.88%	16.70%	6.27%
Class R-2 Return Before Taxes	31.17%	16.86%	6.43%
Class R-3 Return Before Taxes	31.40%	17.06%	6.61%
Class R-4 Return Before Taxes	31.56%	17.31%	6.81%
Class R-5 Return Before Taxes	31.79%	17.44%	6.94%
S&P 500 Index (reflects no deduction for fees, expenses, or taxes)	32.39%	17.94%	7.41%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Manager:

Principal Global Investors, LLC


•	Thomas L. Kruchten (since 2011), Research Analyst and Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

LARGECAP VALUE FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.42%	0.42%	0.42%	0.42%	0.42%	0.42%	0.42%	0.42%	0.42%	0.42%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses (2)	0.22%	0.78%	0.24%	0.26%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.89%	2.20%	0.91%	0.68%	0.43%	1.30%	1.17%	0.99%	0.80%	0.68%
Fee Waiver and Expense Reimbursement(3)(4)(5)	N/A	(0.50)%	(0.01)%	(0.06)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.89%	1.70%	0.90%	0.62%	0.43%	1.30%	1.17%	0.99%	0.80%	0.68%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Based on estimated amounts for the current fiscal year. (Class P)
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(4) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.70% for Class C shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(5) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% for Class P shares. It is expected that the expense limit will continue through the period ending February 28, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class A	$636	$818	$1,016	$1,586
Class C	273	632	1,126	2,488
Class J	192	289	503	1,118
Class P	63	204
Institutional Class	44	138	241	542
Class R-1	132	412	713	1,568
Class R-2	119	372	644	1,420
Class R-3	101	315	547	1,213
Class R-4	82	255	444	990
Class R-5	69	218	379	847

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	173	632	1,126	2,488
Class J	92	289	503	1,118

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with large market capitalizations at the time of each purchase. For this Fund, companies with large market capitalizations are those with market capitalizations within the range of companies comprising the Russell 1000^® Value Index (which as of December 31, 2013 ranged between approximately $1.126 billion and $526.685 billion). The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund actively trades portfolio securities.

Principal Risks

100

as a whole. Investments in smaller companies and mid-size companies may involve greater risk and price volatility than investments in larger, more mature companies.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), Class C shares (January 16, 2007) and Class P shares (June 3, 2014), performance shown in the bar chart and the table for these classes is based on the performance of the Fund’s Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	15.65	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(21.93	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

101



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	23.53%	13.95%	5.79%
Class A Return After Taxes on Distributions	20.37%	13.20%	5.00%
Class A Return After Taxes on Distribution and Sale of Fund Shares	15.06%	11.14%	4.65%
Class C Return Before Taxes	28.47%	14.39%	5.62%
Class J Return Before Taxes	29.55%	15.20%	6.21%
Class P Return Before Taxes	30.49%	15.23%	6.34%
Institutional Class Return Before Taxes	31.21%	15.87%	6.92%
Class R-1 Return Before Taxes	30.04%	14.88%	6.02%
Class R-2 Return Before Taxes	30.21%	15.02%	6.14%
Class R-3 Return Before Taxes	30.49%	15.23%	6.34%
Class R-4 Return Before Taxes	30.62%	15.43%	6.52%
Class R-5 Return Before Taxes	30.86%	15.58%	6.65%
Russell 1000 Value Index (reflects no deduction for fees, expenses, or taxes)	32.53%	16.67%	7.58%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Arild Holm (since 2007), Portfolio Manager


•	Jeffrey A. Schwarte (since 2010), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

102

Payments to Broker-Dealers and Other Financial Intermediaries

103

LARGECAP VALUE FUND III


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.79%	0.79%	0.79%	0.79%	0.79%	0.79%	0.79%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.19%	0.01%	0.54%	0.46%	0.33%	0.29%	0.27%
Total Annual Fund Operating Expenses	1.23%	0.80%	1.68%	1.55%	1.37%	1.18%	1.06%
Fee Waiver(2)(3)	(0.02)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%
Total Annual Fund Operating Expenses after Fee Waiver	1.21%	0.79%	1.67%	1.54%	1.36%	1.17%	1.05%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.012% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$223	$388	$673	$1,487
Institutional Class	81	254	443	989
Class R-1	170	528	911	1,986
Class R-2	157	488	844	1,844
Class R-3	138	433	749	1,645
Class R-4	119	374	648	1,431
Class R-5	107	336	584	1,293

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):

104



	1 year	3 years	5 years	10 years
Class J	$123	$388	$673	$1,487

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in companies with large market capitalizations at the time of each purchase. For this Fund, companies with large market capitalizations are those with market capitalizations within the range of companies comprising the Russell 1000^® Value Index (as of December 31, 2013, the range of the index was between approximately $1.126 billion and $526.685 billion). The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued.

Principal Risks

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Class J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

105

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	15.89	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(21.54	)%

⁽¹⁾ The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	31.56%	14.78%	5.14%
Institutional Class Return After Taxes on Distributions	31.36%	14.49%	4.63%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	18.02%	11.96%	4.24%
Class J Return Before Taxes	29.97%	14.18%	4.49%
Class R-1 Return Before Taxes	30.29%	13.77%	4.21%
Class R-2 Return Before Taxes	30.52%	13.94%	4.36%
Class R-3 Return Before Taxes	30.71%	14.12%	4.54%
Class R-4 Return Before Taxes	31.05%	14.33%	4.74%
Class R-5 Return Before Taxes	31.08%	14.47%	4.87%
Russell 1000 Value Index (reflects no deduction for fees, expenses, or taxes)	32.53%	16.67%	7.58%


⁽¹⁾	The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

Barrow, Hanley, Mewhinney & Strauss, LLC.

Westwood Management Corp.

106

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

107

MIDCAP FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.60%	0.60%	0.60%	0.60%	0.60%	0.60%	0.60%	0.60%	0.60%	0.60%
Distribution and/or Service (12b-1) Fees (1)	0.25%	1.00%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.17%	0.17%	0.13%	0.13%	0.06%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	1.02%	1.77%	0.98%	0.73%	0.66%	1.48%	1.35%	1.17%	0.98%	0.86%
Fee Waiver and Expense Reimbursement(2) (3)	N/A	N/A	(0.01)%	—%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.02%	1.77%	0.97%	0.73%	0.66%	1.48%	1.35%	1.17%	0.98%	0.86%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% for Class P shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

Example

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

108



	1 year	3 years	5 years	10 years
Class A	$648	$857	$1,082	$1,729
Class C	280	557	959	2,084
Class J	199	311	541	1,200
Class P	75	233	406	906
Institutional Class	67	211	368	822
Class R-1	151	468	808	1,768
Class R-2	137	428	739	1,624
Class R-3	119	372	644	1,420
Class R-4	100	312	542	1,201
Class R-5	88	274	477	1,061

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	180	557	959	2,084
Class J	99	311	541	1,200

Portfolio Turnover

Principal Investment Strategies

The Fund invests in equity securities with value and/or growth characteristics and constructs an investment portfolio that has a "blend" of equity securities with these characteristics. Investing in value equity securities is an investment strategy that emphasizes buying equity securities that appear to be undervalued. The growth orientation selection emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average. The Fund does not have a policy of preferring one of these categories over the other.

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

109

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, C, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), Class C shares (January 16, 2007) and Class P shares (September 27, 2010), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the fees and expenses of each respective class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

During 2004, the R-4 Class experienced a significant withdrawal of monies by an affiliate. As the remaining shareholders held relatively small positions, the total return amounts expressed herein are greater than those that would have been experienced without the withdrawal.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	17.51	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(23.89	)%


⁽¹⁾	The Fund is showing returns for Class A shares after combining separate prospectuses.

110



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	25.85%	21.23%	10.55	%
Class A Return After Taxes on Distributions	25.22%	20.61%	9.63	%
Class A Return After Taxes on Distribution and Sale of Fund Shares	15.13%	17.46%	8.65	%
Class C Return Before Taxes	31.13%	21.68%	10.29	%
Class J Return Before Taxes	32.23%	22.57%	11.00	%
Class P Return Before Taxes	33.49%	22.82%	11.22	%
Institutional Class Return Before Taxes	33.60%	23.15%	11.65	%
Class R-1 Return Before Taxes	32.56%	22.10%	10.70	%
Class R-2 Return Before Taxes	32.68%	22.28%	10.84	%
Class R-3 Return Before Taxes	32.97%	22.48%	11.06	%
Class R-4 Return Before Taxes	33.17%	22.73%	11.24	%	⁽²⁾
Class R-5 Return Before Taxes	33.33%	22.87%	11.39	%
Russell Midcap Index (reflects no deduction for fees, expenses, or taxes)	34.76%	22.36%	10.22	%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.


⁽²⁾	During 2004, the Class experienced a significant withdrawal of monies by an affiliate. As the remaining shareholders held relatively small positions, the total return amounts expressed herein are greater than those that would have been experienced without the withdrawal.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	K. William Nolin (since 2000), Portfolio Manager


•	Tom Rozycki (since 2013), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

For retail investors (i.e., non-employer sponsored retirement plan investors), effective as of the close of the New York Stock Exchange on June 14, 2013 and for employer-sponsored retirement plan investors, effective as of the close of the New York Stock Exchange on August 15, 2013, the MidCap Fund will no longer be available for purchases from new investors except in limited circumstances. See the section Purchase of Fund Shares for additional information.

111

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

112

MIDCAP GROWTH FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.32%	0.12%	0.56%	0.48%	0.35%	0.31%	0.29%
Total Annual Fund Operating Expenses	1.22%	0.77%	1.56%	1.43%	1.25%	1.06%	0.94%
Fee Waiver and Expense Reimbursement(2)(3)	(0.01)%	(0.03)%	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.21%	0.74%	1.56%	1.43%	1.25%	1.06%	0.94%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
⁽²⁾ Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.75% for Institutional class shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$223	$386	$669	$1,476
Institutional Class	76	242	424	951
Class R-1	159	493	850	1,856
Class R-2	146	452	782	1,713
Class R-3	127	397	686	1,511
Class R-4	108	337	585	1,294
Class R-5	96	300	520	1,155

113

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$123	$386	$669	$1,476

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with medium market capitalizations at the time of each purchase. For this Fund, companies with medium market capitalizations are those with market capitalizations within the range of companies comprising the Russell Midcap^® Growth Index (as of December 31, 2013, this range was between approximately $1.26 billion and $29.14 billion). The Fund invests in growth equity securities; growth orientation emphasizes buying equity securities of companies whose potential for growth of capital and earnings is expected to be above average. The Fund actively trades portfolio securities.

Principal Risks

Performance


•	For Class J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

114

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q4 ‘10	17.62	%
Lowest return for a quarter during the period of the bar chart above:	Q4 ‘08	(25.27	)%

⁽¹⁾ The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	35.28%	18.72%	8.67%
Institutional Class Return After Taxes on Distributions	25.76%	16.25%	7.42%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	22.07%	14.63%	6.83%
Class J Return Before Taxes	33.80%	18.03%	7.90%
Class R-1 Return Before Taxes	34.31%	17.71%	7.75%
Class R-2 Return Before Taxes	34.53%	17.89%	7.88%
Class R-3 Return Before Taxes	34.67%	18.05%	8.08%
Class R-4 Return Before Taxes	34.94%	18.27%	8.27%
Class R-5 Return Before Taxes	35.30%	18.46%	8.40%
Russell Midcap Growth Index (reflects no deduction for fees, expenses, or taxes)	35.74%	23.37%	9.77%

⁽¹⁾ The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Columbus Circle Investors


•	Clifford G. Fox (since 2005), Senior Managing Director/Portfolio Manager


•	Michael Iacono (since 2008), Managing Director/Co-Portfolio Manager


•	Katerina Wasserman (since 2010), Managing Director/Co-Portfolio Manager

115

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

116

MIDCAP GROWTH FUND III


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.97%	0.97%	0.97%	0.97%	0.97%	0.97%	0.97%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.23%	—	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	1.45%	0.97%	1.85%	1.72%	1.54%	1.35%	1.23%
Fee Waiver(2)(3)	(0.03)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%	(0.02)%
Total Annual Fund Operating Expenses after Fee Waiver	1.42%	0.95%	1.83%	1.70%	1.52%	1.33%	1.21%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.022% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$245	$455	$789	$1,732
Institutional Class	97	307	534	1,188
Class R-1	186	579	998	2,167
Class R-2	173	540	931	2,028
Class R-3	155	484	837	1,833
Class R-4	135	425	737	1,622
Class R-5	123	388	673	1,487

117

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$145	$455	$789	$1,732

Portfolio Turnover

Principal Investment Strategies

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

118

Performance


•	For Classes J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	20.43	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(28.66	)%

⁽¹⁾ The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	35.62%	21.26%	8.47%
Institutional Class Return After Taxes on Distributions	28.80%	19.92%	7.71%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	23.29%	17.19%	6.85%
Class J Return Before Taxes	33.89%	20.62%	7.76%
Class R-1 Return Before Taxes	34.37%	20.23%	7.53%
Class R-2 Return Before Taxes	34.53%	20.37%	7.66%
Class R-3 Return Before Taxes	34.81%	20.54%	7.85%
Class R-4 Return Before Taxes	34.94%	20.78%	8.05%
Class R-5 Return Before Taxes	35.08%	20.89%	8.18%
Russell Midcap Growth Index (reflects no deduction for fees, expenses, or taxes)	35.74%	23.37%	9.77%

⁽¹⁾ The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

119

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

Robert W. Baird & Co. Incorporated

William Blair & Company, L.L.C.

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	For accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

120

MIDCAP S&P 400 INDEX FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%	0.15%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.25%	0.06%	0.54%	0.46%	0.33%	0.29%	0.27%
Acquired Fund Fees and Expenses	0.01%	0.01%	0.01%	0.01%	0.01%	0.01%	0.01%
Total Annual Fund Operating Expenses	0.66%	0.22%	1.05%	0.92%	0.74%	0.55%	0.43%
Fee Waiver and Expense Reimbursement(2)(3)	(0.01)%	—%	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	0.65%	0.22%	1.05%	0.92%	0.74%	0.55%	0.43%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
⁽²⁾ Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.25% for Institutional class shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$166	$210	$367	$821
Institutional Class	23	71	124	280
Class R-1	107	334	579	1,283
Class R-2	94	293	509	1,131
Class R-3	76	237	411	918
Class R-4	56	176	307	689
Class R-5	44	138	241	542

121

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$66	$210	$367	$821

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the Standard & Poor's ("S&P") MidCap 400 Index at the time of each purchase. The Index is designed to represent U.S. equities with risk/return characteristics of the mid cap universe. As of December 31, 2013 , the market capitalization range of the companies comprising the Index was between approximately $1.112 billion and $11.49 billion . The Fund employs a passive investment approach designed to attempt to track the performance of the Index. The Fund utilizes derivative strategies and exchange-traded funds ("ETFs"). A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. Specifically, the Fund invests in index futures and equity ETFs on a daily basis to gain exposure to the Index in an effort to minimize tracking error relative to the benchmark.


Note:	“Standard & Poor's MidCap 400" and "S&P MidCap 400" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed by Principal. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.

Principal Risks

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

122

Performance


•	For Class J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	19.87	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(25.73	)%

⁽¹⁾ The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Institutional Class Return Before Taxes	33.13%	21.60%	10.12%
Institutional Class Return After Taxes on Distributions	31.73%	20.86%	9.27%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	19.70%	17.77%	8.28%
Class J Return Before Taxes	31.58%	20.93%	9.42%
Class R-1 Return Before Taxes	32.00%	20.58%	9.17%
Class R-2 Return Before Taxes	32.22%	20.74%	9.32%
Class R-3 Return Before Taxes	32.41%	20.95%	9.52%
Class R-4 Return Before Taxes	32.70%	21.18%	9.72%
Class R-5 Return Before Taxes	32.84%	21.33%	9.86%
S&P Midcap 400 Index (reflects no deduction for fees, expenses, or taxes)	33.50%	21.89%	10.36%


⁽¹⁾	The Fund is showing after-tax returns for Institutional Class shares after combining separate prospectuses.

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

123

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Manager:

Principal Global Investors, LLC


•	Thomas L. Kruchten (since 2011), Research Analyst and Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	For accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

124

MIDCAP VALUE FUND I


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

Shareholder Fees (fees paid directly from your investment)



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.98%	0.98%	0.98%	0.98%	0.98%	0.98%	0.98%
Distribution and/or Service (12b-1) Fees (1)	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.22%	0.02%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.01%	0.01%	0.01%	0.01%	0.01%	0.01%	0.01%
Total Annual Fund Operating Expenses	1.46%	1.01%	1.87%	1.74%	1.56%	1.37%	1.25%
Fee Waiver (2)(3)	(0.07)%	(0.06)%	(0.06)%	(0.06)%	(0.06)%	(0.06)%	(0.06)%
Total Annual Fund Operating Expenses after Fee Waiver	1.39%	0.95%	1.81%	1.68%	1.50%	1.31%	1.19%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.06% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Class J	$242	$454	$790	$1,739
Institutional Class	97	315	551	1,230
Class R-1	184	581	1,004	2,185
Class R-2	171	541	937	2,046
Class R-3	153	486	843	1,850
Class R-4	133	427	743	1,640
Class R-5	121	390	680	1,505

125

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$142	$454	$790	$1,739

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in a diversified portfolio of equity securities of companies with medium market capitalizations at the time of each purchase. For this Fund, companies with medium market capitalizations are those with market capitalizations within the range of companies comprising the Russell Midcap^® Value Index (as of December 31, 2013, the range was between approximately $1.126 billion and $26.943 billion). The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund also invests in real estate investment trusts.

Principal Risks

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

126

Performance


•	For Classes J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class J shares (March 2, 2009), performance shown in the table for Class J shares is based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and expenses of Class J shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold December 29, 2003.

Total Returns as of December 31 (Institutional Class shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	22.38	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(23.74	)%

⁽¹⁾ The Fund is showing returns for Institutional Class shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	Life of Fund
Institutional Class Return Before Taxes	33.63%	20.28%	10.50%
Institutional Class Return After Taxes on Distributions	24.49%	18.40%	9.01%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	22.71%	16.14%	8.35%
Class J Return Before Taxes	32.07%	19.58%	9.83%
Class R-1 Return Before Taxes	32.45%	19.26%	9.55%
Class R-2 Return Before Taxes	32.61%	19.40%	9.69%
Class R-3 Return Before Taxes	32.88%	19.60%	9.88%
Class R-4 Return Before Taxes	33.11%	19.84%	10.08%
Class R-5 Return Before Taxes	33.21%	19.98%	10.22%
Russell Midcap Value Index (reflects no deduction for fees, expenses, or taxes)	33.46%	21.16%	10.25%


⁽¹⁾	The Fund is showing returns for Institutional Class shares after combining separate prospectuses.

127

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

Goldman Sachs Asset Management, L.P.

Los Angeles Capital Management and Equity Research, Inc.

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
J	Initial Investment	$1,000⁽¹⁾
J	For accounts with an Automatic Investment Plan (AIP)	$100
J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

128

MIDCAP VALUE FUND III


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None	None	None

129

Annual Fund Operating Expenses

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



	Share Class
	A	J	P	Inst.	R-1	R-2	R-3	R-4	R-5	R-6
Management Fees	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%
Distribution and/or Service (12b-1) Fees(1)	0.25%	0.25%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A	N/A
Other Expenses (2)	0.40%	0.17%	0.27%	0.02%	0.54%	0.46%	0.33%	0.29%	0.27%	0.08%
Acquired Fund Fees and Expenses	0.04%	0.04%	0.04%	0.04%	0.04%	0.04%	0.04%	0.04%	0.04%	0.04%
Total Annual Fund Operating Expenses	1.34%	1.11%	0.96%	0.71%	1.58%	1.45%	1.27%	1.08%	0.96%	0.77%
Fee Waiver and Expense Reimbursement(3)(4)(5)(6)(7)	(0.01)%	(0.02)%	(0.08)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.01)%	(0.04)%
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.33%	1.09%	0.88%	0.70%	1.57%	1.44%	1.26%	1.07%	0.95%	0.73%
(1)Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J were reduced.
(2) Based on estimated expenses for the current fiscal year (Classes A, P, and R-6).
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.014% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(4) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's Management Fees through the period ending February 29, 2016. The fee waiver will reduce the Fund's Management Fees by 0.014% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.
(5)Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund's expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.30% for Class A, and 0.69% for Class R-6 shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20% (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 29, 2016; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.
(6) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(7) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.736% for Institutional class shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

130

Example

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



	1 year	3 years	5 years	10 years
Class A	$678	$949
Class J	211	351	$609	$1,350
Class P	90	288
Institutional Class	72	226	394	881
Class R-1	160	498	859	1,877
Class R-2	147	457	791	1,734
Class R-3	128	402	696	1,533
Class R-4	109	342	594	1,316
Class R-5	97	305	530	1,177
Class R-6	75	241

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$111	$351	$609	$1,350

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with medium market capitalizations at the time of each purchase. For this Fund, companies with medium market capitalizations are those with market capitalizations within the range of companies comprising the Russell Midcap^® Value Index (as of December 31, 2013, this range was between approximately $1.126 billion and $26.943 billion). The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund invests in real estate investment trusts.

Principal Risks

131

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, J, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, R-5, and R-6 - www.principal.com.

For periods prior to the inception date of Classes A and P shares (June 3, 2014) and Class R-6 shares (November 25, 2014), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000.

132

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '09	19.13	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(22.51	)%


⁽¹⁾	The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	28.51%	18.74%	8.34%
Class A Return After Taxes on Distributions	27.03%	18.16%	7.21%
Class A Return After Taxes on Distribution and Sale of Fund Shares	16.65%	15.06%	6.48%
Class J Return Before Taxes	35.31%	20.23%	8.99%
Class P Return Before Taxes	36.06%	20.14%	9.02%
Institutional Class Return Before Taxes	36.83%	20.89%	9.91%
Class R-1 Return Before Taxes	35.70%	19.77%	8.68%
Class R-2 Return Before Taxes	35.84%	19.93%	8.82%
Class R-3 Return Before Taxes	36.06%	20.14%	9.02%
Class R-4 Return Before Taxes	36.35%	20.39%	9.22%
Class R-5 Return Before Taxes	36.53%	20.52%	9.35%
Class R-6 Return Before Taxes	36.06%	20.14%	9.02%
Russell Midcap Value Index (reflects no deduction for fees, expenses, or taxes)	33.46%	21.16%	10.25%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2010), Portfolio Manager


•	Randy L. Welch (since 2010), Portfolio Manager

Sub-Advisors:

Barrow, Hanley, Mewhinney & Strauss, LLC

Principal Global Investors, LLC

133

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	For accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, R-5, and R-6	There are no minimum initial or subsequent investment requirements for eligible purchases.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

134

MONEY MARKET FUND


Objective:	The Fund seeks as high a level of current income as is considered consistent with preservation of principal and maintenance of liquidity.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	J	Inst.
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	1.00%	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	J	Inst.
Management Fees	0.39%	0.39%	0.39%	0.39%
Distribution and/or Service (12b-1) Fees	—%	1.00%	0.25%	0.02%
Other Expenses	0.15%	0.27%	0.18%
Acquired Fund Fees and Expenses	0.01%	0.01%	0.01%	0.01%
Total Annual Fund Operating Expenses	0.55%	1.67%	0.83%	0.42%
Fee Waiver and Expense Reimbursement(1) (2)	N/A	—%	(0.01)%	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	0.55%	1.67%	0.82%	0.42%
(1) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(2) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.79% for Class C shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

135

Example

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



	1 year	3 years	5 years	10 years
Class A	$56	$176	$307	$689
Class C	270	526	907	1,976
Class J	184	264	459	1,024
Institutional Class	43	135	235	530

With respect to Class C and J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	170	526	907	1,976
Class J	84	264	459	1,024

Principal Investment Strategies

The Fund seeks to maintain a stable net asset value of $1.00 per share by investing its assets in a portfolio of high quality, short-term money market instruments such as those issued by banks, corporations (U.S. and non-U.S.), municipalities and the U.S. government. Such instruments include certificates of deposit, bankers acceptances, commercial paper, treasury bills, bonds, and shares of other money market funds. The Fund maintains a dollar weighted average portfolio maturity of 60 days or less. As with all mutual funds, the value of the Fund's assets may rise or fall.

Principal Risks

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the Fund. The principal risks of investing in the Fund, in alphabetical order, are:

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Performance


•	For Classes A, C, and J - www.principalfunds.com.

136


•	For Institutional Class - www.principal.com.

The bar chart shows the investment returns of the Fund’s Class A shares for each full calendar year of operations for 10 years (or, if shorter, the life of the Fund). The table shows, for Institutional Class shares of the Fund and for the last one, five, and ten calendar year periods (or, if shorter, the life of the Fund), how the Fund’s average annual total returns compare with those of one or more broad measures of market performance.

For periods prior to the inception date of Class A shares (June 28, 2005) and Class C shares (January 16, 2007), performance shown in the bar chart and the table for these classes is based on the performance of the Fund's Class R-3 shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class R-3 shares, which were first sold on December 6, 2000 and liquidated on March 25, 2012.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q3 '07	1.24	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '13	0.00	%


⁽¹⁾	The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	0.00%	0.04%	1.51%
Class C Return Before Taxes	(1.00)%	0.01%	0.97%
Class J Return Before Taxes	(1.00)%	0.01%	1.30%
Institutional Class Return Before Taxes	0.00%	0.05%	1.65%
Barclays U.S. Treasury Bellwethers 3 Month Index (reflects no deduction for fees, expenses, or taxes)	0.08%	0.14%	1.71%

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Tracy Reeg (since 2004), Portfolio Manager


•	Alice Robertson (since 2000), Trader and Portfolio Manager

137

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A, C, and J	Initial Investment	$1,000⁽¹⁾
A, C, and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A, C, and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

138

OVERSEAS FUND


Objective:	The Fund seeks long-term growth of capital.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	1.07%	1.07%	1.07%	1.07%	1.07%	1.07%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.03%	0.55%	0.47%	0.34%	0.30%	0.28%
Total Annual Fund Operating Expenses	1.10%	1.97%	1.84%	1.66%	1.47%	1.35%
Fee Waiver(1)	(0.03)%	(0.03)%	(0.03)%	(0.03)%	(0.03)%	(0.03)%
Total Annual Fund Operating Expenses after Fee Waiver	1.07%	1.94%	1.81%	1.63%	1.44%	1.32%
(1) Principal Management Corporation has contractually agreed to limit the Fund's Management Fees through the period ending February 28, 2015. The fee waiver will reduce the Fund's Management Fees by 0.03% (expressed as a percent of average net assets on an annualized basis). It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and Principal, the parties to the agreement may agree to terminate the fee waiver prior to the end of the period.

Example

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



	1 year	3 years	5 years	10 years
Institutional Class	$109	$346	$603	$1,337
Class R-1	197	615	1,059	2,293
Class R-2	184	575	992	2,156
Class R-3	166	520	899	1,962
Class R-4	147	461	799	1,754
Class R-5	134	424	736	1,621

Portfolio Turnover

Principal Investment Strategies

Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of foreign companies at the time of each purchase. Foreign companies are:


•	companies with their principal place of business or principal office outside the U.S. or


•	companies whose principal securities trading market is outside the U.S.

The Fund invests in emerging market countries. The Fund invests in value equity securities, an investment strategy that emphasizes buying equity securities that appear to be undervalued. The Fund invests in equity securities of small, medium, and large market capitalization companies.

139

Principal Risks

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance

Life of Fund results are measured from the date the Fund's shares were first sold (September 30, 2008).

For periods prior to the inception date of Classes R-1, R-2, R-3, R-4, and R-5 shares (March 1, 2012), performance shown in the table for these classes is based on the performance of the Fund's Institutional Class shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on September 30, 2008.

140

Total Returns as of December 31 (Institutional Class shares)



Highest return for a quarter during the period of the bar chart above:	Q2' 09	22.88	%
Lowest return for a quarter during the period of the bar chart above:	Q3' 11	(21.11	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Institutional Class Return Before Taxes	21.70%	12.11%	8.88%
Institutional Class Return After Taxes on Distributions	19.95%	11.07%	7.91%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	13.85%	9.86%	7.20%
Class R-1 Return Before Taxes	20.63%	11.14%	7.93%
Class R-2 Return Before Taxes	20.85%	11.30%	8.08%
Class R-3 Return Before Taxes	20.99%	11.48%	8.25%
Class R-4 Return Before Taxes	21.21%	11.71%	8.47%
Class R-5 Return Before Taxes	21.37%	11.84%	8.60%
MSCI EAFE Value Index (reflects no deduction for fees, expenses, or taxes)	22.95%	11.99%	6.80%

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2009), Portfolio Manager


•	Randy L. Welch (since 2009), Portfolio Manager

Sub-Advisors:

Barrow, Hanley, Mewhinney & Strauss, LLC

Causeway Capital Management LLC

Purchase and Sale of Fund Shares

There are no minimum initial or subsequent investment requirements for an eligible purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

141

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

142

PRINCIPAL CAPITAL APPRECIATION FUND


Objective:	The Fund seeks to provide long-term growth of capital.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	C	P	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	C	P	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.47%	0.47%	0.47%	0.47%	0.47%	0.47%	0.47%	0.47%	0.47%
Distribution and/or Service (12b-1) Fees	0.25%	1.00%	N/A	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.18%	0.26%	0.21%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Total Annual Fund Operating Expenses	0.90%	1.73%	0.68%	0.48%	1.35%	1.22%	1.04%	0.85%	0.73%
Expense Reimbursement(1)	N/A	—%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Expense Reimbursement	0.90%	1.73%	0.67%	0.48%	1.35%	1.22%	1.04%	0.85%	0.73%
(1) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 1.82% for Class C shares. In addition, for Class P, the expense limit will maintain "Other Expenses" (expressed as a percent of average net assets on an annualized basis) not to exceed 0.20%, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses). It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

143

Example

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



	1 year	3 years	5 years	10 years
Class A	$637	$821	$1,021	$1,597
Class C	276	545	939	2,041
Class P	68	216	378	845
Institutional Class	49	154	269	604
Class R-1	137	428	739	1,624
Class R-2	124	387	670	1,477
Class R-3	106	331	574	1,271
Class R-4	87	271	471	1,049
Class R-5	75	233	406	906

With respect to Class C shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class C	$176	$545	$939	$2,041

Portfolio Turnover

Principal Investment Strategies

The Fund invests primarily in equity securities of companies with any market capitalization, but has a greater exposure to large market capitalization companies than small or medium market capitalization companies.

Principal Risks

144

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A, C, and P - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Classes R-1, R-2, R-3, R-4, and R-5 Class shares (March 1, 2010) and Class P shares (September 27, 2010), performance shown in the table for these classes is based on the performance of the Fund's Class A shares adjusted to reflect the respective fees and expenses of each class. The adjustments result in performance for such periods that is no higher than the historical performance of the Class A shares, which were first sold on November 24, 1986.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	16.44	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(22.78	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

145



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	25.16%	16.06%	7.59%
Class A Return After Taxes on Distributions	24.30%	15.57%	7.04%
Class A Return After Taxes on Distribution and Sale of Fund Shares	14.92%	13.05%	6.21%
Class C Return Before Taxes	30.34%	16.32%	7.24%
Class P Return Before Taxes	32.73%	17.57%	8.29%
Institutional Class Return Before Taxes	32.99%	17.90%	8.64%
Class R-1 Return Before Taxes	31.82%	16.88%	7.68%
Class R-2 Return Before Taxes	32.00%	17.03%	7.81%
Class R-3 Return Before Taxes	32.22%	17.25%	8.01%
Class R-4 Return Before Taxes	32.49%	17.44%	8.20%
Class R-5 Return Before Taxes	32.65%	17.55%	8.28%
Russell 3000 Index (reflects no deduction for fees, expenses, or taxes)	33.55%	18.71%	7.88%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor:

Principal Management Corporation

Sub-Advisor and Portfolio Managers:

Edge Asset Management, Inc.


•	Daniel R. Coleman (since 2010), Head of Equities, Portfolio Manager


•	Philip M. Foreman (since 2002), Portfolio Manager

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and C	Initial Investment	$1,000⁽¹⁾
A and C	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and C	Subsequent Investments	$100⁽¹⁾⁽²⁾
P, Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

146

Payments to Broker-Dealers and Other Financial Intermediaries

147

PRINCIPAL LIFETIME STRATEGIC INCOME FUND


Objective:	The Fund seeks current income, and as a secondary objective, capital appreciation.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees (1)	0.25%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.22%	0.09%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.59%	0.59%	0.59%	0.59%	0.59%	0.59%	0.59%	0.59%
Total Annual Fund Operating Expenses	1.09%	0.96%	0.63%	1.50%	1.37%	1.19%	1.00%	0.88%
Fee Waiver and Expense Reimbursement(2) (3)	(0.09)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.00%	0.95%	0.63%	1.50%	1.37%	1.19%	1.00%	0.88%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.41% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

148

Example

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



	1 year	3 years	5 years	10 years
Class A	$473	$699	$944	$1,645
Class J	197	305	530	1,177
Institutional Class	64	202	351	786
Class R-1	153	474	818	1,791
Class R-2	139	434	750	1,646
Class R-3	121	378	654	1,443
Class R-4	102	318	552	1,225
Class R-5	90	281	488	1,084

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	97	305	530	1,177

Portfolio Turnover

As a fund of funds, the Fund does not pay transaction costs, such as commissions, when it buys and sells shares of underlying funds (or “turns over” its portfolio). An underlying fund does pay transaction costs when it buys and sells portfolio securities, and a higher portfolio turnover may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the examples, affect the performance of the underlying fund and the Fund. During its most recent fiscal year, the Fund's portfolio turnover rate was 14.6% of the average value of its portfolio.

Principal Investment Strategies

The Fund invests according to an asset allocation strategy designed for investors primarily seeking current income and secondarily capital appreciation. The Fund's asset allocation is designed for investors who are approximately 15 years beyond the normal retirement age of 65. The Fund is a fund of funds that invests in PFI Institutional Class shares. Its underlying funds consist of domestic and foreign equity funds, fixed-income funds, real asset funds, and alternative investments funds. Alternative investments aim to offer diversification beyond traditional equity and fixed-income securities and include investments in such assets as infrastructure, commodities, currencies and public timber companies. The Fund is managed by Principal Management Corporation (“Principal”); Principal has hired a sub-advisor, Principal Global Investors, LLC (“PGI”), to assist in managing the Fund.

Principal, with assistance from PGI, develops, implements and monitors the Fund's strategic or long-term asset class targets and target ranges, is also responsible for an active rebalancing strategy designed to identify asset classes that appear attractive over the short term and sets the percentage of Fund assets to be allocated to a particular asset class. Principal selects the underlying funds for each asset class and the target weights for each underlying fund. Principal, with assistance from PGI, may shift asset class targets in response to normal evaluative processes, the shortening time horizon of the Fund or changes in market forces or Fund circumstances. Principal may add, remove, or substitute underlying funds at any time.

In selecting underlying funds and target weights, Principal considers both quantitative measures (e.g., past performance, expected levels of risk and returns, expense levels, diversification and style consistency) and qualitative factors (e.g., organizational stability, investment experience, investment and risk management processes, and information, trading, and compliance systems). There are no minimum or maximum percentages of assets that the Fund must invest in a specific asset class or underlying fund.

149

currencies, investment companies (including index funds), real estate securities, derivatives, mortgage-backed securities, and U.S. government and U.S. government-sponsored securities. The underlying funds engage in derivative transactions to gain exposure to a variety of securities or asset classes or attempt to reduce risk. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The underlying funds principally use futures, options, swaps (including, for example, credit default, interest rate, and currency swaps) and forwards.

Principal Risks

The broad diversification of the Fund is designed to cushion severe losses in any one investment sector and moderate overall price volatility. However, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them, and its share prices will fluctuate as the prices of underlying fund shares rise or fall with changing market conditions. If you sell your shares when their value is less than the price you paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

Conflict of Interest Risk. The Advisor and its affiliates earn different fees from different underlying funds and may have an incentive to allocate more fund-of-fund assets to underlying funds from which they receive higher fees.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

150

Target Date Fund Risk. A target date fund should not be selected based solely on age or retirement date because there is no guarantee that this fund will provide adequate income at or through retirement.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

151

times it would not otherwise do so, and may as a result increase transaction costs and adversely affect underlying fund performance.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), performance shown in the bar chart and the table for this class is based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and expenses of Class A shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on March 1, 2001.

Total Returns as of December 31 (Class A shares)



Highest return for a quarter during the period of the bar chart above:	Q3 '09	9.69	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(11.34	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

152



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	1.08%	8.29%	3.66%
Class A Return After Taxes on Distributions	0.37%	7.37%	2.57%
Class A Return After Taxes on Distribution and Sale of Fund Shares	0.70%	6.20%	2.50%
Class J Return Before Taxes	4.06%	9.06%	4.10%
Institutional Class Return Before Taxes	5.39%	9.50%	4.62%
Class R-1 Return Before Taxes	4.53%	8.55%	3.71%
Class R-2 Return Before Taxes	4.66%	8.71%	3.87%
Class R-3 Return Before Taxes	4.81%	8.88%	4.03%
Class R-4 Return Before Taxes	5.02%	9.11%	4.23%
Class R-5 Return Before Taxes	5.13%	9.24%	4.37%
S&P Target Date Retirement Income Index (reflects no deduction for fees, expenses, or taxes)	6.28%	7.62%	4.85%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2007), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2007), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

153

154

PRINCIPAL LIFETIME 2010 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	3.75%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees (1)	0.25%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.20%	0.06%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%	0.63%
Total Annual Fund Operating Expenses	1.11%	0.97%	0.67%	1.54%	1.41%	1.23%	1.04%	0.92%
Fee Waiver and Expense Reimbursement(2) (3)	(0.07)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.04%	0.96%	0.67%	1.54%	1.41%	1.23%	1.04%	0.92%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.41% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

155

Example

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



	1 year	3 years	5 years	10 years
Class A	$477	$707	$956	$1,669
Class J	198	308	535	1,189
Institutional Class	68	214	373	835
Class R-1	157	486	839	1,834
Class R-2	144	446	771	1,691
Class R-3	125	390	676	1,489
Class R-4	106	331	574	1,271
Class R-5	94	293	509	1,131

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	$98	$308	$535	$1,189

Portfolio Turnover

Principal Investment Strategies

The Fund operates as a “target date fund” that invests according to an asset allocation strategy designed for investors having a retirement investment goal close to the year in the Fund’s name. The Fund's asset allocation will become more conservative over time as investment goals near (for example, retirement, which is assumed to begin at age 65) and investors become more risk-averse. The Fund is a fund of funds and invests in PFI Institutional Class shares. Its underlying funds consist of domestic and foreign equity funds, fixed-income funds, real asset funds, and alternative investments funds. Alternative investments aim to offer diversification beyond traditional equity and fixed-income securities and include investments in such assets as infrastructure, commodities, currencies and public timber companies. The Fund is managed by Principal Management Corporation (“Principal”); Principal has hired a sub-advisor, Principal Global Investors, LLC (“PGI”), to assist in managing the Fund.

156

asset-backed securities, and U.S. government and U.S. government-sponsored securities. The underlying funds engage in derivative transactions to gain exposure to a variety of securities or asset classes or attempt to reduce risk. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The underlying funds principally use futures, options, swaps (including, for example, credit default, interest rate, and currency swaps) and forwards.

Within 10 to 15 years after its target year, the Fund's underlying fund allocation is expected to match that of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of Fund shareholders. It is expected that at the target date in the Fund’s name, the shareholder will begin gradually withdrawing the account's value.

Principal Risks

The broad diversification of the Fund is designed to cushion severe losses in any one investment sector and moderate overall price volatility. However, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them, and its share prices will fluctuate as the prices of underlying fund shares rise or fall with changing market conditions. If you sell your shares when their value is less than the price you paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

157

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

158

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

For periods prior to the inception date of Class A shares (June 28, 2005), performance shown in the bar chart and the table for Class A shares is based on the performance of the Fund's Institutional Class shares adjusted to reflect the fees and expenses of Class A shares. The adjustments result in performance for such periods that is no higher than the historical performance of the Institutional Class shares, which were first sold on March 1, 2001.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	13.95	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(16.36	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

159



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	6.43%	11.08%	4.52%
Class A Return After Taxes on Distributions	5.79%	10.34%	3.64%
Class A Return After Taxes on Distribution and Sale of Fund Shares	3.76%	8.57%	3.31%
Class J Return Before Taxes	9.63%	11.92%	5.02%
Institutional Class Return Before Taxes	10.93%	12.34%	5.50%
Class R-1 Return Before Taxes	10.02%	11.36%	4.57%
Class R-2 Return Before Taxes	10.09%	11.51%	4.71%
Class R-3 Return Before Taxes	10.39%	11.72%	4.90%
Class R-4 Return Before Taxes	10.57%	11.94%	5.11%
Class R-5 Return Before Taxes	10.67%	12.04%	5.24%
S&P Target Date 2010 Index (reflects no deduction for fees, expenses, or taxes)	9.42%	9.16%	5.47%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2007), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2007), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

160

share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary's website for more information.

161

PRINCIPAL LIFETIME 2015 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.65%	0.65%	0.65%	0.65%	0.65%	0.65%
Total Annual Fund Operating Expenses	0.69%	1.56%	1.43%	1.25%	1.06%	0.94%

Example

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



	1 year	3 years	5 years	10 years
Institutional Class	$70	$221	$384	$859
Class R-1	159	493	850	1,856
Class R-2	146	452	782	1,713
Class R-3	127	397	686	1,511
Class R-4	108	337	585	1,294
Class R-5	96	300	520	1,155

Portfolio Turnover

Principal Investment Strategies

162

class. Principal selects the underlying funds for each asset class and the target weights for each underlying fund. Principal, with assistance from PGI, may shift asset class targets in response to normal evaluative processes, the shortening time horizon of the Fund or changes in market forces or Fund circumstances. Principal may add, remove, or substitute underlying funds at any time.

The underlying funds invest in growth and value stocks of large market capitalization companies, fixed-income securities (including high yield or “junk” bonds), domestic and foreign (including those in emerging markets) securities, securities denominated in foreign currencies, investment companies (including index funds), real estate securities, derivatives, mortgage-backed and asset-backed securities, and U.S. government and U.S. government-sponsored securities. The underlying funds engage in derivative transactions to gain exposure to a variety of securities or asset classes or attempt to reduce risk. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The underlying funds principally use futures, options, swaps (including, for example, credit default, interest rate, and currency swaps) and forwards.

Principal Risks

163

paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

164

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance

Life of Fund results are measured from the date the Fund's shares were first sold (February 29, 2008).

165

Total Returns as of December 31 (Institutional Class shares)



Highest return for a quarter during the period of the bar chart above:	Q3 '09	14.34	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '11	(10.77	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Institutional Class Return Before Taxes	13.51%	12.89%	5.21%
Institutional Class Return After Taxes on Distributions	11.78%	11.67%	4.14%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	8.45%	10.03%	3.81%
Class R-1 Return Before Taxes	12.52%	11.89%	4.21%
Class R-2 Return Before Taxes	12.56%	12.04%	4.35%
Class R-3 Return Before Taxes	12.83%	12.23%	4.52%
Class R-4 Return Before Taxes	13.08%	12.48%	4.74%
Class R-5 Return Before Taxes	13.17%	12.61%	4.86%
S&P Target Date 2015 Index (reflects no deduction for fees, expenses, or taxes)	12.16%	10.54%	5.39%

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2008), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2008), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares

There are no minimum initial or subsequent investment requirements for an eligible purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

166

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

167

PRINCIPAL LIFETIME 2020 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees(1)	0.25%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.17%	0.07%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.67%	0.67%	0.67%	0.67%	0.67%	0.67%	0.67%	0.67%
Total Annual Fund Operating Expenses	1.12%	1.02%	0.71%	1.58%	1.45%	1.27%	1.08%	0.96%
Fee Waiver and Expense Reimbursement(2) (3)	(0.04)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.08%	1.01%	0.71%	1.58%	1.45%	1.27%	1.08%	0.96%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.41% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

168

Example

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



	1 year	3 years	5 years	10 years
Class A	$654	$882	$1,129	$1,834
Class J	203	324	562	1,247
Institutional Class	73	227	395	883
Class R-1	161	499	860	1,878
Class R-2	148	459	792	1,735
Class R-3	129	403	697	1,534
Class R-4	110	343	595	1,317
Class R-5	98	306	531	1,178

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	103	324	562	1,247

Portfolio Turnover

Principal Investment Strategies

169

The underlying funds invest in growth and value stocks of small, medium, and large market capitalization companies, fixed-income securities (including high yield or “junk” bonds), domestic and foreign (including those in emerging markets) securities, securities denominated in foreign currencies, investment companies (including index funds), real estate securities, derivatives, and U.S. government and U.S. government-sponsored securities. The underlying funds engage in derivative transactions to gain exposure to a variety of securities or asset classes or attempt to reduce risk. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The underlying funds principally use futures, options, swaps (including, for example, credit default, interest rate, and currency swaps) and forwards.

Principal Risks

The broad diversification of the Fund is designed to cushion severe losses in any one investment sector and moderate overall price volatility. However, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them, and its share prices will fluctuate as the prices of underlying fund shares rise or fall with changing market conditions. If you sell your shares when their value is less than the price you paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

170

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

171

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	15.99	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(18.46	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

172



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	9.13%	12.29%	5.18%
Class A Return After Taxes on Distributions	8.26%	11.61%	4.36%
Class A Return After Taxes on Distribution and Sale of Fund Shares	5.52%	9.63%	3.90%
Class J Return Before Taxes	14.63%	13.56%	5.87%
Institutional Class Return Before Taxes	15.90%	13.99%	6.37%
Class R-1 Return Before Taxes	14.98%	13.01%	5.45%
Class R-2 Return Before Taxes	15.06%	13.14%	5.58%
Class R-3 Return Before Taxes	15.31%	13.34%	5.77%
Class R-4 Return Before Taxes	15.52%	13.56%	5.96%
Class R-5 Return Before Taxes	15.68%	13.72%	6.10%
S&P Target Date 2020 Index (reflects no deduction for fees, expenses, or taxes)	14.76%	11.75%	6.26%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation

• James W. Fennessey (since 2007), Portfolio Manager

• Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2007), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

173

or other intermediary and your salesperson to recommend the Fund over another investment, or to recommend one share class of the Fund over another share class. Ask your salesperson or visit your financial intermediary's website for more information.

174

PRINCIPAL LIFETIME 2025 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.69%	0.69%	0.69%	0.69%	0.69%	0.69%
Total Annual Fund Operating Expenses	0.73%	1.60%	1.47%	1.29%	1.10%	0.98%

Example

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



	1 year	3 years	5 years	10 years
Institutional Class	$75	$233	$406	$906
Class R-1	163	505	871	1,900
Class R-2	150	465	803	1,757
Class R-3	131	409	708	1,556
Class R-4	112	350	606	1,340
Class R-5	100	312	542	1,201

Portfolio Turnover

Principal Investment Strategies

175

Principal Risks

176

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

177

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance

Life of Fund results are measured from the date the Fund's shares were first sold (February 29, 2008).

178

Total Returns as of December 31 (Institutional Class shares)



Highest return for a quarter during the period of the bar chart above:	Q2 '09	15.65	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '11	(13.65	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Institutional Class Return Before Taxes	17.50%	14.18%	5.50%
Institutional Class Return After Taxes on Distributions	15.56%	13.13%	4.58%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	10.82%	11.20%	4.12%
Class R-1 Return Before Taxes	16.49%	13.22%	4.59%
Class R-2 Return Before Taxes	16.63%	13.34%	4.72%
Class R-3 Return Before Taxes	16.95%	13.55%	4.89%
Class R-4 Return Before Taxes	17.15%	13.78%	5.11%
Class R-5 Return Before Taxes	17.32%	13.92%	5.24%
S&P Target Date 2025 Index (reflects no deduction for fees, expenses, or taxes)	17.03%	12.77%	5.97%

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

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2008), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2008), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares

There are no minimum initial or subsequent investment requirements for an eligible purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

179

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

180

PRINCIPAL LIFETIME 2030 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees(1)	0.25%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.21%	0.08%	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.71%	0.71%	0.71%	0.71%	0.71%	0.71%	0.71%	0.71%
Total Annual Fund Operating Expenses	1.20%	1.07%	0.75%	1.62%	1.49%	1.31%	1.12%	1.00%
Fee Waiver and Expense Reimbursement(2) (3)	(0.08)%	(0.01)%	N/A	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.12%	1.06%	0.75%	1.62%	1.49%	1.31%	1.12%	1.00%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.41% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

181

Example

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



	1 year	3 years	5 years	10 years
Class A	$658	$901	$1,165	$1,917
Class J	208	339	589	1,305
Institutional Class	77	240	417	930
Class R-1	165	511	881	1,922
Class R-2	152	471	813	1,779
Class R-3	133	415	718	1,579
Class R-4	114	356	617	1,363
Class R-5	102	318	552	1,225

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	108	339	589	1,305

Portfolio Turnover

Principal Investment Strategies

182

Principal Risks

The broad diversification of the Fund is designed to cushion severe losses in any one investment sector and moderate overall price volatility. However, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them, and its share prices will fluctuate as the prices of underlying fund shares rise or fall with changing market conditions. If you sell your shares when their value is less than the price you paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

183

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

184

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance


•	For Classes A and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	16.94	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(20.15	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.

185



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	12.34%	13.27%	5.50%
Class A Return After Taxes on Distributions	11.38%	12.60%	4.73%
Class A Return After Taxes on Distribution and Sale of Fund Shares	7.42%	10.44%	4.19%
Class J Return Before Taxes	17.86%	14.51%	6.18%
Institutional Class Return Before Taxes	19.26%	14.95%	6.72%
Class R-1 Return Before Taxes	18.25%	13.95%	5.79%
Class R-2 Return Before Taxes	18.46%	14.11%	5.93%
Class R-3 Return Before Taxes	18.59%	14.30%	6.11%
Class R-4 Return Before Taxes	18.82%	14.52%	6.31%
Class R-5 Return Before Taxes	18.99%	14.68%	6.45%
S&P Target Date 2030 Index (reflects no deduction for fees, expenses, or taxes)	19.14%	13.60%	6.73%

⁽¹⁾ The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2007), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2007), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

186

187

PRINCIPAL LIFETIME 2035 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.01%	0.53%	0.45%	0.32%	0.28%	0.26%
Acquired Fund Fees and Expenses	0.72%	0.72%	0.72%	0.72%	0.72%	0.72%
Total Annual Fund Operating Expenses	0.76%	1.63%	1.50%	1.32%	1.13%	1.01%

Example

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



	1 year	3 years	5 years	10 years
Institutional Class	$78	$243	$422	$942
Class R-1	166	514	887	1,933
Class R-2	153	474	818	1,791
Class R-3	134	418	723	1,590
Class R-4	115	359	622	1,375
Class R-5	103	322	558	1,236

Portfolio Turnover

Principal Investment Strategies

188

Principal Risks

189

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

190

times it would not otherwise do so, and may as a result increase transaction costs and adversely affect underlying fund performance.

U.S. Government Securities Risk. Yields available from U.S. government securities are generally lower than yields from many other fixed-income securities.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

Performance

Life of Fund results are measured from the date the Fund's shares were first sold (February 29, 2008).

Total Returns as of December 31 (Institutional Class shares)



Highest return for a quarter during the period of the bar chart above:	Q2 '09	16.61	%
Lowest return for a quarter during the period of the bar chart above:	Q3 '11	(15.22	)%



Average Annual Total Returns
For the periods ended December 31, 2013	1 Year	5 Year	Life of Fund
Institutional Class Return Before Taxes	20.97%	15.16%	5.81%
Institutional Class Return After Taxes on Distributions	19.08%	14.22%	4.99%
Institutional Class Return After Taxes on Distribution and Sale of Fund Shares	12.76%	12.07%	4.40%
Class R-1 Return Before Taxes	19.98%	14.14%	4.91%
Class R-2 Return Before Taxes	20.14%	14.30%	5.03%
Class R-3 Return Before Taxes	20.40%	14.52%	5.22%
Class R-4 Return Before Taxes	20.60%	14.74%	5.43%
Class R-5 Return Before Taxes	20.79%	14.88%	5.57%
S&P Target Date 2035 Index (reflects no deduction for fees, expenses, or taxes)	20.84%	14.27%	6.16%

191

differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Institutional Class shares only and would be different for the other share classes.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2008), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2008), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares

There are no minimum initial or subsequent investment requirements for an eligible purchaser. You may purchase or redeem shares on any business day (normally any day when the New York Stock Exchange is open for regular trading) through your plan, intermediary, or Financial Professional; by sending a written request to Principal Funds at P.O. Box 8024, Boston, MA 02266-8024 (regular mail) or 30 Dan Road, Canton, MA 02021-2809 (overnight mail); calling us at 1-800-222-5852; or accessing our website (www.principalfunds.com).

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

192

PRINCIPAL LIFETIME 2040 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Class A Shares of Principal Funds, Inc. More information about these and other discounts is available from your financial professional and in “Choosing a Share Class and The Costs of Investing” beginning on page _____, of the Fund’s prospectus and “Multiple Class Structure” beginning on page ____ of the Fund’s Statement of Additional Information.

Shareholder Fees (fees paid directly from your investment)



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None	None	None	None	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of the offering price or NAV when Sales Load is paid, whichever is less)	1.00%	1.00%	None	None	None	None	None	None

Annual Fund Operating Expenses

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



	Share Class
	A	J	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees ⁽¹⁾	0.25%	1.00%	0.25%	N/A	0.35%	0.30%	0.25%	0.10%
Other Expenses	0.25%	0.81%	0.12%	0.01%	0.53%	0.45%	0.32%	0.28%
Acquired Fund Fees and Expenses	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%
Total Annual Fund Operating Expenses	1.27%	2.58%	1.14%	0.78%	1.65%	1.52%	1.34%	1.15%
Fee Waiver and Expense Reimbursement ^{(2) (3)}	(0.12)%	(0.68)%	(0.01)%	N/A	N/A	N/A	N/A	N/A
Total Annual Fund Operating Expenses after Fee Waiver and Expense Reimbursement	1.15%	1.90%	1.13%	0.78%	1.65%	1.52%	1.34%	1.15%
(1) Expense information in the table has been restated to reflect current fees. Effective December 30, 2013, the Distribution and/or Service (12b-1) Fees for Class J shares were reduced.
(2) Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J. The limit will maintain the level of Distribution Fees not to exceed 0.24%. It is expected that the fee waiver will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to the end of the period.
(3) Principal Management Corporation ("Principal"), the investment advisor, has contractually agreed to limit the Fund’s expenses by paying, if necessary, expenses normally payable by the Fund, (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) to maintain a total level of operating expenses (expressed as a percent of average net assets on an annualized basis) not to exceed 0.41% for Class A shares. It is expected that the expense limit will continue through the period ending February 28, 2015; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit prior to the end of the period.

193

Example

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



	1 year	3 years	5 years	10 years
Class A	$661	$918	$1,196	$1,988
Class J	215	361	626	1,385
Institutional Class	80	249	433	966
Class R-1	168	520	897	1,955
Class R-2	155	480	829	1,813
Class R-3	136	425	734	1,613
Class R-4	117	365	633	1,398
Class R-5	105	328	569	1,259

With respect to Class J shares, you would pay the following expenses if you did not redeem your shares (all other classes would be the same as in the above example):



	1 year	3 years	5 years	10 years
Class J	115	361	626	1,385

Portfolio Turnover

Principal Investment Strategies

194

The underlying funds invest in growth and value stocks of small, medium, and large market capitalization companies, fixed-income securities, domestic and foreign (including those in emerging markets) securities, securities denominated in foreign currencies, investment companies (including index funds), and derivatives. A derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. The underlying funds principally use equity index futures and options to manage equity exposure.

Principal Risks

The broad diversification of the Fund is designed to cushion severe losses in any one investment sector and moderate overall price volatility. However, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them, and its share prices will fluctuate as the prices of underlying fund shares rise or fall with changing market conditions. If you sell your shares when their value is less than the price you paid, you will lose money. The Fund operates as a fund of funds and thus bears both its own expenses and, indirectly, its proportionate share of the expenses of the underlying funds in which it invests. An investment in the Fund is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The principal risks of investing in the Fund that are inherent in the fund of funds, in alphabetical order, are:

Asset Allocation Risk. A fund's selection and weighting of asset classes may cause it to underperform other funds with a similar investment objective.

195

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

The principal risks of investing in the Fund that are inherent in the underlying funds, in alphabetical order, are:

Currency Risk. Risks of investing in securities denominated in, or that trade in, foreign (non-U.S.) currencies include changes in foreign exchange rates and foreign exchange restrictions.

Derivatives Risk. Transactions in derivatives may increase volatility, cause the liquidation of portfolio positions when not advantageous to do so and produce disproportionate losses.

Index Fund Investment Risk. More likely than not, an index fund will underperform the index due to cashflows and the fees and expenses of the fund.

Investment Company Securities Risk. Fund shareholders bear indirectly their proportionate share of the expenses of other investment companies in which the fund invests.

Value Stock Risk. The market may not recognize the intrinsic value of value stocks for a long time, or they may be appropriately priced at the time of purchase.

196

Performance


•	For Classes A and J - www.principalfunds.com.


•	For Classes Institutional, R-1, R-2, R-3, R-4, and R-5 - www.principal.com.

Total Returns as of December 31 (Class A shares) ⁽¹⁾



Highest return for a quarter during the period of the bar chart above:	Q2 '09	17.31	%
Lowest return for a quarter during the period of the bar chart above:	Q4 '08	(21.45	)%

⁽¹⁾ The Fund is showing returns for Class A shares after combining separate prospectuses.



Average Annual Total Returns⁽¹⁾
For the periods ended December 31, 2013	1 Year	5 Years	10 Years
Class A Return Before Taxes	15.14%	13.91%	5.67%
Class A Return After Taxes on Distributions	13.89%	13.30%	4.93%
Class A Return After Taxes on Distribution and Sale of Fund Shares	9.28%	11.06%	4.38%
Class J Return Before Taxes	20.84%	15.11%	6.29%
Institutional Class Return Before Taxes	22.36%	15.65%	6.89%
Class R-1 Return Before Taxes	21.22%	14.64%	5.95%
Class R-2 Return Before Taxes	21.41%	14.78%	6.09%
Class R-3 Return Before Taxes	21.56%	14.99%	6.29%
Class R-4 Return Before Taxes	21.79%	15.20%	6.48%
Class R-5 Return Before Taxes	21.99%	15.34%	6.61%
S&P Target Date 2040 Index (reflects no deduction for fees, expenses, or taxes)	22.10%	14.77%	6.96%


⁽¹⁾	The Fund is showing after-tax returns for Class A shares after combining separate prospectuses.

197

tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A shares only and would be different for the other share classes.

Management

Investment Advisor and Portfolio Managers:

Principal Management Corporation


•	James W. Fennessey (since 2007), Portfolio Manager


•	Jeffrey R. Tyler (since 2011), Portfolio Manager


•	Randy L. Welch (since 2007), Portfolio Manager

Sub-Advisor and Portfolio Managers:

Principal Global Investors, LLC


•	Matthew Annenberg (since 2013), Managing Director, Asset Allocation

Purchase and Sale of Fund Shares



Share Class	Investment Type	Purchase Minimum Per Fund
A and J	Initial Investment	$1,000⁽¹⁾
A and J	Initial Investment for accounts with an Automatic Investment Plan (AIP)	$100
A and J	Subsequent Investments	$100⁽¹⁾⁽²⁾
Institutional, R-1, R-2, R-3, R-4, and R-5	There are no minimum initial or subsequent investment requirements for eligible purchasers.	N/A


⁽¹⁾	Some exceptions apply; see "Purchase of Fund Shares - Minimum Investments" for more information.


⁽²⁾	For accounts with an AIP, the subsequent automatic investments must total $1,200 annually if the initial $1,000 minimum has not been met.

Tax Information

Payments to Broker-Dealers and Other Financial Intermediaries

198

PRINCIPAL LIFETIME 2045 FUND


Objective:	The Fund seeks a total return consisting of long-term growth of capital and current income.

Fees and Expenses of the Fund

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

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

Annual Fund Operating Expenses

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



	Share Class
	Inst.	R-1	R-2	R-3	R-4	R-5
Management Fees	0.03%	0.03%	0.03%	0.03%	0.03%	0.03%
Distribution and/or Service (12b-1) Fees	N/A	0.35%	0.30%	0.25%	0.10%	N/A
Other Expenses	0.02%	0.54%	0.46%	0.33%	0.29%	0.27%
Acquired Fund Fees and Expenses	0.74%	0.74%	0.74%	0.74%	0.74%	0.74%
Total Annual Fund Operating Expenses	0.79%	1.66%	1.53%	1.35%	1.16%	1.04%

Example

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



	1 year	3 years	5 years	10 years
Institutional Class	$81	$252	$439	$978
Class R-1	169	523	902	1,965
Class R-2	156	483	834	1,824
Class R-3	137	428	739	1,624
Class R-4	118	368	638	1,409
Class R-5	106	331	574	1,271

Portfolio Turnover

Principal Investment Strategies

199

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