In the aftermath of the 2008 stock market crash that wiped out retirement accounts, nervous investors stampeded for cover and poured a record number of dollars into bond mutual funds last year.

Some fund experts say this embrace of bond funds isn't letting up, despite a rally in stocks. And the continued shift to bonds could backfire on investors. Bond funds aren't expected to repeat last year's performance, when certain fixed-income sectors nearly matched or surpassed returns on stock funds. Many market experts say interest rates could start inching up later this year, which is bad news for bond holders. And if we learned anything from bubbles in the past, we should be wary of buying the hot investment of the day.

Bond funds are one of the "scariest investments for 2010," says John Rekenthaler, vice president of research at Morningstar, which tracks mutual funds. He had this straightforward advice: "People who have been piling into bond funds, stop doing it."

The appetite for bonds over stocks started in 2007 but accelerated last year as inflows into bond funds hit a historic high.

From January through November of last year, the net inflow into bond funds reached a record $349 billion, up from $27 billion for all of 2008, according to the latest figures from the Investment Company Institute. Meanwhile, more money exited stock funds last year than went in, with outflows reaching $4.1 billion during the first 11 months. That's on top of a $234 billion exodus from stock funds the year before.

Of the 10 best-selling U.S. mutual funds last year, nine were bond funds, according to Morningstar.

The retreat from stocks partly occurred because bonds sound safe to aging investors worried about retirement.

"2008 is fresh in people's minds," says Brenda Wenning, principal of Wenning Investments in Newton, Mass. "They can't afford to lose any more money."

Also, investors tired of earning next to nothing on conservative money market funds switched to bond funds that offered higher yields, says Steve Huber, portfolio manager of T. Rowe Price's Strategic Income Fund.

Still, those rushing out of stocks into bonds missed last year's rally after equities hit bottom in early March. The typical U.S. stock fund gained nearly 33 percent last year, while domestic bond funds averaged a 17.5 percent gain, Morningstar reports. Only funds with high-yield bonds, so-called junk bonds issued by less credit-worthy companies, outperformed stock funds with an average return of about 47 percent.

Of course, nobody knows if and when interest rates will go up or where the economy is headed. But if the economy shows more signs of recovery, the Federal Reserve could begin raising today's historically low short-term rates in the second half of this year, Wenning predicts.

Rising rates are bad for bond funds. Suddenly, old bonds in the fund are worth less because new bonds are offering higher rates. As a result, the bond fund price goes down. And unlike an individual bond held to maturity, bond funds can lose principal - something many investors don't realize.

If rates go up, the impact won't be the same for bond funds across the board.

"As a general rule in a time of rising rates, the highest-quality funds are hurt the most," Rekenthaler says. "They have nothing but pure interest-rate sensitivity. There's no other risk about them."

Funds with U.S Treasuries, particularly long-term government bonds with maturities of 10 or more years, will be the most vulnerable when rates go up, he says.

Price's Huber calculates investors in a bond fund comprised of 10-year Treasuries would lose about 8 percent of their principal if interest rates went up 1 percentage point. That loss would be somewhat cushioned by interest income generated by the bonds in the funds, he says.

High-yield funds would be among the least affected if rates rose because the economy is improving. The theory is that companies issuing junk bonds will be less likely to default in a healthier economy.

You won't want to be in high-yield funds, though, if the economy dips back into a recession, Wenning warns.

Price's Huber is tweaking the holdings in his year-old fund, which returned 19.8 percent last year, in case the economy remains weak. He reduced the exposure to corporate bonds this year and is looking to do the same with high-yield bonds. He's added more short- and intermediate-term Treasuries.

All of this is not to say that you should bail out of bond funds this year. Portfolios need bonds for stability over the long haul.

But if you are among those who overloaded on bond funds out of fear or to chase yields, you might want to reconsider that strategy now.

In today's environment, stick with funds holding bonds with short-term maturities - say, no more than three or four years, experts say. Rising rates will ding these funds, too, but less so than long-term bond funds.

Invest in funds that hold U.S. and foreign bonds, Rekenthaler suggests. "The advantage of going global is that other countries' interest rates might not rise and sink with ours," he says.

Consider dividend-paying stocks as an alternative to bond funds. Many investors buy bonds for the income they generate. But you can diversify that income stream by buying dividend-paying stocks such as utilities, Rekenthaler says. Granted, utility stocks are interest-rate sensitive, but less so than bonds, he says.

Larry Rosenthal, president of Financial Planning Services in Virginia, suggests investors consider municipal bond funds whose income isn't subject to federal taxes. And if the fund is made up of municipal bonds from your home state, you won't have to pay state taxes on the income, either.

With the Bush administration income tax cuts expiring at the end of this year, the demand will grow for such tax-free investments, Rosenthal says.