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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
BOND & MORTGAGE SECURITIES FUND
CALIFORNIA MUNICIPAL
CORE PLUS BOND FUND I
DIVERSIFIED INTERNATIONAL FUND
EQUITY INCOME FUND
GLOBAL DIVERSIFIED INCOME FUND
GLOBAL REAL ESTATE SECURITIES FUND
GOVERNMENT & HIGH QUALITY BOND FUND
HIGH YIELD FUND
HIGH YIELD FUND I
INCOME FUND
INFLATION PROTECTION FUND
INTERNATIONAL EMERGING MARKETS FUND
INTERNATIONAL FUND I
LARGECAP BLEND FUND II
LARGECAP GROWTH FUND
LARGECAP GROWTH FUND I
LARGECAP GROWTH FUND II
LARGECAP S&P 500 INDEX FUND
LARGECAP VALUE FUND
LARGECAP VALUE FUND III
MIDCAP FUND
MIDCAP GROWTH FUND
MIDCAP GROWTH FUND III
MIDCAP S&P 400 INDEX FUND
MIDCAP VALUE FUND I
MIDCAP VALUE FUND III
MONEY MARKET FUND
OVERSEAS FUND
PRINCIPAL CAPITAL APPRECIATION FUND
PRINCIPAL LIFETIME STRATEGIC INCOME FUND
PRINCIPAL LIFETIME 2010 FUND
PRINCIPAL LIFETIME 2015 FUND
PRINCIPAL LIFETIME 2020 FUND
PRINCIPAL LIFETIME 2025 FUND
PRINCIPAL LIFETIME 2030 FUND
PRINCIPAL LIFETIME 2035 FUND
PRINCIPAL LIFETIME 2040 FUND
PRINCIPAL LIFETIME 2045 FUND
PRINCIPAL LIFETIME 2050 FUND
PRINCIPAL LIFETIME 2055 FUND

2


PRINCIPAL LIFETIME 2060 FUND
PRINCIPAL LIFETIME HYBRID INCOME
PRINCIPAL LIFETIME HYBRID 2015
PRINCIPAL LIFETIME HYBRID 2020
PRINCIPAL LIFETIME HYBRID 2025
PRINCIPAL LIFETIME HYBRID 2030
PRINCIPAL LIFETIME HYBRID 2035
PRINCIPAL LIFETIME HYBRID 2040
PRINCIPAL LIFETIME HYBRID 2045
PRINCIPAL LIFETIME HYBRID 2050
PRINCIPAL LIFETIME HYBRID 2055
PRINCIPAL LIFETIME HYBRID 2060
REAL ESTATE SECURITIES FUND
SAM (STRATEGIC ASSET MANAGEMENT) BALANCED PORTFOLIO
SAM (STRATEGIC ASSET MANAGEMENT) CONSERVATIVE BALANCED PORTFOLIO
SAM (STRATEGIC ASSET MANAGEMENT) CONSERVATIVE GROWTH PORTFOLIO
SAM (STRATEGIC ASSET MANAGEMENT) FLEXIBLE INCOME PORTFOLIO
SAM (STRATEGIC ASSET MANAGEMENT) STRATEGIC GROWTH PORTFOLIO
SHORT-TERM INCOME FUND
SMALLCAP BLEND FUND
SMALLCAP GROWTH FUND I
SMALLCAP S&P 600 INDEX FUND
SMALLCAP VALUE FUND II
TAX-EXEMPT BOND FUND
ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
PORTFOLIO HOLDINGS INFORMATION
MANAGEMENT OF THE FUNDS
PRICING OF FUND SHARES
CONTACT PRINCIPAL FUNDS, INC.
PURCHASE OF FUND SHARES
REDEMPTION OF FUND SHARES
EXCHANGE OF FUND SHARES
DIVIDENDS AND DISTRIBUTIONS
FREQUENT PURCHASES AND REDEMPTIONS
TAX CONSIDERATIONS
CHOOSING A SHARE CLASS AND THE COSTS OF INVESTING
DISTRIBUTION PLANS AND INTERMEDIARY COMPENSATION
FUND ACCOUNT INFORMATION
FINANCIAL HIGHLIGHTS
APPENDIX A - DESCRIPTION OF BOND RATINGS
APPENDIX B- RELATED PERFORMANCE OF ORIGIN ASSET MANAGEMENT LLP
ADDITIONAL INFORMATION



3



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.

4




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.

5




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).

6




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.

7




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

8




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.


9




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
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
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.
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

$455

$624
$808
$1,339
Class C
287

579

995

2,159

Institutional Class
57

179

 
 

10




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
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 20.4% 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 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
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:
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.
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.
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.
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.
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.
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.
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.

11




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.
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 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%
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

12




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
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.


13




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
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 254.1% 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 a diversified portfolio of fixed-income instruments of varying maturities, represented by forwards or

14




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
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.
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.
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.
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.
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.

15




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.
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.
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 www.principal.com.
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).

16




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).

17




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.

18




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.

19




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
$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
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 76.9% of the average value of its portfolio.
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
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:
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.
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.
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

20




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

21




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.
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
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.
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.

22




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.


23




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
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
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.

24




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
$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
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 16.4% 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 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
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:
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.
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

25




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.
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.
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
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 P - 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.
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 May 31, 1939.
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.

26




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.
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:
Edge Asset Management, Inc.
Daniel R. Coleman (since 2010), Head of Equities, Portfolio Manager
David W. Simpson (since 2008), Portfolio Manager

27




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.
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.


28




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


29




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
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 79.0% of the average value of its portfolio.
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

30




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
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:
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.

31




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.
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.
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.
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.
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.
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.
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.
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.
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).

32




Real Estate Investment Trusts (“REITs”) Risk. A REIT could fail to qualify for tax-free pass-through of income under the Internal Revenue Code, and fund shareholders will indirectly bear their proportionate share of the expenses of REITs in which the fund invests.
Real Estate Securities Risk. Real estate securities are subject to the risks associated with direct ownership of real estate, including declines in value, adverse economic conditions, increases in expenses, regulatory changes and environmental problems. 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.
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
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 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.

33




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.
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.
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.

34




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.
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.

35




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.

36




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
$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
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 52.4% 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 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.

37




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:
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.
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).
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.
Real Estate Investment Trusts (“REITs”) Risk. A REIT could fail to qualify for tax-free pass-through of income under the Internal Revenue Code, and fund shareholders will indirectly bear their proportionate share of the expenses of REITs in which the fund invests.
Real Estate Securities Risk. Real estate securities are subject to the risks associated with direct ownership of real estate, including declines in value, adverse economic conditions, increases in expenses, regulatory changes and environmental problems. 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.

38




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 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.

39




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.
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.
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.
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).

40




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
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.


41




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
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
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%