Most financial advisors would recommend holding some of your 401(k) money in bonds, at least most of the time.

But over the past three years, bond funds going beyond tried-and-true Treasurys and investment-grade corporate bonds are drawing in cash by the bucketful, as frustrated investors seek decent income, Jason Zweig of The Wall Street Journal writes in his column.

The more exotic funds contain high-yield bonds; foreign bonds, both developed and emerging market; and floating-rate bank loans.

Editor's Note: How to Pay Zero Taxes . . . Legally

"Now they are being marketed in 'white papers' and sales calls as the next new thing for 401(k) plans," Zweig writes.

"The offbeat bond funds offer higher income, greater diversification, some protection against rising interest rates and at least the potential for higher returns," he adds.

"One thing these funky bond categories have in common: They often act like stocks, with big ups and downs that could alarm investors used to the more-placid behavior of investment-grade bonds," Zweig states.

But risk abounds with these funds, experts say.

"The basic principle that there's more to the bond market than U.S. Treasurys and corporate issues is correct, but you have to appraise the risk of these funds," Laurence Siegel of the Research Foundation of CFA Institute tells Zweig.

"And the ones with the best recent performance are most likely to have the greatest risk," Siegel says, as they are most likely to be overvalued.

In fact, Zweig notes, "All three offbeat categories have been trading recently near record-high prices, raising the possibility that retirement investors unfamiliar with their risks might buy in just before a fall."

Morningstar analyst Eric Jacobson says that foreign bonds don't inherently represent danger.
"The bigger risk that you run into ... is holding foreign bonds and not hedging away the currency exposure," he says.

Editor's Note: How to Pay Zero Taxes . . . Legally