Why you must invest in art

Nalini woke up with a start, ending a wonderful dream. She had dreamt that fixed deposit rates were 12% as in the good old days when one did not really need to rack their brains as to where to invest their surplus funds.

Sadly, the reality today is quite different.

Whereas investments in fixed deposits and debt mutual funds (funds that invest in fixed return instruments) barely beat the inflation rate, investments in equity still remains fraught with risk of a very high order that most Indian investors find unpalatable.

After all, notwithstanding the scaling of the 10K peak, the memory of ‘Black Monday‘ and ‘stock market scams’ have not been erased from the minds of investors half-heartedly seeking to foray into the equity segment of the market.

As a young schoolgirl, Nalini’s favourite subject had been art. So when Jaya, her sister who returned from Dubai, suggested she consider art (paintings) as an investment avenue, she did not simply shrug and dismiss the idea as many of us are prone to. 

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

If well-picked, they also have the potential to translate into decent sums of money. Interestingly, during the time frame between 1995 and 2001, the annual appreciation in the value of investments in art was only around 5%. However, of late, it has picked up and, in the last three years, there has been an estimated appreciation of more than 10% in value. Notably, quality works have even displayed a mind-boggling 100% appreciation in price!

One key factor that has pushed up prices is the NRI proliferation, 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 a large number of Indians reside.

In a sign of the coming of age of Indian art, the art world in general is sitting up and recognising Indian masters on the international platform. 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?

Firstly, comfort can be derived from the fact that, unlike in the past when purchasing paintings was the preserve of rich businessmen and their wives, today’s art investor includes imaginative middle-class women.

For starters, one can simply 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%, 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 they screen an artist’s work before placing it in their gallery. In short, it protects you against the danger of ending up with entirely worthless works of art. 

Jaya told Nalini her friend, Lily, who was an avid art collector, said that, in an artist’s portfolio, oil on canvas commands the highest price, followed by watercolors, pastels, sketches and drawings, and then graphics and etchings.

However, this is merely a thumb-rule. To gain greater expertise. one would need to have a finger on 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 :

1. How long has the artist been painting or sketching?

2. How many exhibitions have he/ she held?

3. How well does his/ her work sell?

4. Has he/ she picked up awards at any level ?

These basic questions could well be the filter that provides invaluable pointers to a future bestselling artist.

For those who understand stock markets, the best example to cite would be that established painters like M F Husain, Ganesh Pyne and F N Souza are like blue-chips whose work will continue to appreciate steadily.

If you thought that makes selection easy… well, as in the case of blue-chips, not everyone can afford them. 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 horse. But caution is advised. Buying a new artist is like a speculative investment, where the gains could be astounding, but the risks are equally high. If you’re risk-averse, play safe and stick with the masters.

While trying to identify tomorrow’s art 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 makes 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, do not 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 in the first place, for they may reduce their commission in some cases to as little as 10%.

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 be sure to follow, and that will allow anyone and everyone  to dare to dream of owning even that elusive Husain or Pyne painting.

The main principles behind successful art investment are 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 works of many great artists have been known to stall temporarily, or worse still, early promise has been belied.

Yet, if you do spend some time and effort buying the right painter, you can get a very significant return on your investment.

Trading in art is similar in some ways to dealing in other commodities, in that it is subject to very similar 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 :

1. Know the artist to buy.

2. Know the price to pay.

3. Know the price to sell.

If you get these three basic facts right, you can begin.

Just like, Nalini plans to.

Would you invest in art? Do you think it makes a good investment? Share your reasons with other Get Ahead readers.

Ashok Kumar is the founder and CEO of LOTUS KNOWLWEALTH, which aims at knowledge driven wealth creation.