Typically, an asset pyramid should have a strong base of traditional investments such as equity and debt. Alternative investments routes should be closer to the top of the pyramid. Let us look at an alternate investment route that is being sought after by the high net worth individuals namely, art.
In the recent times, art has been witnessing a lot of action, both in terms of rise in prices and the number of art auctions. Artists like S H Raza and M F Husain are commanding crores per painting. Also, Indians painters are being able to showcase their talent in international galleries, thereby getting a better valuation for their work.
Obviously, with all this hype and hoopla surrounding art, there are a large number of people who are willing to test the waters by investing in it. However, art is not everyone's cup of tea. It is primarily because prospective investors have to be conversant with the unique features of these investments. These include:
Art is extremely vulnerable to fluctuations in public tastes and is hence a high-risk investment.
Many art buyers believe that you should buy art primarily because you like it. Return on investment is only secondary.
The natural corollary from the above is that one should never go overboard while investing in this asset class. However, despite these peculiarities, investing in art is not very different from investing in other asset classes. The difference between investing and speculating is applicable here too.
In speculating, the potential risks and rewards are high and the time span is short. In stark contrast, investing takes place over a longer time span at a more moderate level of risk.
Investment in quality art is expensive, often illiquid and therefore is usually not an advisable option for the small investor. Also, paintings, sculpture and installations are fragile, require proper environmental conditions, regular maintenance, adequate insurance and security, and frequent appraisals. Transportation, marketing and selling also may be costly and time consuming.
Here are some basic rules to be followed while investing in art:
Find a reputable dealer who has been in the business for many years. You can benefit from his experience in terms of quality, market trends and pricing practices in the field in which you want to collect or invest. Alternatively one may also choose to take an exposure in this asset through dedicated art funds.
Edelweiss launched the first fund known as Yatra Fund in September 2005 and garnered a corpus of Rs 10.75 crore (Rs 107.5 million). This fund aims at providing investors capital appreciation through the holding of a cohesive, historically driven portfolio of investment and management in the contemporary fine arts from the Indian sub-continent.
Obtain a written appraisal or certificate from a leading appraiser or certifier in your field attesting to the quality and authenticity of the item. This is of paramount importance, as there have been some cases in Mumbai in late 2006 and early 2007 when reputed art galleries inadvertently conducted auctions of fake paintings.
As far as possible, purchase top-quality items. Yes, that does mean high prices (just like top-quality stocks command higher P/E ratios) but they tend to appreciate even during difficult markets.
Insure the item adequately. Most homeowner policies allow for fire and theft but not natural disasters, such as floods, or accidents.
Maintain the artwork properly. If repairs are required, they should be made only by well-trained experts. The value of a poorly maintained artwork diminishes rapidly.
Avoid putting more than 10 to 15 per cent of the value of your investment portfolio into such investments. Most experts would advise that exceeding this limit may subject your entire investment plan to a high level of risk.
As far as taxation goes, art gets the same tax treatment as hard assets such as real estate and gold.
The writer is a certified financial planner.