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The art of money making

Ashok Kumar | September 20, 2004 13:44 IST

Buying art, as an investment is a relatively new phenomenon in the Indian market, though internationally it has been in existence for several years. Of late, Indians have started recognising the fact that paintings are more than just pretty wall adornments.

If well-picked, paintings have the potential to translate into decent sums of money. During the period between 1995 and 2001, the annual appreciation in the value of investments in art was only around 5 per cent.

However, of late, it has picked up and in the last three years there has been an estimated appreciation of more than 10 per cent in value. Notably, quality works have displayed an impressive 100 per cent appreciation in price!

One key factor that has pushed up prices is the proliferation of non-resident Indians, as a result of which there has been great demand for Indian art abroad in recent times.

Particularly noteworthy are places like London, New York, Singapore and Hong Kong where lots of Indians reside. The art world has started recognising Indian masters in the international arena. However, the prime driver remains auction houses like Sotheby's and Christie's which have opened up the international market for Indian art.

So, how does one go about investing in art? To begin with, one can walk into an art gallery to get a feel of things. Galleries keep a cross-section of works and you get a variety to choose from. Since they charge commissions of around 30 per cent, their prices are inevitably higher than what one would find in an artist's studio.

However, it might yet be worth the additional expenditure for an inexperienced art buyer as galleries screen the artist's work before placing it for sale. In short, buying artwork from galleries protects you against the danger of owning entirely worthless works of art.

During a recent research on art as an asset class, we learnt that in an artist's portfolio, oil on canvas commands the highest price, followed by water-colours, pastels, sketches, drawings, graphics and etchings. However, this is merely a thumb-rule and to gain greater expertise one needs to be able to gauge the pulse of the art world.

One must also interact as often as possible with art dealers and critics besides visiting galleries frequently.

Some of the basic questions to be asked before investing in a painting are:

  • How long has the artist been painting or sketching?
  • How many exhibitions has he/she held?
  • How well does his/her work sell?
  • Has he/she picked up awards at any level?

These basic questions could help us spot artists who will emerge as best-selling masters in future.

Paintings by established artists like M F Hussain, Ganesh Pyne and F N Souza are like blue-chip stocks. But as in the case of blue-chip scrips, not everyone can afford them. Unfortunately, there is no dematerialised system as in equities that permits the purchase of small units of paintings.

Also, the big names in the art world have probably reached their peak prices, which are unlikely to appreciate significantly. There are several good artists today whose works have been picked up for a lot less by collectors who got in early.

That is where the new artists come in. They are comparatively cheaper but can offer huge returns at rates that are far better than those offered by the big names.

The key is to identify tomorrow's dark horses. But caution is advised. Buying a new artist is like a speculative investment where gains could be astounding but risks are high. If you are risk-averse, play safe and stick to the masters.

While trying to identify tomorrow's maestros, do look out for the three crucial Cs: content, continuity and consistency.

Like in any other investment avenue, diversifying one's portfolio by buying paintings across a number of artists makes good business sense. Even if one or two of those you chose actually make it big, you stand to make a lot of money.

As for the others, since you bought them because you liked them, there's always the pleasure of seeing them on your walls.

When it comes to encashing your investment, don't be in too much of a hurry. You need time to allow your investment to mature. The longer you let a painting adorn your walls, the greater its chances of growing in value.

While there can be no general rule that applies here, on an average, most experts suggest holding periods of between three and 10 years, depending on how fast the work appreciates.

When you do decide to sell your treasures, the best way is to go through a reputed art gallery. It is a good idea to go through the gallery that sold you the painting, for they may reduce their commission in some cases to as little as 10 per cent.

So what deters more investors from flocking to this investment avenue? For starters, there is no insurance in the art mart. This has deterred financial institutions from entering the market, thereby precluding the option of financing art purchases. Once insurers get comfortable, financiers will surely follow.

The main principles behind successful art investment are similar to those that work in the equity markets. They include understanding market trends, tracking new artists and being able to spot the winners early.

A common myth is that a painting's market price will grow all the time. Often, the value of works of many great artists have been known to stall temporarily, belying early gains.

Yet, if you do spend some time and effort buying the right painter, you can get significant returns on your investment. Trading in art is similar to dealing in other commodities in the sense that it is subject to the market pressures of demand and supply.

So, at the end of the day, there are three golden rules that budding art investors must take note of: know the artist you plan to buy, know the price to pay and know the price to sell. If you get these three basic facts right, you can be.

The author heads Lotus Knowlwealth, Mumbai

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