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Putnam Investments of Boston is considering creating a new type of cloned fund sensitive to capital gains taxes, said Gordon Forrester, managing director at Putnam.

The new cloned funds, which Putnam is calling "serialized funds," would be created when an existing fund achieves a high level of unrealized capital gains of perhaps 25 percent or more of the fund's total value, Forrester said. Putnam would then close that original fund to new investors and create a clone, or serialized fund, Forrester said.

Mutual funds companies usually clone a fund due to asset growth to levels unwieldy for a portfolio manager, Forrester said. A serialized fund, on the other hand, would be created due to large profits, or unrealized capital gains, he said.

Putnam's serialized funds would be managed by the same portfolio management team as the original fund, and the serialized fund would follow the same investment strategy and execution as the original fund, Forrester said.

The main difference between the original and the new, serialized fund would be that new investors would not be subject to the unrealized capital gains already embedded in the original fund, Forrester said.

Other tax-sensitive funds attempt to diminish realized capital gains through low turnover of stocks, Forrester said. However, such so-called tax-sensitive funds make no attempt at dealing with unrealized capital gains, Forrester said.

"All tax-managed funds . . . are not created equal," he said. "Many funds that have low portfolio turnover claim to be tax-managed or tax-efficient. While these funds might succeed in cutting realized capital gains, they do not address a huge, potential hazard - unrealized capital gains, which can build substantially in a fund over time."

Putnam is in the early stages of exploring this new serialization concept and is a long way away from registering such a fund with the SEC, Forrester said. However, Putnam is considering introducing a family of serialized funds and has discussed the idea with a number of its distributors, he said. Putnam is considering calling the family the Tax Smart Equity Funds. The response has been favorable, he said.

Larry West, a financial planner in Huntsville, Ala. who specializes in tax planning, said serialized funds might interest his clients. But, he said he would only recommend his clients buy such funds right after a serialized fund had come to market.

West, president of West Financial Consulting, has already recommended such a strategy to help his clients avoid unrealized capital gains taxes embedded in older funds.

"When Dreyfus came out with the Dreyfus Emerging Leaders funds to emulate the Dreyfus Market Leaders funds, I told my clients to get into the Emerging Leaders funds because it was the same management team, the same investment objective, but no unrealized capital gains burden and a smaller, more nimble asset size," said West.

"Investors face a real, potential liability when they buy into a fund with large, unrealized gains and this is really a very innovative approach to what is becoming an increasingly sensitive issue," said Burton Greenwald, president of B.J. Greenwald & Associates, a mutual fund consultancy in Philadelphia.

However, some industry observers doubt the effectiveness of serializing funds in controling unrealized capital gains over the long term.

"Unrealized capital gains is always going to be the case in any profitable fund, and there is nothing to stop a successful serialized fund from repeating the unrealized capital gains pattern of the original fund," said Ramy Shaalan, mutual funds analyst at Wiesenberger, Thomson Financial of Rockville, Md. Thomson Financial is the publisher of this newsletter.

Putnam is smart to explore a new type of tax-sensitive fund at this time, however, Shaalan said. With the SEC considering requiring funds to report after-tax performance and Putnam's major competitors beginning to report such figures, taxes are bound to become a major concern of investors, Shaalan said.