When Syed Haider Raza's painting sold for a whopping Rs 16.3 crore at a Christie's auction recently, it signalled the revival of the art market. What reaffirmed this was the sale of a Jehangir Sabavala painting in India for Rs 1.7 crore at Saffronart's summer online auction. The art market certainly seems to be bouncing back after last year's meltdown.
Needless to say, you will soon hear about art funds and how it can be a good investment. Is art truly profitable for the average investor? To answer this, one must consider several factors. For one, how does one decide the price? The valuation of a work of art is subjective, depending on personal taste.
When you buy a stock or mutual fund, you know the current selling price, but this is not the case with a painting. Even if you want an approximate figure, there is usually no point of comparison. If you are betting on a new artist, there is no guarantee he will graduate to the next level, improving your investment.
This leaves you only with the 'established' artists, and for these, the entry price can be formidable. Another factor is the kind of art you buy. The market goes through fad cycles, and even if the market is looking up, there may be no demand for the paintings you hold. To get the best returns, you will have to master the art of prediction, not an easy task under the best of circumstances.
Lack of liquidity in art also doesn't work in its favour because it is difficult to dispose of on short notice. Besides, unlike in other investments, art delivers only capital gains-the money obtained from the sale of a painting-not dividends.
Of course, there are art funds for the investors who know nothing about valuing art or predicting demand. Though such funds are registered with the market regulator, there is no real benchmark to measure their performance. Art funds were in vogue in 2007, but this was the time when all other asset classes were going through a re-rating process. When the art market crashed, a few funds failed even to meet the redemption demand.
Then there are questions about the manner in which funds value art because they don't always invest in paintings of renowned artists. The valuation depends on the fund manager or an adviser and there are neither rules nor benchmarks to value paintings or calculate their appreciation. Even sales figures are murky and unreliable as the industry has to depend on the averages of gallery sales.
Even if one looks at art as an avenue to diversify a portfolio, it is not really a hedge (like gold) against other asset classes. At best, it moves in tandem with other asset classes, which are simpler products compared with art. The bottom line is that if you have to buy art, do so because you are passionate about it. Don't look at it as a short-term investment like other asset classes.