If you feel clueless and invest money in bond funds, you should know that your funds could bite you in 2014. Bond funds are NOT safe investments and some are riskier than others. Read this before investing money (or more money).Truly safe investments pay interest and your principal is safe, or fixed. Safe investments do not fluctuate in price or value, and may be insured or even guaranteed by an agency of the federal government. Examples include: bank savings and checking accounts, CDs, and Treasury bills. Bond funds pay interest too, in the form of dividends. Their price or value DOES fluctuate as the prices of the debt securities (bonds) they hold in their investment portfolio fluctuate (like stocks). People invest money here to earn HIGHER INTEREST INCOME vs. truly safe investments. That’s why they are also called income funds.Bond funds are RELATIVELY safe investments – compared to stock funds. But they are not even close to being as safe as money market funds, whose share price is fixed at $1 per share. You must understand this before you invest money in income funds: your investment can go up in value, and it can go down. Some funds invest money (yours) in high quality debt securities of government entities or corporations; others opt for the higher yields of lower quality or even junk bonds. In 2014 and 2015: that’s not the big issue.While money market funds invest your money in very short-term IOUs, bond funds buy and hold relatively long-term debt securities (IOUs called bonds). A money market fund may hold IOUs that mature (on average) in 25, 30, or 40 days. In other words, they invest money in high quality IOUs that promise to pay them their money back in a matter of days. Because the debt securities held in money market funds are so short-term in nature their value fluctuates little, and they are considered to be safe investments. Not so with income funds that invest money in IOUs maturing (on average) in 5, 10, 15, 20, or more YEARS.The major issue in 2014 and beyond for bond funds is called “interest rate risk”. Picture a fund that holds IOUs that (on average) mature (pay the owner back) in 20 years. If these are IOUs for $1000 that promise to pay 3% per year in interest ($30) they have a price (or value) of about $1000 when 3% is the prevailing rate for similar IOUs in the bond market. Remember that bonds trade in the bond market just like stocks trade in the stock market. Now, what would happen to the price (value) of this IOU if prevailing interest rates climbed to 6%, 7% or higher?Investors in the marketplace would still be buying and selling this IOU… but the price of it would fall significantly… because now investors can get 6% or more ($60 a year or more in interest) in other IOUs because that’s the prevailing interest rate. This is an example of interest rate risk in action, and that’s why bond funds are not safe investments. If you invest money in these income funds or plan to, you must understand this.All income funds will include a number (expressed in years) in their literature called AVERAGE MATURITY. Examples: 3.42 years, 7.15 years, 18.7 years. From left to right these three examples would be called short-term, intermediate-term and long-term bond funds. As you go from left to right the dividend yield (interest earned and paid in dividends) increases. More importantly, the interest rate risk increases dramatically as you go from short-term to long-term funds!Short-term funds are relatively safe investments, but in today’s interest rate environment they offer miserly interest income. Long-term bond funds might yield 3% or a bit more (depending on quality), but interest rate risk is HIGH. Intermediate-term funds might yield 2% to 3%, but they still have a significant amount of interest rate risk. If interest rates double or more in 2014 and beyond, investors in longer term funds could see losses of 50% or more.The last time interest rates soared was in the late 1970s, peaking in 1981. Investors who held long-term bond funds lost almost 50%. Today’s interest rates are near all-time lows. This means that when you invest money in longer-term income funds just to earn 3% or 4% in interest income, you are accepting considerable risk to earn a miserly income.Bond funds have basically been good investments since 1981… because interest rates were falling, which increases the value (price) of these funds. Now, you know the rest of the story. Bond funds are not really safe investments for 2014 and beyond. Interest rates could go up.