Bond funds may be exposing customers and the financial system to more risk than some investors realize as money managers seek higher returns in less liquid assets, the International Monetary Fund said in a report recommending improved oversight.

"The role of fixed-income funds, which entail larger contagion risks than traditional equity investment, has expanded considerably," the IMF said Wednesday in a chapter on asset managers in its latest Global Financial Stability Report.

The 2010 Dodd-Frank law's curbs on proprietary trading in the U.S., known as the Volcker Rule, has reduced liquidity and raised the importance of mutual funds and exchange-traded funds in the bond market. The Washington-based lender said that's made more products available to "less sophisticated investors."