Investment funds will no longer be labelled as 'cautious' or 'balanced' as consumers find the terms confusing, an insurance trade body said today.
The Association of British Insurers says it will rename its managed fund sectors to make it clearer to people how much of their money is invested in shares.
Under current names, a fund can be categorised as cautious even if up to 60% of the money is invested in equities, meaning it is likely to be unsuitable for many people, such as those close to retirement.
A balanced fund can have 85% of the money held in shares, while money held in a flexible fund may be entirely invested in them.
Research carried out by the ABI found many consumers are confused by the names and the level of risk involved in the different funds they applied to.
Instead they want everyday terms to be used to describe funds, with names that offer easy to understand information on how much of their money would be held in shares.
As a result, the ABI is changing the names of its sectors to literally describe what percentage of the fund can be made up from shares.
- a defensive fund will be known as a 'mixed investment 0% to 35% shares'
- a cautious fund will be known as a 'mixed investment 20% to 60% in shares'
- a balanced fund will be known as a 'mixed investment 40% to 85% shares'
- a flexible fund will be known as a 'mixed investment 60% to 100% shares'
The new names will apply from April this year.
Fund managed by members of the ABI contain almost 2,000 life and pension funds, worth an estimated £340 billion, approximately 80% of all money invested in managed funds.
Helen White, the ABI's acting director of life and savings, said: "It was becoming increasingly clear that terms like 'cautious' were confusing for consumers so the ABI was keen to act quickly and make changes to help customers.
"Our research of over 2,600 adults told us that the new names are significantly less likely to lead to consumers misinterpreting the type of funds they choose to invest in.
"We found that consumers want simple information about the minimum and maximum amount of their money that an investment fund will put into shares. The new fund sector names do just that."
The Investment Management Association, which represents many fund managers, is also considering changing the names it uses for funds.
Jane Lowe, director of markets at the IMA, says: "The IMA has been evaluating its own sector classification scheme since autumn 2010. It is vitally important that this work is handled carefully in order to deliver the right result for consumers.
"We welcome the work undertaken by ABI and will take it into account as we reach conclusions for our own sector scheme."
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