In Zelda II, the red potions are not filling your life bar as they should, instead they fill the magic bar.
Not a bug. Red potions fully restore your magic meter, whereas the greenish blueish ones refill about one block's worth. The only ways to heal are to cast Life or hire a prostitute in town. My memory's not clear, but finding hearts, beating the palaces, and leveling up your life stat might or might not do so as well, but that's rarer stuff.
Protip: with the above in mind, the best place to stop and grind levels for a while is the entrance to the Island Palace. Strike the head of the Ironknuckle statue, and it will either drop a red potion or come to life. The red potions give you a chance to heal while you repeatedly kill Ironknuckles. Once you're level 8 in each stat, you'll get bonus lives whenever you earn enough experience, and you'll need them.
It'll be a while before I get to try it, so how does saving work in Zelda II? I seem to remember that you had to press up and A on controller 2 while paused to save and quit. There isn't a controller 2 on 3DS.