Market Watch : Holders of Junk Bond Funds Are Urged to Sell : Investing: An organization that tracks defaults predicts that $50 billion worth of the high-risk issues will go sour in 1991 and 1992.

The Bond Investors Assn. is offering some advice to junk bond mutual fund investors: Get out before it’s too late.

The nonprofit organization, which tracks bond defaults, predicts that $50 billion in junk bonds will go bad in 1991 and 1992. Mutual funds that invested in the dismal junk bond market are holding many bonds that they would sell if they could find buyers, the Miami Lakes, Fla.-based association said.

Because the funds have been forced to sell their liquid holdings as investors cash in shares, they are left with default-vulnerable and hard-to-sell issues, said C. Richard Lehman, the association’s president. That leads to a number of problems, according to Lehman, including the possibility that the bond funds will default at a rate higher than that for other types of investments.

On top of that, the group says, the bond funds’ daily net asset values, or net worth, are routinely overstated. If the bond funds could actually sell their unwanted securities, the bonds’ market prices would likely plummet, bringing down the net asset value, the Bond Investors Assn. said.

“A fund holder who is selling his shares is being overpaid relative to the realizable value of the portfolio,” the association said in the December edition of Defaulted Bonds Newsletter. “The only benefit fund holders still have is the ability to liquidate their holdings even while their fund cannot.”

The association did not mention particular mutual funds. “We decided not to try to finger the specific candidates, although we could,” Lehman said.

Junk bond fund managers declined to talk about the report.

A spokeswoman for the Investment Company Institute, Betty Hart, said investors frequently hedge their risk by diversifying.

“There are a number of different types of mutual funds with varying objectives and, generally speaking, for any fund that is highly aggressive, whether it be equities or bonds, good financial planning principles suggest people have more than one investment,” she said.

The association also takes bond funds to task for their accounting methods. The group wants the Securities and Exchange Commission to force the funds to set aside some of the bonds’ interest income to cover losses expected from defaults.

“This is not unlike a business concern that sells its products on credit to high-risk customers without booking a provision for uncollectible accounts receivable,” the newsletter said.

There is good news, though.

If the junk bond market ever recovers, there could be huge gains. The association advises investors who want to stay in junk bonds that they should sell their current fund holding and buy into a newly established fund--or one with assets of less than $100 million.

It says go ahead and pay the typical 5% front-end load. “A new fund should outperform an existing fund by many times this cost,” the newsletter said.

Junk funds have been feeling the heat lately. The collapse of the market has sent prices reeling and their corresponding yields soaring.

In October, the Securities and Exchange Commission asked the funds to make it clear to potential investors that high yield means high risk.

The bonds’ prices have been beaten down as the market has become more fearful that a recession will make it hard, if not impossible, for some issuers to make interest and principal payments.