HOW TO INVEST IN ART

While still in its infancy, art is emerging and being slowly recognized and accepted as a new, alternative asset class. Art is establishing itself world over as an opportunity to positively diversify investment portfolios. While not yet formally a part of the financial product suites of most banking institutions, there are a large number of private wealth management firms that are steadily integrating art into their wealth portfolio analysis. Hitherto, art was considered a hobby of the rich and privileged, and not perceived as an investment per say. But even in that scenario, there was an unstated knowledge that art was of immense value, it added greatly to inheritance and had the potential to yield good returns.?

In today’s world of massive globalization, online markets dissolving geographical distances, advanced online payment gateways, strong logistic infrastructure, ever increasing disposable income, a keen interest in exploring new avenues for investment, social media, social awareness and information available at one’s fingertips, art is gradually establishing itself as an area of interest for a much larger section of society than before. This pertains especially to the section of the Indian population that has grown financially over the past few decades with a resulting increase in disposable income, higher levels of education and exposure, leading to a much wider horizon of interests. In line with Maslow’s Pyramid, this growing section of society has achieved their basic needs and are now targeting psychologically fulfilling and esteem raising pursuits. It is in this respect that art acquisition is no longer limited to the UHNWIs but is quickly percolating into the lives of the upper middle class, middle and top management of corporates, younger age groups and of course the nouveau riche.?

Having said all of this, not all art would necessarily result in great returns and hence not all art should be considered as an investment. Much like any other asset, one must spend some time on research before establishing what particular artwork/s would yield good returns, and must then make an informed decision on whether or not to acquire it. Not unlike any other investment, one needs to be aware of the market, the trends, the risks and the inherent way the product functions. In this article we discuss the 5 main aspects to keep in mind while making one’s art investment decisions.

5 Key Areas to keep in mind while investing in art:

1. Budget

The first key step that one needs to take before embarking on any investment is to assess the quantum they would like to invest. This holds true for investing in art as well. While investing in art can generate good returns, one must remember that art should only be a part of one’s overall portfolio. Keeping this in mind, one should first calculate the amount that one is looking to invest in art.

Once a budget is arrived at, the next step would be to decide whether one wishes to invest in one expensive artwork or a mix of artworks. Works by renowned Modern and Pre-Modern artists like M.F. Husain, Tyeb Mehta, Jagdish Swaminathan, F.N. Souza, Arpita Singh, Amrita Sher-Gil, Raja Ravi Verma and Jamini Roy, offer assured growth, but more often than not come at a higher price. There are works of other Modernists and Pre-modernists, as well as Contemporary artists that fall in a lower price range and depending on their current position, performance and trends, have the potential for good returns over time. So, one might either invest their entire budget in one work or spread it across a mix of works. It is always advisable though to not put all of one’s eggs in one basket. The same wisdom applies here as well. It is always safer to diversify one’s portfolio, even in art investments.

2. Time duration

The second key aspect to keep in mind is that art appreciates better in the long run and therefore one must look at it as a medium to long term investment. If one is looking for quick returns, then art is perhaps not the best investment choice. Typically, world-over, the minimum duration one must look at while investing in art is an 8-10 year window. Yes, there have been instances where solid returns have been achieved in the short term as well, however, this is not the norm and should definitely not be the consideration, as it is quite risky.?

3. Overhead/Incidental expenses

Much like any other investments, investing in art also has incidental costs and it’s best that one is aware of these costs before taking the plunge. Maintenance, insurance and storage are the first set of expenses that one must consider. If you’re considering displaying the artwork in your premises then you’re responsible for keeping the artwork in pristine condition, which means monitoring factors like humidity and sunlight and ensuring there is no damage. If you’re considering keeping your artwork/s in storage then that’s an additional expense you would need to incur. One is always advised to insure their artworks, especially if they are of high value and if they’re old works.

The next set of expenses one must be aware of while investing in art are restoration, advisory and commissions. If the artwork is old or not properly maintained then the owner would need to engage the services of a restorer in order to prevent further deterioration in condition as well as value. When the owner is looking to sell the artwork, he might need to hire a professional for art valuation and advisory, in order to know the correct value of his investment. These are still considered boutique services and can cost quite a bit. The last expense that might be incurred is if one were to hire an art dealer or the services of a gallery or auction house for the sale of their artwork. These entities typically charge a commission for their services.?

It is prudent to be aware of all these incidental costs and factor them into your budget while determining the amount you wish to invest in art.

4. Characteristics of the Artwork

Once the primary driving decisions of budget, holding duration and overhead expenses have been taken into consideration, the next step is to evaluate the selected artwork itself. There are a number of aspects to consider while determining whether the artwork is worth investing in. Starting from the obvious factor of who the artist is, his/her current popularity, how the artist has been performing over the past 5 years and to what period in the artist’s journey the artwork belongs to, one would need to move on to aspects like the physical condition of the artwork, the medium and material used, the size, subject matter, how rare the artwork is and whether it was part of a series by the artist.?

Next comes the aspect of authenticity. Provenance and authenticity are key factors in determining the value of the artwork. Works signed by the artist will hold greater value. The historic ownership and journey of the artwork also plays an important role in determining the authenticity and value of the artwork. Similarly, works that have been part of publications and have a verifiable exhibition history have higher probability of appreciating in value.

5. Aesthetic value

Apart from the tangible benefits of return on investment, diversification of portfolio, balancing risk exposure, and collateral, art holds a great deal of intangible benefits too. These include aesthetic pleasure, emotional connect, associated pride with owning a particular artwork and sometimes the joy of being a part of an artist’s journey. These intangible benefits are what primarily differentiates investments in art from other regular investments. Even though the aim is to invest in art, it is always suggested that one should like the artwork they’re investing in. Chances are you are going to have that piece for a while and it’s best that you find it aesthetically and emotionally appealing!?

In conclusion, if you’re a cautious investor and want guaranteed returns on your investments, have limited money to work with or are looking for short term returns, art may not be the best investment for you. If, however, you’re a seasoned and confident investor, have extra funds and are in no urgent rush for returns, investing in artworks could be an exciting and rewarding way to diversify your portfolio.

Art investors can expect returns more comparable to those of bonds or higher, as long as they make smart choices in the works that they acquire. Basically, it is like any investment, where you need to be aware of the market, the trends, the risks and in the inherent way the product functions. At the end of the day, one needs to do some amount of research and that is where market data plays a huge role. It is only with data and its accurate analysis that any well-informed investment decision can be made-whether buying or selling.?