Art as Alternate Investment

8/8/2019 Art as Alternate Investment

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12/21/2010

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PERSONAL

WEALTH

MANAGEMENT

ART ASALTERNATIVE

INVESTMENTOPTION

Submitted By:

Group 2

Shivi Aggarwal 91051

Radhika Gupta 91041

Sweta Agarwal 91059

Madhusudan Partani 91029

Submitted To:

Prof. Vinay Dutta


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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


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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 TablesTable 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 PicturesPicture 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


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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 proofthat 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 artto 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 2009remained 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:


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Luxury collectibles remained the primary HNWI investment of passiono 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 ofpassion 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 Easto 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 investmento 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 in2009, but 2010 sales show a robust rebound. Chinas 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 washighest in Europe and Latin America (27%).

Allocations to other collectibles grew slightlyo 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-collectorHNWIs, 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 Travelo 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 increasingspending on luxury/experiential travel.


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o HNWI spending on luxury consumables (designer handbags, shoes, etc.) was on therise 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 $

trillion)

% of

Wealth

Equities 11.2 35%

Debt 18.5 58%

Alternative Assets 2.3 7%

Table 1 Allocation of Wealth (Global)

India Wealth Report 2010

KARVYs India Wealth Report is the countrys first ever detailed perspective on the growth of Indias

wealth. The report uncovers the future of Indian wealth, through ground breaking findings that will

determine much of the investments by Indias 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, Indias total wealth with HNIs 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)


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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)

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%

Wealth Allocation 2009-10


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Picture 2 Wealth Allocation- Comparison Global and India

Art Research: ET Intelligence

ET Intelligence Group (ETIG), the research arm of The Economic Times, Indias 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

1Price * = Hammer Price + Buyer's Premium

35% 33.90%

58%65.80%

7%0.30%

0%

10%

20%

30%

40%

50%

60%

70%

Global India

Comparison of Global & Indian Individual Wealth

According to Asset Class

Equities Debt Alternative Assets


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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 overthe 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.


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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


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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 artists 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. Whil e the countrys 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.


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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 nosource of regular income in most of the collectables.

Like Art, Collectables too are not meant for pure investment.


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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 theconnoisseurs 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 withforeigners 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


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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 investmentglamorous 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

regulators 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 arelisted on stock exchanges, but sculptures dont 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.


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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, thoughin 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 anyprocessing 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 anddelicacy 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 withasymmetry 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 toCosts 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


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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. Sometimesthese 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 2persons. 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 usethe 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 tworeasons. 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.


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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 activitiesrelated 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 buyerand someexpert 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 arethey are constantly researching prices and doing deals, so they know as well as

anyone the prevailing price for an artists 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.


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Art Investors/Collectors: is basically a keeper/curator of art works or one whoinvest 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 IndexIndex 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 Osians Connoisseurs of Art, the worlds 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--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 Osians have used the transactions of artworks belonging to

Indias 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 criteriasuch as originality, critical acclaim, exhibition and publication history, collector profile, sales record.


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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.

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 Meiand Michael Moses , both

professors at the Stern School of Business at New York University . The index structure based on thefact 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%

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

4000.00

ET Art Index


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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 obtainedfrom the sale of these art works are distributed amongst the investors.

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

Osians 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 investmentsstarting from $100,000.


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Taxes on Work of ArtIn 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 issubject to VAT @12.5%.

If the work of art is purchased from outside India by a collector and brought back to Indiathen there will be an added custom duty @14.712% apart from [email protected]%.

Wealth Tax on Art

At present April 2012 onwardsScope Paintings, drawings,

sculptures not under wealth

tax ambit

Paintings, drawings,

sculptures under wealth tax

ambit

Wealth Tax Limit Net wealth exceeding Rs 30

lakh

Net wealth exceeding Rs 1

crores

Wealth Tax Rate 1% of taxable net wealth 1% of taxable net wealthTable 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 Giftor 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 assetsand from April 2007 capital assets also

included:

Archaeological collections, Drawings, Paintings, Sculptures, Any work of art
mailto:[email protected]%25mailto:[email protected]%25


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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 investorsapplicable 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.


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ValuationThe 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 restoredsince its inception? If so, has the

original integrity of the workbeen upheld?

Provenance: The source or place of origin, the history of ownership2http://en.wikipedia.org/wiki/Art_valuation

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


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Medium: What kind of medium is used like Drawings, Watercolors, Pastels, Oil Or Acrylic onCanvas, 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 theprime 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 someones opinion or estimate as to the monetary valueof 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.


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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 areunique

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


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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 dealers 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 thismeans 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 usuallya 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 madeof 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


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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 tobe 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.

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


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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 Losso Fire damageo Water damageo Restoration cost on damageo 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 armslength. 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 mostprofitable 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 artworks 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


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o Value of the painting i.e., $700,000o 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 homeowners 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


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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.


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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 wouldbe 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 thequality. 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 toappreciate in value.

Buy works of well-known artists if you are looking for returns in the short term. However, ifyou 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. Andtake 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/noregular IncomeVery Few Tax Benefits


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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 Dayand Giampiero Favato of Henley Business School, The journal of financial transformation,

The capco Institute, pp 63-71

KARVY PRIVATE WEALTHS 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 Sekin (stanbul Bilgi University) and Erdal Atukeren(Swiss Institute forBusiness 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

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canvas/8872/1

http://ftmandate.com/news/fullstory.php/aid/2497/The_art_of_alternative_investment.html?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

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Art as Alternate Investment

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