Art as Alternate Investment

12/21/2010

PERSONAL
ART AS ALTERNATIVE
WEALTH
MANAGEMENT INVESTMENT OPTION

Submitted To:
Prof. Vinay Dutta

Submitted By:
Group 2
Shivi Aggarwal 91051
Radhika Gupta 91041
Sweta Agarwal 91059
Madhusudan Partani 91029

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Art as Alternative Investment Option 1

Table of Contents
World Wealth Report 2010 ................................................................................................................. 3
India Wealth Report 2010 ................................................................................................................... 5
Art Research: ET Intelligence .............................................................................................................. 7
The Antiquities and Art Treasures ACT, 1972 ......................................................................................... 8
Indian Art: A blissful Journey .................................................................................................................. 9
History ................................................................................................................................................. 9
Mughal Art Influence .......................................................................................................................... 9
Rajputana Art ...................................................................................................................................... 9
Modern Indian Art ............................................................................................................................ 10
Indian Art Today................................................................................................................................ 10
Collectables ........................................................................................................................................... 10
Objectives of Collectables ................................................................................................................. 11
Risks .................................................................................................................................................. 11
Art ......................................................................................................................................................... 12
Why Invest in Art?............................................................................................................................. 13
Buy art for art's sake ......................................................................................................................... 13
Costs .................................................................................................................................................. 14
Risks .................................................................................................................................................. 15
Participants in Art Investing Market ..................................................................................................... 16
Art Index................................................................................................................................................ 17
ET- Osian Art Index............................................................................................................................ 17
Mei Moses Fine Art Index ................................................................................................................. 18
Art Fund: An Alternative to Art Investment.......................................................................................... 19
Taxes on Work of Art ............................................................................................................................ 20
Tax on purchase of a work of Art ...................................................................................................... 20
Wealth Tax on Art ............................................................................................................................. 20
Tax on income earned from the Work of Art.................................................................................... 20
Tax on work of art received as a ‘Gift’ or ‘Gift Tax’ .......................................................................... 20
Tax on sale of a work of Art .............................................................................................................. 20
Valuation ............................................................................................................................................... 22
Factors affecting Pricing of artwork .................................................................................................. 22

The art market economic model....................................................................................................... 23
Appraisal ............................................................................................................................................... 23
Definition .......................................................................................................................................... 23
Purpose ............................................................................................................................................. 24
Difficulties in Appraising Artwork ..................................................................................................... 24
Basic Appraisal Methods ....................................................................................................................... 25
Market Comparison Approach .......................................................................................................... 25
Cost Approach ................................................................................................................................... 25
Income Approach .............................................................................................................................. 25
Intuitive Approach ............................................................................................................................ 26
Replacement Value Approach .......................................................................................................... 26
Internal Revenue Service Value Approach........................................................................................ 26
Insurance of Art .................................................................................................................................... 27
Title Insurance................................................................................................................................... 27
Property Insurance............................................................................................................................ 28
Conclusion ............................................................................................................................................. 30
Art of buying Art ............................................................................................................................... 30
Tips .................................................................................................................................................... 30

Table of Tables
Table 1 Allocation of Wealth (Global) ..................................................................................................... 5
Table 2 Allocation of Wealth (India) ....................................................................................................... 5
Table 3 Forecast of Wealth (India) .......................................................................................................... 6
Table 4 Forecast of Wealth Allocation (India)......................................................................................... 6
Table 5 Top Ten Results For Indian Contemporary Paintings, Drawings & Books Auctions ................... 7
Table 6 Wealth Tax on Art .................................................................................................................... 20

Table of Pictures
Picture 1 Allocation of Wealth (India)..................................................................................................... 6
Picture 2 Wealth Allocation- Comparison Global and India ................................................................... 7
Picture 3 Risk Pyramid .......................................................................................................................... 16
Picture 4 ET Art Index............................................................................................................................ 18
Picture 5 Mei Mosses Fine Art Index .................................................................................................... 19

Introduction

One popular advice that every investment advisor will give you is to diversify your investment
portfolio. One specific asset class that has attracted a lot of attention after the year 2000 is ‘art.’
Considering the high volatility of equity markets, more and more people are investing in art works of
internationally recognized Indian artists. Moreover, Indian art is growing tremendously and breaking
new trends of unprecedented appreciation due to excess liquidity in the economy.

The global art market is estimated at $23.5 billion, and more than half of it is in the US, considered
the most-developed art market. The Indian art industry is estimated at about Rs 250 crore, and is
expected to grow at 35per cent a year. This is one reason why there is greater interest in `investing'
in Indian art now; price increases of between two times and eight times in just the last three years
for the works of artists like M.F. Husain, V.S. Gaitonde, Satish Gujral and Tyeb Mehta is further proof
that art is a good investment option. Today, people aren't buying art out of conviction or pleasure,
but because they see money in it.

It's not as volatile as stocks, gold and property, and is not affected as much by economic downturns
— and, it provides the investor an aesthetic benefit, as well. So at the least, including art in one's
asset portfolio is one way of diversifying risks.

There has long been a global market for Indian miniature paintings, sculptures, and other antiquities,
but interest in the country's modern art has lagged. Now, a robust economy, a new moneyed class,
and the energetic participation of young expat Indians are boosting sales of contemporary Indian art
to new highs. In the past two years, investors have started at least four "art funds" in which a
curator buys and sells artworks instead of stocks. And since March, Bombay's Economic Times has
even published an "art index" aggregating prices for works by 51 top artists.

The HNWIs cautiously re-entered the financial markets after the crises, and also returned to
investments of passion. Different Surveys and Wealth reports reiterate the same facts.

World Wealth Report 2010
HNWIs cautiously re-entered the financial markets after the crises, they also returned to
investments of passion. When compared to pre-crisis levels, outright global demand in 2009
remained weaker in many categories, including Luxury Collectibles (luxury automobiles, boats, jets),
Art, and Jewellery, Gems and Watches; however, such demand lifted in the latter half of 2009. With
financial markets still in flux, some HNWIs indicated that they also approached their investments of
passion as “investor-collectors,” seeking out those items perceived to have tangible long-term value.
The two categories that were most attractive to these “investor-collectors” were Art and Other
Collectibles (coins, antiques, wines, etc.). The demand for investments of passion overall is likely to
increase in 2010 as wealth levels rebound, evidenced by the fact that auction houses, luxury goods
makers and high-end service providers all reported signs of renewed demand toward the end of
2009, and in the early part of 2010.

The key highlights and drivers of investments of passion are listed below:

 Luxury collectibles remained the primary HNWI investment of passion
o Luxury Collectibles (e.g., luxury automobiles, yachts, jets, etc.) continued to account
for the largest portion of HNWIs’ investments of passion in 2009 – 30% of the total
among HNWIs globally.
o In 2009, HNWIs from North America allocated the largest share of investments of
passion to Luxury Collectibles (31%), followed closely by those from Europe and
Latin America (30% each).
o While global yacht sales tumbled 45% in 2009, sales in the U.S. reported a near 30%
increase in the first quarter of 2010 as compared to a year earlier, illustrating the
resurgence in demand for Luxury Collectibles.

 Jewellery, gems and watches attract HNWIs, especially in Middle East
o Jewellery, gems and watches became the second largest allocation of investments of
passion overall, at 23%.
o The Middle East and Asia (except Japan) were most heavily invested, at 35% and
31% respectively.

 Art remains key to HNWIs as a passion and as a sound investment
o Overall, 22% of HNWIs’ investments of passion were held in Art at the end of 2009,
down from 25% in 2008. However, interest in Art is clearly picking up again in 2010.
o Among HNWI “investor-collectors,” who view Art primarily as a financial investment,
Art was the most likely of all such investments to be acquired for its potential to gain
value.
o U.K. and U.S. art auction sales were down $1.9 billion and $1.6 billion respectively in
2009, but 2010 sales show a robust rebound. China’s art markets thrived, with
auction revenues rising 25% to $380 million.
o As in previous years, the proportion of investments of passion allocated to Art was
highest in Europe and Latin America (27%).

 Allocations to other collectibles grew slightly
o Sales of coins and memorabilia also edged up in 2009, with some high-end items
registering huge auction prices late in the year.
o Other Collectibles (wines, antiques, coins, etc.) were favoured by investor-collector
HNWIs, second only to Art for their potential to return financial gains and hold long
term value.

 HNWIs return to lifestyle spending, particularly in Health/Wellness and Travel
o Health/wellness – which includes activities like high-end spa visits, fitness-
equipment installations and preventative medicine procedures – was the top
lifestyle spending category in 2009.
o Luxury travellers also returned to the market, with 45% of HNWI clients increasing
spending on luxury/experiential travel.

o HNWI spending on luxury consumables (designer handbags, shoes, etc.) was on the
rise in the latter half of 2009 in countries such as China and Brazil, but remained
subdued in North America.

According to the World Wealth report, the total allocation of wealth of HNIs of whole world is
summarised in following table

Name of Asset (Us $ % of
trillion) Wealth
Equities 11.2 35%
Debt 18.5 58%
Alternative Assets 2.3 7%
Table 1 Allocation of Wealth (Global)

India Wealth Report 2010
KARVY’s India Wealth Report is the country’s first ever detailed perspective on the growth of India’s
wealth. The report uncovers the future of Indian wealth, through ground breaking findings that will
determine much of the investments by India’s individuals over the next 3 years. This is compiled and
published by Karvy Private Wealth, the wealth management arm of KARVY Group.

As per the Wealth report, India’s total wealth with HNI’s total at Rs. 70 Lac Crores. The report gives
the summary of Allocation of wealth into different avenues by the HNIs.

Asset Allocation 2009-10
Insurance 14.30%
Savings 9.20%
Small Savings 7.10%
PF 3.90%
Mutual Funds 3.80%
Alternate Assets 0.30%
Direct Equity 31.10%
FD and Bonds 30.30%
Table 2 Allocation of Wealth (India)


Wealth Allocation 2009-10
Insurance,
14.30%
FD and Bonds,
30.30% Savings, 9.20%

Small Savings,
7.10%
Direct Equity,
31.10% PF, 3.90%

Mutual
Alternate Funds,
Assets, 0.30% 3.80%

Picture 1 Allocation of Wealth (India)

Also the report gives the forecast of Total wealth with HNIs for next two years based on the
additional returns on the existing wealth and also Additional Household Financial Savings forecasted
for next two years. According to it the wealth would grow by CAGR of 25%. Also according to the
forecast, the asset allocation in Alternative Investments would grow from current 0.3% to 1.00%.

in (Rs Crores) 2010-11 2011-12 2012-13
Individual Wealth-Beginning of the year 73,07,878 91,60,011 1,14,95,116
Return Generated on Invested Wealth 8,03,032 10,36,658 13,39,928
Financial Household Saving to be invested 10,49,101 12,98,448 16,05,490
Total Individual Wealth-End of Year 91,60,011 1,14,95,116 1,44,40,534
Table 3 Forecast of Wealth (India)

Name of the Asset Class 2009-10 2012-13
Equities 33.90% 42.90%
Debt 65.80% 56.10%
Alternative Assets 0.30% 1.00%
Table 4 Forecast of Wealth Allocation (India)


Comparison of Global & Indian Individual Wealth
According to Asset Class
70%
60%
50%
40%
30% 65.80%
58%
20% 35% 33.90%
7%
10%
0.30%
0%
Global India

Equities Debt Alternative Assets

Picture 2 Wealth Allocation- Comparison Global and India

Art Research: ET Intelligence
ET Intelligence Group (ETIG), the research arm of The Economic Times, India’s largest business paper
which apart from compiling a ART Index, a reference Index for Investors , galleries and Financers also
publishes data on Auctions. And According to its latest report, top ten Prices for Indian Creations are
summarised in following table

Artist/Author Title Price (Rs.)1
Sher-Gil, Amrita Village Scene 6,90,00,000
Gaitonde, V.S. Untitled 4,88,75,000
Varma, Raja Ravi Adaptation of the poem 'Veena nu Mrug' 2,87,50,000
Souza, F.N. Nude 2,30,00,000
Padamsee, Akbar Nude in Grey 2,07,00,000
Swaminathan, J. Mountain & Bird Series 1,72,50,000
Husain, M.F. Subhe Banaras 1,61,00,000
Souza, F.N. Couple 1,61,00,000
Ramkumar Banaras Series 1,61,00,000
Dodiya, Atul Welcome 97,75,000
Table 5 Top Ten Results for Indian Contemporary Paintings, Drawings & Books Auctions

1
Price * = Hammer Price + Buyer's Premium

The Antiquities and Art Treasures ACT, 1972

This Act is enacted to regulate the export trade in antiquities and art treasures, to prevent
smuggling of and fraudulent dealings in antiquities. The primary purpose was effective control over
the moveable cultural property consisting of antiquities and art treasures. The Act is to regulate the
export trade in antiquities and art treasures, to provide for the prevention of smuggling of, and
fraudulent dealings in, antiquities, to provide for the compulsory acquisition of antiquities and art
treasures for preservation in public places and to provide for certain other matters connected
therewith or incidental or ancillary thereto.

Few important Sections of the act are

Section 2 (1) – ‘Antiquities’ - which have been in existence for not less than 100 years Viz.,

a. Sculptures in stone, terracotta, metals, ivory.
b. Painting in paper, wood, cloth, skin etc
c. Manuscripts

Section 2(2) - “Art treasure” means any human work of art, not being an antiquity, declared by the
Central Government by notification in the Official Gazette, to be an art treasure for the purposes of
this Act having regard to its artistic or aesthetic value:
Provided that no declaration under this clause shall be made in respect of any such work of art so
Long as the author thereof is alive;

Section.3: It is unlawful for any person, other than the Central Government or any authority
authorized by Central Government to export antiquity or art treasure.

Section.5: Antiquities to be sold only under a licence.

Section.14: Any person who owns controls or is in possession of any antiquity shall register the same
before the registering officer and should obtain a certificate.

Section.25: If any person exports or attempts to export any antiquity or art treasure is liable for
punishment for a term not less than 3 months which may extend to 3 years and with fine.

Indian Art: A blissful Journey

With a 5000-year-old culture, Indian Art is rich in its tapestry of ancient heritage, medieval times,
Mughal rule, British rule, Progressive art and now contemporary art. The earliest recorded art of
India originated from a religious Hindu background, which was later replaced by a soaring popular
Buddhist art. Moreover, from a timeless era art in India has been inspired by spiritualism and
mystical relationship between man and god. Art in India had survived in its homeland and spread
from time to time all over the world. This was possible because many kings who recognized budding
talent patronized art and themselves were great connoisseurs. Each king has left a deep impression
of his affinity to the artist community. Until today, art is patronized by the rich and famous in the
country.

History
2nd century BC produced the magnificent cave paintings and they still are a big attraction. The
famous Ajanta and Ellora caves in the Deccan jungles of Maharashtra can be considered the ancient
art galleries that have remained unscathed by attackers. Most of the artwork reflects on the growth
of Buddhism during the period which also spread to South East Asia.

Many foreigners have not understood Indian art because they have no background or knowledge of
the religion and symbols. Therefore, they tend to confuse the meaning and misinterpret it. Properly
understood Indian Art represents a mystical outlook of the people and a spiritual connection. Now
with awareness and different artists using interpretation techniques even ancient art is being
appreciated.

Mughal Art Influence
When the Mughals made India their home, they bought the Persian influence in their artwork.
Miniatures of the Mughal period speak of a different art form altogether. Widely accepted by the
people, art from this period represent the importance of the king. Muslim kingdoms flourished until
the British entered India.

Marble was used extensively to produce sculpture and the Taj Mahal is a living example of the
glorious era. Now understood to be one of the wonders of the ancient world, along with the
Egyptian pyramids it is the only surviving ancient monument in the world. Religion gave way to other
themes like people and animals. Artists during this period mixed different elements and used
influence of each other in their works.

Rajputana Art
Mostly men were painting during this period (roughly around the 16th Century). The artists worked
on the belief that nature is sacred and they painted trees, animals and people all in harmony to one
another. Lord Krishna is depicted in many Rajputana paintings. The Vaishnava group in their art
stressed the relationship of humans with the Almighty. The miniature paintings from the Rajputanas
flourished as long as the kings were in court. Once the British came to India, the art scene also
changed. Most of the artists gave up, as the British could not understand native art. The ones who
did understand a little bit got some artists to paint scenes to take back home to England. This would

give their people an idea of the country they were living in. Miniatures today are an inspiration to
Indian fashion designers, jewellery designers and artists as they are reviving some art forms, in the
hope that they do not die and are consigned to pages of history.

Like Rajasthani art Madhubani paintings originate from Bihar and still artist’s form there produce
fine art. From other states Tanjore paintings down south and Bengal Art are distinct I styles but each
have affinity to religious themes.

Modern Indian Art
In the beginning of the 20th century, some educated Indians began painting new themes, which
were directly inspired by the ancient culture of India. With the arrival of the foreigners in the
motherland most artists were pinning to get back to the core of native themes. Some bold new
revivalists that changed the face of the art world. IN the forefront was Rabindranath Tagore from
West Bengal. He lit the torch that was kept aflame by his nephews. While the country’s politics was
stormy, no artist worth his salt drew inspiration from its turmoil. During this time the biggest name
that emerged was that of Raja Ravi Varma from the kingdom of Travancore. His talents took him to
Europe where he learnt to paint in oils. To this day, paintings of God and Goddesses under his
signature are fascinating art lovers.

A group of progressive artist decided to express their talents during the turbulent days. Landscapes,
nature, portraits were some of the themes that artists chose during this time. Current poster boy of
the art world M F Hussain is one of the progressive artists who are rocking at the age of 88 years.
These artists gave a completely new meaning to Indian art in the following years. As artists started to
express themselves, art galleries were needed to display their works. Art galleries appeared in Delhi
and Mumbai only in the post sixties. The face of Indian Art was changing with times.

Indian Art Today
Once the government recognized the need to give the new breed of artists a solid platform the
colours on the canvas have inspired and encouraged talent from all over the country. Today many
artists are producing great works of art and exhibiting them abroad. Most Indian paintings are
finding buyers in other countries. The uniqueness of Indian Art still lies in its rich cultural heritage.
The art mart in India has gone global and like other sectors it is an economically a viable proposition
for business. Somewhere in the world right now, an Indian painting will be bought or sold at an
auction and at an unheard price. The paintbrush is becoming as powerful as the pen to express for
many Indians

Collectables
Collectables means any object or objects collected by an individual or organisation out of hobby or
passion. Usually Collectables include the objects which an individual likes the most. These include
Stamps, Coins, Bags, Furniture, Perfumes, Jewellery, Vintage cars and the list goes on endlessly. But
are collectables meant just for memories and passion. Though the primary purpose is memories and
hobby but secondary objectives could be more of financial motive.

Objectives of Collectables
Some of the purposes for which Individuals invest in collectables are

 Self Fulfilment
 Passion
 Love towards the objects/Antiques
 Long Term Appreciation
 Capital Gains on resale
 Protection against Inflation

Risks
But the Investment in Collectables also face few demerits and risks like

 Liquidity
 No Fundamental value. Current trends and investor sentiments have a huge impact on prices
in the collectibles market and tailwinds are a frequent occurrence in these markets
 Unlike Art, where regular Income can be assured by renting the Art to Galleries, there is no
source of regular income in most of the collectables.
 Like Art, Collectables too are not meant for pure investment.

Art

Art, hearing the word reminds of paintings, Portraits, Sketches and Drawings by renowned artists
like Da Vinci, M F Hussian, Tagore et al. Though Art was primarily an object of Collection, where the
connoisseurs use to collect the art and enjoy its presence in their place of living. But now the
purpose of art has bit diluted.

Study has shown that art holds demand in the market during an economic boom as well as a
slowdown. Investing in art is one alternative investment strategy, which has been gaining increasing
acceptance around the world. The increasing activity of art auction houses over the last decade has
provided an important secondary market which has resulted in liquidity, promoting art not only as
an object of pleasure but also as an inevitable asset.

The launch of many online art auction houses and art funds has fuelled the interest and with
foreigners also now acknowledging Indian Artists, there is good potential for further capital
appreciation over the coming years. Several media channels more known for their financial content
are also now discussing art on a more regular basis, giving greater exposure to the public and
educating them on a new investment in art opportunity.

The Indian art market is entering a period of accelerating change and complexity. At the same time,
conflicts of interest within the art market are giving rise to the need for independent and objective
advice on art due diligence and art investment. This is all the more important as the prices of quality
art with strong provenance and good condition are expected to continue to increase in the long
term.

Just as one should obtain independent and objective advice when making a financial investment, the
same holds true for investing in high value works of art. This, however, is not always easy to obtain.
To date such advice has been provided largely by art dealers, galleries and auction houses for which
conflicts of interest could exist.

However, unlike other financial asset markets and products — which have developed quickly by way
of infrastructure and innovation — the buying, selling, intermediation and financing of art has
remained virtually unchanged over the years. Aggregation and sharing of information is also
negligible, so there is little knowledge with buyers and sellers. The market also lacks transparency
and inter-linkage between the various players — artists, gallery owners, auction houses, dealers and
individual collectors.

It certainly is an uphill task: the market is inefficient, unorganized and fragmented; there is a brisk
business in fakes and `collectors' out to make a quick buck. Even with more uniform systems, there is
a danger that a market of fakes will crop up, so processes for proper documentation and
authentication will also be necessary.

As awareness of art increases, there will be more demand, which may lead to a scarcity of supply,
and higher prices. So sustainability would depend on a wider and more mature market with greater

transparency, increased liquidity and better informed buyers, supported by the entry of more
international auction houses, and a greater number of galleries, auctions, exhibitions — or the
secondary sales market, where the largest price gains occur. Tax regulations are also needed.

Why Invest in Art?
In principle, art has all the makings of a great investment—glamorous with long-term appreciation.
We evaluate why still makes investment sense is.

 Art Funds: Legal? An art fund is intended to be a pool of art works, into which high net-
worth individuals can invest. Major Banks signed up to distribute the fund to their high net-
worth clients, who were excited about a more institutional art offering. Now, in theory, an
art fund is similar to an equity mutual fund. The problem is that Sebi has created no legal
structure for art funds. As a result, investors are putting money into the market without the
regulator’s protection, which has value, particularly so when investments go sour.
 Uncorrelated Returns? The single best reason for investing in art is that art returns, in
foreign markets at least, have been uncorrelated to equity returns. Investing in uncorrelated
assets brings distinctive exposure and diversification to the portfolio beyond equities and
debt. The problem is that uncorrelated assets suddenly change character in a crisis. Think
2008: as equities crashed, art crashed even worse. Osian saw the price of celebrity paintings,
by names such as M.F. Husain, getting beaten down severely.
 Valuation Problems? How do you value a painting or sculpture? More traditional assets are
listed on stock exchanges, but sculptures don’t sell on the NSE. Yes, M.F. Husain is better
known than Mr XYZ, but beyond that, it is difficult to put a fair price on art. Unlike real
estate, where there is an active buyer and seller market, making even a rough valuation is
very difficult in the art market.

The concept is exciting, but a bit of implementation thinking is required. For starters, we could use a
regulatory structure from Sebi, a policy for valuation of art assets, and some clarity on what exactly
is art. Till then, art investing is best confined to our individual imaginations, tastes and preferences,
and best housed in our homes and offices.

Buy art for art's sake
Investors buy art for two reasons. First, of course is the type who buys art for the love of it. And the
second group buys art from an investment angle.

The investment value of art increases due to several reasons, say art advisors. The popularity and
history of the artist for one can have huge impact on the work of art. Unless an artist is able to
sustain its quality of work over a period of time, the value of his works tends to stagnate.

There are several things that keep the value of a painting at a high level. The market perception of
the artist, the quality of his works and even the number of exhibition done, can have a bearing on
the price.

But more often than not, the value of art never comes down. So if you can spot talent early enough,
then your investment in his/her work stands a better chance of appreciation.

Experts note that art as investment is a unique proposition. First of all, like real estate it is not as
liquid as financial instruments. Also for an investment to appreciate in value, one must be prepared
to bide his time.

On a conservative estimate, investments in art can appreciate up to 20 per cent per annum, though
in some special cases, it can even double or triple in value.

While works of well-known artists have already acquired a fairly high value, those by young up and
coming artists can be a good proposition, as they will accrue in value over the years to come.

Costs
Like any Investment, Art also has few costs attached to it.

When costs are considered (as a factor impacting price) they can be divided into two distinct groups:
production costs and selling costs. In art, as a rule, the price of the work of art consists of its
production costs plus the aesthetic value of the piece.

The first of these categories can vary a great deal, and it cannot be assumed that the price of an
artwork is simply attributable to the time value of the artist and a simple set of input costs such as
paint, canvas, and studio space. Certain artworks have production costs that add significantly to the
final sale cost. A good example of this is the recently produced piece entitled “For the love of god”
by the artist Damien Hirst, which is a diamond-encrusted skull with a production cost of around
£14m, equivalent to one-quarter of its value . A key selling-based category of costs that can often be
discounted are those attributable to the promotion of a new artist in terms of distribution and public
relation efforts. To sum up, the principal costs for the production of art can be divided into four
groups: the work of art itself (direct production costs), those associated with the artist (a notional
salary in lieu of time spent producing the work), the costs attributed by the market (sales and
marketing costs, valuation fees), and those from the macroeconomic environment (taxes, insurance,
and other duties).

Thus the costs can be majorly identified as

 Entry Cost: This includes cost of Investment, brokerage paid to the dealer and also any
processing fees etc. As already mentioned Art has a major cost towards its preparation
which would add to its value.
 Holding Cost: In case of Art, the Holding Cost seems to be very high because of care and
delicacy it attracts. There is high requirement of maintenance for Arts. And also Insurance
costs are part of holding cost. Sometimes the art may require restoration which further
attracts restoration cost.
 Transfer Cost: Due to Illiquid nature and shallowness of Market, characterised with
asymmetry of information between buyer and seller, the Transfer cost becomes high. The
search cost, Brokerage/ charges paid to gallery owners for display of arts for sale,
commissions, tax on Capital gains if any add to the transfer cost.
 Exit Cost: There is a very thin line between Exit Cost and Transfer Cost. The Exit cost refers to
Costs of search of buyer ready to pay decent price as required by the seller. In case of India,
since Art market is at its very nascent stage it is difficult to find the buyers and thus help of

intermediaries is pre requisite. Also the Charges paid to valueor of Art for determining its
price is also very high.

Risks
Art is considered as Alternative Investment and not Primary Investment. Though it has many
benefits over the other instruments like High returns, Low correlation with Equity market, protection
against Inflation, high capital appreciation etc. But there are high risks too attached to it. An Art may
just remain a piece of covering Wall or may turn to a multibillion master piece. An art though bought
after paying hefty prices may ultimately mean buying a fake art. There many risks in Art making it
less attractive investment avenue for risk conservative individual.

Some of the Risks in Art are

 Art is far less liquid than stocks: You can't simply push a button and sell a Picasso tomorrow.
 The Indian Art market is especially shallow featured with few buyers and sellers. Also it is
much unorganised leading to high search cost and transaction costs.
 The Transaction costs are as high as 30-40% as brokerage to Gallery Owners. Sometimes
these charges may touch a peak of 60%.
 Since there is need of Valuation in determining value of the art, there is high valuation cost.
Also it requires a specialised valuation and is only possible by a person having excellent
knowledge about art, its history etc
 Art also require High maintenance leading to negative Income.
 Though Art provides opportunity to earn regular income by lending it to gallery Owners/
Exhibitions and museums. But in this case, one has to give up the pleasure of enjoying the
art.
 Since the Market is shallow, The Art when auctioned, the price is dependent on just 1 or 2
persons. Thus the price will be skewed towards their will and wishes. Thus the price
discovery mechanism faces serious demerits
 The Art Index which measures the average performance of Art pieces of famous artists use
the data of Auction sales and ignore other arts. Thus there is a serious inconsistency in
computation. There are different ways of constructing the art index, but the most popular is
through repeat sales of the same painting at auctions, requiring at least two price
observations per painting before it can be included in the database.
This means that returns reported for art in these studies are upwardly biased for two
reasons. First, the relatively substantial transaction costs are unaccounted for. Second, the
method suffers from what is called survivor bias: many of the contemporary artist paintings
sold, which subsequently become worthless, never come up for a repeat sale. In other
words, the returns reported for art are rosier than reality!

Due to these risks, Art is regarded as a very highly Risky Investment avenue placed at the Top of the
risk pyramid.


Picture 3 Risk Pyramid

Participants in Art Investing Market

• Artists: An artist is a person engaged in one or more of any of a broad spectrum of activities
related to creating art, practicing the arts and/or demonstrating an art.
• Art Advisors: The art market can be a tricky place even for an experienced buyer—and some
expert advice can make all the difference between a wise, rewarding purchase and a long-
lasting regret (both aesthetic and financial). This is where art advisors can play a valuable
role: They act essentially as your personal art-market agent, expert and coach. Their role can
cross the spectrum: from serving as a tutor about art history; to helping buyers develop (or,
in your case, refine) their eye; to negotiating money-saving deals with galleries and artists;
to helping you frame, hang, light and display your works in the most appealing way possible;
to selling your collection for you. For one, art advisors are immersed in the market as few
others are—they are constantly researching prices and doing deals, so they know as well as
anyone the prevailing price for an artist’s work.
• Art Dealers: He is a person or company that buys and sells works of art. Art dealers'
professional associations serve to set high standards for accreditation or membership and
to support art exhibitions and shows. An art dealer typically seeks out various artists to
represent, and builds relationships with collectors and museums whose interests are likely
to match the work of the represented artists. Some dealers are able to anticipate market
trends, while some prominent dealers may be able to influence the taste of the market.
Many dealers specialize in a particular style, period, or region. They often travel
internationally, frequenting exhibitions, auctions, and artists’ studios looking for good buys,
little-known treasures, and exciting new works. When dealers buy works of art, they resell
them either in their galleries or directly to collectors.

• Art Investors/Collectors: is basically a keeper/curator of art works or one who
invest in it
• Art Restorers: Is the one who restores the ancient artworks
• Art Museums
• Art Galleries
• Art Auction Houses: An auction is a process of buying and selling goods or services by
offering them up for bid, taking bids, and then selling the item to the highest bidder. By way
of auction art is sold here.
• Art Insurance companies

Art Index
Index of value of Art is compiled by different institutions enabling the different players in art market
including the Investor, artists, Gallery, Fund managers to have a general idea about the performance
of Art market.

ET- Osian Art Index
ET had launched in recent years, ET now unveils its next generation index called the ET Art Index
powered by Osian’s – Connoisseurs of Art, the world’s premier Archive on the Indian contemporary
fine and popular arts. This index was developed keeping in mind the growing interest in Indian
contemporary art across the globe and the need to track its performance vis-à-vis other asset classes
like equities, gold and real estate.

The ET Art Index could become an ideal benchmark not only for the fund managers and insurance
companies, but also for investors including High Net worth Individuals (HNIs). With increased
interest in Indian art and new art funds slated to be launched in the country, the need for a
quantitative evaluation of the movement of art prices is now imperative.

In order to develop this index, ET and Osian’s have used the transactions of artworks belonging to
India’s leading 51 contemporary artists. The transaction value of these 51 artists comprise 88% of
the total organized Indian art market in the year 2005 while it was over 91% in the year 1997. Some
of the prominent artists included in the art index are Jamini Roy, A.R. Chughtai, M.F. Husain,
F.N..Souza, Tyeb Mehta, V.S. Gaitonde, Akbar Padamsee, Ganesh Pyne, J. Swaminathan, J. Sultan Ali,
Bhupen Khakhar and the three Tagores - Abanindranath, Rabindranath and Gaganendranath.

ET Art Index is calculated on the basis of the average Square Inch Rate (S.I.R) of works of art of these
top artists. Since works of artists are in different media and dimensions, the S.I.R is the appropriate
basic unit so as to measure and compare the values of art fairly. This is calculated by dividing the sale
value by the area/volume of the artwork.

The Liquidity and Historical Significance weights have been considered so as to arrive at the final
index values. The historical weight for each artist have been given on the basis of a range of criteria
such as originality, critical acclaim, exhibition and publication history, collector profile, sales record.

However the liquidity weights are given purely based on the total traded value of each artist for the
calendar year. The year 1997 has been taken as the base year for the purpose of calculating the base
values. This year was a turning point in the history of the Indian Contemporary Art, according to
experts, in which, among other issues, the first professional auction was held by an Indian
organisation, HEART. The base value has been converted into 100 to obtain the index figures.

On a Compounded Annualized Growth (CAGR) basis, ET Art Index gave a return of 47.8% since its
inception in Jan 01, 1998. From a level of 100 on Dec 31, 1997 the index value stood at 2513.1 on
March 22, 2006. During the same period, BSE Sensex gave a return of 14% on a CAGR basis. The
significant movement of the ET Art Index started in the year 2003, which was also the beginning of
the boom period for the Indian equity market.

ET Art Index
4000.00
3500.00
3000.00
2500.00
2000.00
1500.00
1000.00
500.00
0.00

Picture 4 ET Art Index

Mei Moses Fine Art Index
The Mei Moses Fine Art Index is an index based on long-term data on art purchases and sales based
and annual income measures. It was developed by Jiangping Mei and Michael Moses , both
professors at the Stern School of Business at New York University . The index structure based on the
fact that the original sale price of a certain valuable painting (masterpiece) and the subsequent
resale price at Christie's or Sotheby's are compared and the difference between the annual yield is
determined. About 9,000 of these recurring sales of individual paintings have been combined into
the index.

According to this return Art Index gave a return of 10.5%


Picture 5 Mei Mosses Fine Art Index

Art Fund: An Alternative to Art Investment

People who are keen on investing in art can make their investments through Art Funds and also,
diversify their investment portfolio. These art funds in India basically operate like mutual funds, with
people investing money in them and the fund manager purchasing art with the collected money.
These art works are bought through exhibitions or directly from the possessors. The profits obtained
from the sale of these art works are distributed amongst the investors.

The following are some of the major art funds currently operating in India:

 Osian’s Art Fund
 Crayon Capital Art Fund
 Yatra Art Fund
 Copal Art Fund

The latest entrant, the Indian Fine Art Fund which is a $25 million fund, has invited investments
starting from $100,000.

Taxes on Work of Art
In the following pages we will discuss the different types of taxes levied for different types of
transactions involving art.

Tax on purchase of a work of Art
 If the work of art is purchased in India by a collector or an investor then the purchase is
subject to VAT @12.5%.
 If the work of art is purchased from outside India by a collector and brought back to India
then there will be an added custom duty @14.712% apart from VAT@12.5%.

Wealth Tax on Art
At present April 2012 onwards
Scope Paintings, drawings, Paintings, drawings,
sculptures not under wealth sculptures under wealth tax
tax ambit ambit
Wealth Tax Limit Net wealth exceeding Rs 30 Net wealth exceeding Rs 1
lakh crores
Wealth Tax Rate 1% of taxable net wealth 1% of taxable net wealth
Table 6 Wealth Tax on Art

Tax on income earned from the Work of Art
Any income earned from work of art such as rent for allowing it to be displayed in an exhibition or
fee for allowing it to be reprinted in a book, is taxed as normal income under the head “income
from other sources”.

Tax on work of art received as a ‘Gift’ or ‘Gift Tax’
Gifts received during the year in the form of paintings, sculptures or other works of art, whose
aggregate value exceeds Rs. 50,000 or any concession on purchase of any work of art exceeding Rs.
50,000 (Deemed Gift) is subject to Income tax at the applicable tax slab rate.

Tax on sale of a work of Art
Prior to 1 April 2007, a painting or sculpture or any work of art was not regarded as a capital asset.
Therefore, any gains that one made on sale of such art was not subject to capital gains tax since only
gains on the sale of a capital asset can be taxed. However, from 1 April 2007, the gain is no longer
tax-free since the definition of capital asset has been amended to include paintings, sculptures,
drawings, archaeological collections or any work of art.

The Finance Bill 2007 amended scope of “capital assets” and from April 2007 ‘capital assets” also
included:

• Archaeological collections, Drawings,
• Paintings,
• Sculptures,
• Any work of art

If a collector or an investor holds the painting or sculpture for at least three years, the gains made
are regarded as long-term capital gains. The gains would be computed by indexing the cost applying
the cost inflation index and taxed at 20%, the effective rate being less than 20% of the actual gains
on account of the cost indexation benefit. If a collector or an investor sells it within three years of
acquiring it, the gains would be treated as short-term capital gains taxable at the investor’s
applicable tax slab rates. Cost of Improvement and cost of restoration are allowed as deductions
from taxable gains. However, cost of storage is not allowed for deduction from taxable gains.

However according to the proposed New Direct tax Code which shall be applicable for AY 2010-11,
Any Asset held for 1 year or more, any Capital gain on it shall be regarded as Long term capital gain
(LTCG). And For Asset held for less than 12 Months shall attract STCG. Also the Rates for LTCG and
STCG are respective slab rate and half of respective slab rates respectively. And one more change in
DTC 2010 is for the purpose of Indexation the base year is shifted from April 1988 to Apr 2001.

Valuation
The basic level of price determination, an art valuation provides an estimate of the current market
value of a painting, sculpture or print. In a valuation, the artwork is taken to be what it appears to
be. Unless the owner specifically raises the issue, the artwork is presumed authentic and saleable.

Art valuation, an art-specific subset of financial valuation, is the process of estimating the potential
market value of works of art and as such is a financial rather than an aesthetic concern. Art valuation
involves comparing data from multiple sources such as art auction houses, private and corporate
collectors, curators, and specialized analysts to arrive at a value. Art valuation is accomplished not
only for investment and financing purposes, but as part of estate valuations, for charitable
contributions, for tax planning, insurance, and loan collateral purposes.2

Art is a highly unorganised market with little information except in the case of proven and well-
known artists and masterpieces. Information asymmetry in such a market is high and thus makes
pricing inefficient.3

Art valuation activity concerns itself with estimating market demand, liquidity capability of lots,
works, and artists, and valuation trends such as average sale price and means estimates. Because the
art market's participants are far more limited in number than the securities or commodities markets,
art valuation relies to a great extent on the advice and enthusiasm of experienced private collectors,
curators, and specialized market analysts, and this limitation in turn increases the risk that some
items may be over or undervalued. Additionally, the art market is seasonal rather than ongoing: art
valuations made for an autumn auction may be unrealistic for the following spring auction season as
fortunes in the financial markets during one season affect the art market in the following season. In
the case of contemporary art especially, when an artist is not well known and hasn't any auction
history, the risks of incorrect valuation are greater. Valuation estimates are given in ranges of prices
to offset uncertainty. Another technique for pricing pieces by new artists of uncertain value is to
ignore aesthetics and look at three semi-commoditized aspects: "scale" - size and level of detail,
"intensity" - effort, and "medium" - quality of the materials.

Factors affecting Pricing of artwork

• Quality
• Scale: The size and level of detail
• Condition: It is one of the most important factors in assessing value. Has the object been
maintained in the same condition since its creation? If there are changes in the condition,
what are they? Have they affected the structure of the object? Have they affected the
appearance of the object? Has the object been restored since its inception? If so, has the
original integrity of the work been upheld?
• Provenance: The source or place of origin, the history of ownership

2
http://en.wikipedia.org/wiki/Art_valuation
3
http://www.thehindubusinessline.com/iw/2010/05/09/stories/2010050951141400.htm

• Medium: What kind of medium is used like Drawings, Watercolors, Pastels, Oil Or Acrylic on
Canvas, Graphic Paints, Sculptures Etc. determines the cost and finally affects the pricing
• Artist personal Information: His seniority, his name and fame.
• Gallery's Promoter: The promoter of the gallery, his reputation, his expertise matters a lot.
• Publicity & Media: Media creates a lot of hype and thus when the publicity increases it
affects the price also
• Comparables: The price of similar artworks
• Auction Venue: Because it has become so easy to collect and transmit auction results, the
location of the sale must be considered. Oftentimes prices achieved at provincial, general
merchandise auctions (in the US and abroad) are included in the data; prices from such
sources can skew the results in a misleading manner.

The art market economic model
The art market operates in an economic model that considers more than supply and demand: is a
hybrid type of prediction market where art is bought and sold for values based not only on its
perceived cultural value but on its predicted future monetary value, thus valuing artworks for such a
market takes into account a variety of factors. Supply and demand affect the secondary market,
existing art that has been sold at least once before, more than it does the primary art market, where
new art comes to the market for the first time. Once a work is sold on the primary market it enters
the secondary market. Alpha consumers (trend-setters) and gallery or agent promotion are the
prime forces at work in valuing works on the primary market: new, contemporary art that has no
predictive market history and thus its valuation is more difficult and speculative. In the late 1980s,
investment firms focusing on both the primary and secondary art markets began to spring up and
study the market in-depth

Appraisal

Definition
“Appraisal is merely someone’s opinion or estimate as to the monetary value
of an item of property. It can range from an informal oral opinion, with little
or no supporting research or data, to a detailed written report prepared by a
highly experienced valuation expert and based on extensive research. ”

You have just purchased a work of fine art from the gallery around the corner. The owner assured
you that the price you paid was based on an appraisal provided by the manager of the gallery, who
has a degree in Fine Art. You go home feeling comfortable that the price you paid was accurate since
it was based on the appraisal provided by the gallery. Is this comfort justified? No, it is not.

Recent developments indicate that significant problems exist in the world of fine art appraising. Fine
Art Registry® has received numerous complaints from fine art purchasers regarding the appraised
value of their purchase. The complainants allege that the value provided by the seller does not come
close to the offering price provided by interested galleries. So far off the mark are some of those
appraisals that prints appraised at hundreds or even thousands of dollars turn out to be, in fact,
worth no more than the paper they are printed on. The appraisals are inaccurate and worthless.
Those providing such appraisals argue that they are based on gallery prices and other unidentified
reliable sources. These sources do not include auction hammer prices.

Where does the problem lie for such shoddy appraisals? In order to understand the nature of the
problem it is necessary to identify the standard appraisal process.

A proper appraisal of artwork means: 4

 A signed written report
 Regarding a clearly identified piece of art,
 Prepared by a person with the necessary training and experience
 Who is impartial and disinterested,
 Stating an opinion as to the market value as of a given date, and
 Setting forth the facts and analysis supporting the opinion

Purpose
The purpose of appraisal is following:

 To determine a purchase or sales price
 For tax purposes(charitable deduction, gift tax)
 For insurance purposes(premiums are usually set and claims paid based on
replacement value)
 To obtain a loan secured by artwork
 To satisfy the curiosity of the owner

Difficulties in Appraising Artwork

 Original artwork is one of the most difficult things to value because they are
unique

4
Art law handbook, Volume 1 By Roy S. Kaufman

 Also because the value depends on external factors that are difficult to quantify. For E.g.-
It was found that the value and merit of various pieces of artwork had been enhanced by
the sophisticated art dealer’s expertise as a salesman. Demand collapsed when dealer
sent to prison for tax fraud.
 Appraisals are only as good as the time period in which they are presented. What this
means is that appraisals do not possess longevity but are subject to the ups and downs of
the fine art market. Currently there are reports that we are witnessing a downturn in art
market pricing due to an economy moving deeper into a recession. Art price reported
recently that the market over the last quarter dropped about 14% in sale prices
compared to last year. Appraisal numbers must be judged as relative to a given time
period, economic cycle and market forces. Appraisal numbers should not be expected to
hit a bulls-eye but should be regarded as an estimate.
 Returns from other asset classes arise in the form of interim payments such as interest,
dividend, rent etc or on the sale of the asset. Art has no interim payments but requires
tremendous care and maintenance costs, which have to be borne out of pocket. The
monetisation takes place on sale of the art work only. Art has other problems in the
form of fakes, counter-party risk and physical form.

Basic Appraisal Methods

Market Comparison Approach
The cost of similar artworks in the market made of same materials is used to arrive at a value

Cost Approach

 Not applicable to all artworks like in painting. The cost of canvas, paint and varnish is usually
a negligible consideration when it comes to the value of a painting.
 On the other hand this method might be applicable where say the value of an artwork made
of precious metals or gems depends largely on the raw materials or in the case of decorative
arts where the cost of manufacturer is the main factor in determining its value

Income Approach
This method may be appropriate where the artwork produces income, such as artwork in the stock
of someone in the business of renting out artwork or a master image used to produce signed and

numbered prints or commercial products such as posters and t-shirts. Under this method the stream
of income is capitalized and used as the basis for estimating value.

Intuitive Approach
This approach is not officially recognized by any of the major appraisal organizations or the IRS, but it
is commonly used in the art world.

Replacement Value Approach5
Replacement value is the value established by an insurance company for a product stolen, lost or
damaged. It is understood to mean the amount of money required to replace a product with a
product of similar standing in a reasonable timeframe. Also the market in which the sale takes place
must be relevant and appropriate. One would not expect to secure a fine art work in an automobile
shop. The problem with insurance estimates is that according to the ASA, there are very few
underwriters experienced enough to make sound estimates of fine art value. Further, insurance
policy language is deliberately ambiguous regarding similar standing or quality so that values driven
by such concepts are questionable.

Internal Revenue Service Value Approach
As noted earlier, the IRS uses the selling price of an item to determine monetary value. The IRS
prefers to use auction sales of fine art as their platform of appraisal value. Appraisals of fine art
monetary value come under scrutiny as donations, estate pass-through and normal sales. Their
concern focuses on whether the taxes paid under such circumstances are accurate. The IRS assumes
that when donating art the work is usually appraised too high; in leaving art to one's heirs it is
assumed that the art will be appraised too low. High value appraisals via donations reduce taxes to
be paid on gross income. Low value appraisals on art for estate purposes reduce taxes owed as
estate inheritances. The IRS requires that appraisals of fine art be scholarly, follow the requirements
of IRS code, be performed by expert appraisers and be based on completed sales not sale prices.

5
http://www.fineartregistry.com/articles/art-education/fine-art-appraisals.php

Insurance of Art
Two types of insurance are discussed in this paper:

• Title Insurance - Insurance against:
o Defective or lack of title

• Property Insurance - Insurance against:
o Loss
o Fire damage
o Water damage
o Restoration cost on damage
o Theft

Title Insurance

Art title insurance, which acts like real estate title insurance, may be a worthwhile hedge for art
collectors and investors alike. Given the long-standing industry practice of maintaining the
confidentiality of buyers and sellers, a veil of secrecy shrouds many art transactions and by
extension, the provenance of many pieces of art. To further complicate matters, the involvement of
intermediate dealers in many art transactions keeps the primary seller and buyer at arm’s
length. Finally, there is no central registry for art transactions to facilitate chain of title and
provenance research. Because the art market lacks transparency, the illegal and illicit sale of art
contributes to a “black market” worth an estimated $6 billion a year, and is ranked third most
profitable illegal industry (preceded only by weapons and drugs).

While there are clear benefits to title insurance, one frequent complaint is its cost. Premiums ranges
anywhere between 3% and 7% of an artwork’s purchase price. Insurance companies justify the high
premium for art title insurance by highlighting the unregulated, non-transparent nature of the art
market, where it is uncommon for a work of art to have a clean chain of title and indisputable
provenance. Indeed, the title research process for art is significantly more complex than that of real
estate, and may involve the research of historical records, archives and private collections written in
multiple languages spread across several countries. Additionally, the cost of a policy may depend
upon risk characteristics that are specific to a piece of art. For example, a piece of art from Europe
that was looted by the Nazis during World War II is likely to have significant ownership gaps and
therefore a higher premium.

Real life case: Steven Spielberg, the movie producer and art collector, wanted a Norman Rockwell
painting. He called the gallery he usually purchased art from and was told that a Rockwell was
available. He purchased it for $700,000, took it home. Sometime later Spielberg was sued by the
previous owner who claimed that the gallery was not at liberty to sell the work because it lacked the
proper documentation. In point, Spielberg had defective title to the work, and as such, he did not
legally own the Rockwell.

Had Mr. Spielberg taken the insurance, then

• Cost: 7% of $700,000= $49,000
• Benefit: Insured for $750,000

o Value of the painting i.e., $700,000
o Defending charges i.e., $50,000

Property Insurance
Besides defective title, an art collector or investor may seek to insure artwork against possible theft,
loss, damage, or destruction. Such insurance is similar to a homeowner’s insurance policy, but
applies to works of art and is often extremely specific with respect to types of risks covered under
the policy. Accordingly, it is critical that the insured review the policy in detail to verify that it covers
all the risks that he or she intends to cover. The extent of desired coverage will often depend upon
the nature of the insured. A gallery, for instance may seek additional protection against employee
theft, while a collector may seek coverage for unintentional damage for artwork. Geography too is
an important consideration, with Mumbai collectors insuring their works against flood damage and
Delhi collectors insuring them for earthquake damage. Regardless of the variation among policies, it
is critical that a collector seek periodic appraisals of his or her artwork and adjust insurance coverage
as necessary to account for appreciation in the value of the artwork.

To adequately insure artwork against theft or loss, special attention must be paid to the valuation
clause of the policy. For instance, will the reimbursement involve an agreed-upon value, a scheduled
value, or the current market value of the artwork at time of loss? To what extent, if any, will the
insurance company make efforts to recover the stolen or lost art? Furthermore, if the artwork is
recovered after the insurance company has paid out on the policy, then the insurance company may
become the new owner of the work by subrogation. Since the fair market value of fine art tends to
increase over the long term, the insured should therefore consider requesting a right of first refusal
to repurchase the recovered artwork from the insurance company at a pre-negotiated price (i.e. the
original value of the claim).

In cases involving damage or destruction, the insured should confirm that he or she is entitled not
only to the reimbursement for restoration costs, but also for any loss in value to the artwork
attributable to the restoration. He may also request for coverage over gradual deterioration or
quality maintenance fees. The valuation clause of the policy is of particular importance when
artwork is damaged or destroyed. For example, if the insurance company were to provide valuation
services, then the policy might include an arbitration clause to adjudicate any disagreement that the
insured might have with the appraised value of the artwork. Alternatively, the parties may agree to
select a neutral third party to value the artwork. Finally, if the insured is a frequent seller of art, he
or she may wish to mitigate risk for damage to a piece of art while it is in transit to its
purchaser. Under such circumstances, it is important that the insured seek coverage for the artwork
until delivery to the purchaser has been affected.

Like title insurance, the cost of insuring artwork against theft or loss is dependent upon the risk
characteristics of the work in question. These may include the value of the artwork, the security and

construction of the building where the artwork is stored, and whether or not the artwork is
frequently moved and/or relocated. It is also possible for the insured to take out a policy for
individual works of art in his or her collection, or a blanket policy covering the entire collection.

Although it comes at a cost, art insurance may be a sound investment. But, the insured must do his
or her homework, and carefully examine the policy with the assistance of an attorney to ensure full
and complete coverage.

Conclusion

Art of buying Art
The first step to start off is to know as much about the subject as possible. Apart from regular
research through books, magazine and Internet, visit as many art exhibitions as possible to
understand the nuances of art appreciation and to know more about the artist.

An art investor must also be clear about the horizons and gestation time in purchasing art. The
quality of painting, provenance, condition and period of painting are also important considerations.

If possible try to talk to the artist to find out about their vision and insights. Also scout around for
advisory and consultant service providers to know more about the business. Art clubs and
investment consultants who specialize in art can be of good help.

Also, when you want to sell art, visit a good art gallery, who will be able to evaluate the work
properly and advise you. Considering the number of fakes and cheap copies floating around in the
market, one needs to be careful that he or she is buying authentic works of art.

Tips

 Buy the Art which you like. This will ensure an emotional connect with the Art. There would
be personal attachment to the Art even if losses its market value.
 Know thy artist - Art buyers should know the history of the artist's work apart from the
quality. Also check the provenance, condition and period in which it was painted before
investing.
 Have a clear idea about the time horizon and gestation period for a particular work to
appreciate in value.
 Buy works of well-known artists if you are looking for returns in the short term. However, if
you can spot talent early, your returns can grow manifold over a period of time if you are
prepared for the wait. Thus for Long term, buy more of growth Shares( Young Artist ) whose
price would be less and there is more room for growth than buying million dollar master
pieces
 Last but not the least, buy art only if you like the quality of work and not just the artist. And
take good care of your purchase. A work of art can never be replicated.

According to Pheroza J Godrej ( Cymroza Art Gallery, Mumbai), “ Start Small, buy works of art that
you are prepared to live with; Returns will come eventually”

It can be concluded that Art is a Investment of Highly risky nature, Long term Horizon, with less
liquid or in fact illiquid nature suitable for Investor ready to take high risk.

Features Suitability
Risky Risky Investor/ Aggressive
Illiquid Having Sufficient Contingent Fund
Long Term Horizon Of Young Age
Long Gestation period Ready for Capital appreciation with less/no
Very Few Tax Benefits regular Income


References
 INDIA'S ART APPRECIATION. By: Kripalani, Manjeet. BusinessWeek, 6/5/2006, Issue 3987,
p40-41, 2p
 EVALUATING ART AS AN ALTERNATIVE INVESTMENT ASSET, by Raya Mamarbachi, Marc Day
and Giampiero Favato of Henley Business School, The journal of financial transformation,
The capco Institute, pp 63-71
 KARVY PRIVATE WEALTH’S INDIA WEALTH REPORT, September 2010.
 THE ANTIQUITIES AND ART TREASURES ACT, 1972
 ART AS AN INVESTMENT UNDER HIGH INFLATION:AN EMPIRICAL STUDY ON TURKISH
PAINTINGS, Aylin Seçkin (İstanbul Bilgi University) and Erdal Atukeren(Swiss Institute for
Business Cycle Research)
 Writing On The Wall: Art Gets A New Value Tracker, ET Group
 “How investment in art is taxed”, Beyond The Tax Book | Gautam Njayak, Oct 31, 2010, Live
Mint

Web Links (All visited between November 30 th and December 6 t h of 2010)

 http://www.slate.com/id/2144185/
 http://theartappraiser.blogspot.com/2010/07/art-as-investment.html
 http://www.entrepreneur.com/magazine/entrepreneur/2010/may/206062.html
 http://business.in.com/article/investment-guide-2010/pheroza-j-godrej-whats-your-
canvas/8872/1
 http://ftmandate.com/news/fullstory.php/aid/2497/The_art_of_alternative_investment.ht
ml?current_page=1
 http://www.uk.capgemini.com/news-centre/news/pr2114/
http://magazine.wsj.com/luxury-guide/how-to-buy/
 http://www.db.com/pwm/en/select-services-art-advisory.html
 http://www.osians.com/wms/wmsart.php
 http://www.greekshares.com/art_of_art_investment.php
 http://timesofindia.indiatimes.com/home/sunday-toi/all-that-matters/Think-before-you-
buy-art-as-investment/articleshow/5681077.cms
 http://www.investopedia.com/articles/pf/08/fine-art.asp
 http://money.cnn.com/2006/02/09/news/funny/art_investment/ Add Picasso to Ur
Investment
 http://www.art.in/investing-in-art.htm
 http://www.art.in/indian-art.htm
 http://financialedge.investopedia.com/financial-edge/0610/June-4-Investing-In-Artist-
Futures.aspx

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