"Most bond income is taxed at your ordinary income tax rate. Suppose you're getting interest income of $5.00 annually from a corporate bond fund.

"You might actually pocket just $3.25, if you're taxed at the 35% federal rate, and you'll get even less if there's state or local taxes.

"In contrast, municipal bonds are tax-free. When you buy a municipal bond, you are lending money to a state or local government to build bridges, roads, or other public projects.

"The bonds are exempt from federal income taxes because the federal government can't tax state securities, just as states can't tax federal securities. And if you live in the state or municipality of that loan, the local government usually foregoes the taxes, giving you a double or triple tax-free investment.

"The 63 bond holdings in the $84 million portfolio of Morgan Stanley Insured Municipal Securities are fully insured, giving the portfolio a pristine Triple-A credit rating.

"About 12% of the portfolio is dedicated to the most secure general obligation bonds. Another 24% is weighted to public utilities which are benefitting from the flight to quality.

"California issued bonds top the list, accounting for nearly 20% of the holdings. This embattled state offers above-average yields, but its debt is considered somewhat riskier due to a ballooning budget deficit. Still, given California's 'A' credit rating (recently downgraded from 'A+'), the chance of default is considered very low.

"The fund has paid a regular monthly distribution of $0.055 a share since October 2007. n addition, management has distributed year-end capital gains every December for almost a decade. About 14% of the income earned by the portfolio securities is subject to the federal alternative minimum tax (AMT).

"Portfolio manager Dennis Shea has put together a Triple-A portfolio which nevertheless offers an above-average yield. He has achieved this balance by taking a modicum of risk -- over-weighting the portfolio with California bonds, taking on some leverage, or extending the portfolio duration.

"Investors are impressed, and the shares have rallied strongly. IMS has quickly turned around last year's dismal performance of -10.9%, posting robust returns of +14.4% so far this year. Despite the rally the shares can still be had at virtual par, with the portfolio valued at $13.56 per share versus a share price of $13.60.

"IMS offers a high safety/high yield bond portfolio with a taxable-equivalent yield of almost 8%. The fund's strong year-to-date performance bodes well for the months ahead.

"Western Asset Municipal High Income invests its $136 million portfolio in about 120 different municipal bonds issued by state and local governments. The bonds carry an average credit quality of 'A-' assigned by Standard & Poor's, with nearly a third rated Triple-A and close to 60% rated 'A' or higher.

"Almost a quarter of the bonds are pre-refunded, meaning payments are backed by risk-free U.S. Treasuries or agency debt. The balance are mainly in higher risk/reward revenue and industrial bonds. Although the bonds are intermediate or long-term, with an average yield of 6.5%, the effective duration is just 4.2 years.

"MHF has racked up average annual returns, based on market price, of +4.8% over the past two decades since inception in late 1988 through year-end 2008. Like other muni funds, last year's performance of -5.2% returns were the worst in 10 years.

"Trading at an average -5.1% discount for the past decade, the shares can be picked up today at an even steeper discount of -8% of the value of the underlying bond holdings.

"MHF offers conservative investors tax-exempt income from high quality assets with secure payouts. Selling at a steeper than average discount, the fund is attractively priced for a potential rebound to the 10-year average discount level or higher."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.