Shrinking the canvas

SEBI has rapped art funds that have not got its nod as investment schemes. Art funds, usually targeting high net worth individuals, are collective schemes that invest in works of art, usually paintings. But increasingly, many of these funds were marketed as private investment schemes.

As many new players have launched art funds, including a few brokerage and investment houses, SEBI has decided that it will take action, criminal or civil as appropriate, against funds that do not register with it first—these funds fall under a collective investment scheme, under the SEBI (CIS) regulations 1999.

While once it was the exclusive pastime of the connoisseurs, art is increasingly gaining popularity as an investment alternative. Over the last twoto-three years, apart from the famous Osian Connoisseurs of Art Fund, there were other entrants like Copal Fund, Kotak Mahindra Bank (wealth management fund), Yatra Fund, Crayon Capital Fund. All these art funds invest in the works of new or upcoming artists. In many cases, an investor has to shell out a minimum of Rs 10 lakh to access these exclusive funds.

Investing in art works, however, has its drawbacks. Direct art purchases involve huge commissions of purchase and sale (15-20 per cent each time), a VAT of 12.5 per cent, a sale within three years entails a 33.8 per cent short-term capital gains tax and 20 per cent after this, an investor has to ensure a 65-70 per cent appreciation in art, according to Kotak Mahindra and CNBC’s joint initiative wealth management book on “Everything You Wanted to Know About Investing”.

On the other hand, buying through a fund entails a management fee of 3 per cent every year and an annual fee of 8 per cent. However, art is also not a liquid asset. Therefore, valuation of art is a grey area and depends on auction market prices or investor perception. With the market watchdog now keeping an eye on art funds, a clearer picture on the ambiguities should emerge.

— Nitya Varadarajan