When tax time rolls around, munis don't seem so puny.

• Position: Municipal bonds

Since municipal bonds remain one of the few ways to keep the wolf away from the door at tax time, financial engineers continue to devise ways to get more of them into investors' portfolios.

A favorite method is the state-specific mutual fund, made up of dozens of individual bond issues from on-- state. Born in the 70s, these funds exploded in the '80s; the five North Carolina funds' assets exceed $350 million. Income from munis issued elsewhere is subject to state taxes, but the North Carolina funds are exempt from federal and state income taxes and that nagging intangibles tax.

The main advantage is convenience. "You can liquidate the funds at any time, you receive monthly dividends, and the record-keeping is very straightforward,' says Virginia Marans, spokeswoman for California-based Franklin Funds, which operates a $44 million North Carolina fund.

But after reading the fine print, it's worth asking if that convenience is good business, particularly for people with $25,000 or more to invest. The answer is usually no, experts say. There are two problems. First, there's the load. The five North Carolina-specific open-end munis charge a front-end fee of 4 to 4.75 percent. At a 4.5 percent load, you'll have only $23,875 of your $25,000 working for you.

Then there are fund expenses. North Carolina funds average nearly 1 percent a year. If the yield on the fund's bonds is 7 percent, the investor gets only 6 percent of $23,875, or $1,432 a year. Directly buying the underlying bonds would yield 7 percent of $25,000, or $1,750. That's a difference of $318 - meaning the investor loses 18 percent of his tax-free income every year. That bite is about as painful as the tax man's. Are there any alternatives? Until a no-load, low-cost North Carolina fund is available, penny-pinching investors will have to do their own bond buying.

For most muni investors, safety comes first, so it pays to stick with general obligation bonds, backed by the taxing power of the issuer. According to Tony Blalock, a vice president of the North Carolina Municipal Council - a Raleigh company that rates state municipal bonds - there hasn't been a default on a G.O. bond here since the Depression. Right now, there is about $4 billion of outstanding G.O. debt in North Carolina, according to Robert High, deputy state treasurer.

Fortunately, North Carolina has a national reputation for high-quality municipal bonds, says Phil Gilboy, head of Interstate/Johnson Lane's municipal-bond...