COMMODITIES

A Commodity is an article of commerce or trade that is in demand and sold by various suppliers
without any qualitative differentiation. Generally, commodities are raw materials whose prices are
based on market demand and supply. Commodities are of two types-

 Hard: metals, such as aluminium and copper come under the category of hard commodities.
 Soft: Tea, coffee, sugar, cocoa, corn soya, and pork bellies come under the category r soft
commodities.

What is commodity market?

Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodity exchange, in which they are bought and sold in
standardized contracts.

What is commodity trading?

COMMODITY TRADING is a kind of financial trading in which primary products such as food, metals
and energy are brought and sold. Trading in commodities is mostly undertaken on constraints that are
based on such commodities. Some commonly traded commodities includes:

 Agriculture products such as corn, wheat, soybeans, cocoa and oats

 Energy products such as crude oil, ethanol, natural gas and uranium
 Precious metals such as gold, platinum and silver
 Industrial metals such as copper, lead, zinc and tin

Commodities trading are also called future trading. When one trade futures, he/she do not actually
buy/own anything. The contract is bought to speculate on the future direction of the price of the
commodity.

Why commodity trading?

Well, let’s suppose one wants to buy crude because one believes that the price of crude will rise. One
can buy crude oil, store it, wait for it to go up in price, and then sell it at a profit. But, it has to be
made sure that the crude that is bought is pure, a place has to be found to store it, proper security
has to be provided, transportation has to be arranged and other such hassles. A far better way to
invest in crude would be to buy crude futures from the commodities exchange.

How is it done?

Commodity is traded at organised commodity exchanges. Most of the trading involves commodity
futures. Here, the underlying asset of the futures is a particular commodity, such as gold, corn or
copper.
When such contracts are bought, the buyer of the futures contract gets the right to buy or sell the
underlying asset at a specified price at a specified future date. The buyer also pays a price for this
contract and that is called the premium.
Some famous commodities exchanges are
 Chicago Climate Exchange
 Hedge Street Exchange
 Central Japan commodity Exchange
 Dubai Mercantile Exchange
 Tokyo Commodity Exchange
 National Commodity and Derivative Exchange
 Multi Commodity Exchange
Broadly speaking, there are two different types of markets for commodity trading
 Spot Markets- where immediate trading takes place. It includes personal purchases as well
as purchases in large scale. The other market involves future trading. Here, a contract is
traded, rather than the commodity itself.
 When a Futures contract is bought, the following things are undertaken:
 The amount of commodity specified in the contract is bought
 It is bought at the price specified in the contract
 It is bought on the expiry of the contract. This could be after one month, two months,
three months and so on. However, if the futures contract is sold before it expires, then
there is no need to worry about actually buying the underlying commodity.

How does it work?

When a future contract is bought, one does not have to pay the entire amount, just a fixed
percentage of the cost. This is known as the margin.

Let’s say a Gold futures contract is bought. The minimum contract size for a gold future is 100gm.
100 Gms of gold may be worth Rs. 72000. The margin for gold set by MCX is 3.5%. So one pays only
Rs. 2520. The low margin means that one can buy futures representing a large amount of gold by
paying only a fraction of the price. The next day, the price of gold rose to Rs.73000 per 100 Gms.
Rs. 1000(73000-72000) will be credited to the account and vice-versa.

Benefits

Investing in commodities portfolio, with sufficient care and planning, can improve the overall rate of
return of an investment. If one is a hard core trader who follows the technical charts and does not
really care what is traded, and if one is nimble and savvy, then commodity futures could be another
asset class of interest.
 Commodity trading is much cheaper than stock trading, since the margin attached with the
former are much lower. One can start at as much low as Rs. 5000.
 The brokerage in commodity trading is extremely low. It ranges from 0.5% to 0.12%. because
of this, commodity futures are a speculator paradise.
 Commodity trading is highly useful for speculators.
 Whoever plans to diversify his/her investment portfolio and earn high returns from price
fluctuations should invest in the commodity market.
  Futures are highly leveraged investments. The trader puts up a small fraction of the value of
the underlying contract as margin, yet he can ride on the full value of the contract as it
moves up and down.

Risks in commodity trading

Commodity trading is highly risky and may result in huge net loss due to unfavourable market
conditions. Since, commodity trading is usually done in the form of futures. Thus, commodity trading
also involves similar risk factors like that of future trading in equity markets. It is advisable to
amateurs to first trade in stock futures before venturing into commodity trading. Trends are always
unpredictable in the commodity market.

Commodity Trading in India

The commodity trading in India has become very popular among the traders and retail investors in
the recent times. The commodity derivatives constitute an important part of the commodity future
trading in Indian financial market. The commodity derivatives are preferred for the reason that they
provide the investors with a better opportunity of diversifying their portfolio in addition to what the
bonds, shares and real-estate offer. The concept of commodity trading in futures market has been
put in use very recently in the Indian market. It was in the year 2003 that the government of India
took the first major initiative towards setting up multi commodity exchange across the nation. In the
same year the government also expanded the list of commodities that can be traded under the
Forward Contract Act, 1952, to make the commodity trading in India more cost effective and
develop the system of risk management to ensure financial integrity. Commodity trading through
future contracting has been beneficial for the Indian economy in a number of ways. Commodity
trading in future market comes in handy to minimize the risk arising out of fluctuations in demand
and supply conditions. It also helps top preserve the benefits derived from profitable economic
activities. The multi commodity exchange have been quite helpful for the Indian retailers, because
these national level exchanges enable them to carry out commodity trading through futures
contracts even when they do not have any physical stock of the same. The commodities that are
mostly traded through exchanges in India include jute, castor seeds, pepper, oilseed complex, and
soybean complex. The multi commodity exchanges of India limited, the national multi commodity
exchange of India limited, and the national commodity and derivative exchange of India limited are
the three multi commodity exchanges functioning in India. All these make use of electronic
settlement and trading system to ensure secured and hassle free commodity trading.
To participate in the commodity future trading, the traders and retail investors need to take the help
of the registered equity brokers of the respective exchanges. The ISJ Comdesk, Refco sify securities,
sunidhi consultancy are some of the well known brokers that operate in commodity exchanges of
India. Both cash settled and delivery mechanism can be used for commodity trading in India. To start
commodity trading, investors need to have a separate bank account for the purpose.a commodity
account with national securities depositories limited is all that is required to initiate commodity
trading in India.
Despite risk factors, commodity trading is preferred by investors who like to take risks so as to earn
high returns even when trends are unpredictable and commodities actually offer immense potential
to become a separate asset class for market savvy investors, arbitrageurs and speculators. In fact,
the size of the commodity Market in India is also quite significant. Of the country’s GDP,
commodities related industries constitute about 60%.

Investors perspective

Commodity trading, a concept still in its infancy, investors need to be educated more and informed
more about it. Though a large number of investors are now beginning to adopt the same. With the
introduction of future trading, the size of commodity market has grown many folds. Since,
commodity futures are positively correlated with inflation i.e. when inflation rises, commodity prices
tend to rise as well. Their price can rise even during economic downturns. Hence, they can serve as a
hedge against stock market and economic risk. In the event of global recession, agriculture
commodities have been the best investment among commodities. Thus, investors were a bit infused
into trying out this investment option. Moreover, investors who have been struck by the collapse of
the stock market were all the more eager to look for safer investment options. Moreover, they now
want liquidity and transparency that is offered to them through commodity trading. Factually,
commodity assets under management have expanded their business. This triggered the rush for
commodities investment. In addition to this, the commodity performs better amid weak dollar. As a
rule, profits have been moderate but on increasing pace. Certain commodities viz., maize, soybean,
sugar, gold and silver are outperforming other commodities and other investment avenues.

Despite all these, investors are still hesitant to try out this avenue since they are not familiar with
the basics of this type of investment. Thus, they had to be convinced for the fact that commodities
are easy to understand as far as fundamentals of demand and supply are concerned.

Gold

Trading in gold at the commodities exchange

Gold futures are a form of derivatives future trading with gold as its underlying asset. Futures trading
on gold involve an agreement between a buyre and seller to trade a fixed amount of gold, with the
help of a dealer who is accredited to a future exchange. This trade is contracted to take place on a
specified date in the future for a specified price.

The two main world future exchanges which trade gold are COMEX in New york and TOCOM in
Tokyo. In India gold is traded on MCX and NSDEX. The various advantages of trading in gold futures
over trading in physical gold may be summarised as below:-

Trading in physical gold Trading in gold derivatives

Involves paying huge amount of money, as it has Involves paying a small amount of money as it
to cover the entire cost of the gold transacted. has to cover only a margin of 12-15% of the
entire cost of the gold transacted
Involves costs of keeping gold secure plus the ZERO such costs incurred
worries and anxiety resulting out of efforts to
keep gold safe
Cumbersome to avail best price opportunities in Very easy to avail best price opportunities in
the market market
Future trading enables the speculators and other participants an opportunity to participate in the
market on a hoighly leveraged basis. The process also adds liquidity into the market.

Trading in gold futures involves risk too: since the outlay posted for each futures contract is
relatively modest, a small adverse effect in the movement of gold prices can result in the loss of
entire margin deposit.

How the asset allocation to gold assets will add value to the portfolio?

If one of the primary objectives of the investor is to produce piositive investment reurns while
having a low probability of incurring losses in reasonable time frame, one must look for different
asset class that behave differently in different economic cycles. Gold is one such that is “counter
cyclical” in nature. Hence, gold is an ideal asset for use in a portfolio diversification. Financial
advisors advise that investment in gold must be made for the purpose of diversification and at any
point in time, about 10-15% of your assets must be invested in gold.
For example, the correlation of returns between gold and sensex for the period of ten years(Jan
1998 to May 2008) was .071%, which is very low. The correlation between BSE100 and gold for the
same last 10 yrs is -0.056 which is negatively correlated. These data suggest that even if the stock
market falls, one can still be sure that one’s holdings of the precious metal will provide stability to
the portfolio.{source- The Economic Times, 16th july’08}

Benefits

Gold is less volatile then other asset classes and definetly has lower volatility then other precioyus
metals. Gold surprisingly gave 300% returns from 1970 to 1975 when world suffered worst ever
recession after great depression. It improves the overall performance of the portfolio, with the
amount of invedstment in gold differing on each investors portfolio. Gold is internationally
recognized as money. Gold investing helps bullish investors leverage their position as they have the
option to borrow money against their existing gold asset.

Thus, inclusion of gold in ones portfolio provides the following benefits:

 Diversification: Gold belongs to a distinct asset class and may thus be an effective means of
portfolio diversifaiction. During periods of economic and political unceratainty, gold usually
retains its value and usually goes up during the period of inflation. Recent independent
studies have that traditional diversifiers often fall during oeriod of market stress or
instability. On these occasions, most asset classes move in same direction. There is no
cushioning affect of a diversified portfolio- leaving investors disappointed. However, a small
allocation of gold has been proven to significantly improve the consistency of portfolio
performance , during both unstable and stable financial periods. Greater consistency of
performance leads to a desirable outcome- an investros whose expectations are met.
 Gold is highly liquid: Gold can be readily bought and sold 24 hours a day, in large
denomination and at narrow spreads. This cannot be said of most other investments,
including stock of the worlds largest corporations.
  Low correlation: gold has a correlation with the overall equity. Gold not only diversifies ones
portfolio but, when included with the portfolio of equities, may help dampen the volatility of
the overall portfolio.
 Hedge: gold has traditionally acted as a hedge against financial assets. So, in certain times
and in periods of high inflation, gold may act as an effective store of wealth.

Disadvantages:
Gold investing can harm ones portfolio in cases such as:
 Gold investing via leverage may increase the risk associated with the investment if there is
decline in gold prices. Investors may feel a mairgin call.
 If the investment in gold does not match the investors investment objectives, it may prove
counterproductive.
Traditionally, gold investing can be done by wealthy faamilies. High net wirth individuals would
protect their positions by maintaining a large percentage of their asset as gold. More recently, all
classes of investors have been attracted to gold and its derivatives.

Various investment options: Trading in gold at commodity exchanges has been popular since long.
However, recently various alternatives for gold investment have gained much populace.

According to Marcus Grubb- Managing Director, investment research and marketing- world
gold council, “Gold’s investments characteristics makes it a relevant asset for all investors,
whether private individuals or institutions. Gold is an irreplaceable part of indian culture and
unique monetary asset. In the light of current financial crisis, the problem of credit over
leveraging the derivatives has effected the people’s portfolios. Gold’s real value is not that it
provided a quick speculative fix, but that it offered a sure and steady means of protecting
wealth. Gold Is an attractive investment that should form an important part of one’s
investment portfolio.”
Investors in gold have, essentially, three basic alternatives- bullion, individual equities, or funds that
invest in gold and gold related equities( Exchange traded funds)

Gold mutual funds and ETFs

Gold funds have been showing great gains for quite some time and with the current problematic
world economic circumstances, gold funds aren’t likely to be taking a downward slide any time soon.
Investing in a gold mutual fund is a way to add some flexbilty into one’s investment.
Gold mutual funds may be defined as funds that pursue capital appreciation by investing primarily in
equity securities of companies engaged in the minig, distribution, or processing of precious metals. A
investor should expect a return of around 15% p.a. over a two to thjree year time horizon from these
funds.
Gold coins or gold bars
It is sensible to consider modern one ounce gold bullion coins as being one ounce circular bullion
bars, guaranteed by a government rather than a refiner. Because coins are mass produced, and very
efficiently so, they are available at very competitive prices compared with similar size bars. Because
gold coins are almost universally recognised, they are also easy to resell.

Investors can choose from a wide range of gold bullion coins, issued by governments across the
world. In their country of issue, these coins are considered legal tender for their face value, rather
than their gold content.
Alternatively, the market value of bullion coins is determined by their fine gold content, plus a
premium or mark-up that varies between coins and dealers. Of course the premium tends to be
higher for smaller denominations. Gold bars can be bought in a variety of weights and sizes, ranging
from as little as one gram to 400 troy ounces (the size of the internationally traded London Good
Delivery bar). The definition of a small bar is one that weighs 1000g or less. According to industry
specialists Gold Bars Worldwide, there are 110 accredited bar manufacturers and brands in 27
countries. Between them they produce a total of more than 400 types of standard gold bars, all of
which normally contain a minimum of 99.5% fine gold.
Eg.
Bank of india has launched gold coins, with an assay certification, a 24 carat, 99.9% pure gold that
one can purchase for investing or gifting. These are available in 4g, 5g, 8g, 10g, 20g, and 50g weight.
Bank of india customers and non-customers are eligible to buy gold coins.
Gold equities or gold mining shares
Equities of gold mining companies offer greater lavearge then direct ownership of matel itself. As the
prices of gold rises, the prices of gold mining shares rises even faster, because the higher gold prices
improves the profit margins of the gold mining companies. If the price of gold goes down, the share
of mining companies goes down faster as well; this shows the proper risk-reward relationship.
When investing in gold mining shares one has the choice to buy top-tier gold mining companies,
mid-tier or junior gold companies. It should be obvious that the to-tier gold mining companies carry
less overall risk over other type of companies. This is due to the fact that the top tier gold miners and
producers have many properties and they also have large proven gold reserves.
The junior gold exploration companies carry the great risk, because a very few of those companies
succed in finding economic gold resources, and even fewer can turn already found gold resources
into gold producing mines. Thus, they also give the investors the greatest jeverage.

The AIG World Gold Fund is an open ended fund of funds scheme that invest in the equity of gold
companies through falcon gold equity fund based in Zurich.
Gold certificates:

Gold certificates offer modern investors an easy way to invest in gold. gold certificates offer
investors a method of holding gold without taking physical delivery. Individual banks, particularly in
countries like Germany and Switzerland, issue these certificates. The paper confirms an individual's
ownership, while the bank holds the metal on the client's behalf. The client thus saves on storage
and personal security issues. He or she also gains liquidity in terms of being able to sell portions of
the holdings by simply telephoning the custodian.
For investors interested in gold, combining gold certificates with actual physical ownership of gold
might prove to be an excellent hedge against inflation and flat currency devaluation.

Eg.

 ICICI Gold Investment opportunities includes investment in pure gold, mutual funds and
bonds that help you in obtaining certain tax benefits as well as yield you high returns on
maturity of the equity investment.
 Another offering is the National Defence Gold Bonds that come under the gold deposit
bond scheme 1999 notified by the central government. Another investment opportunity
comes as the ICICI Gold ETF that is a kind of mutual fund unit with gold as the underlying
asset.
Normally a 5-10% exposer to gold in an investors portfolio is recommended by most of the financial
advisors.

Gold investment in jewellery in India: physical gold is a favourite of the masses in india. Yhe HNWI
portfolio currently consists of private equity and real estate funds as these asset classes have a good
return on investment which is no longer true in the current scenario.
The modern day HNI segment in india is yet to recognize the full potential of gold as an asset class
for investment. There is unanimity among fund managers across all portfolios, agreeibg that gold is
an asset to be recognized and invested in.
In india, a popular form of investment in gold is jewellery. India has the highest demand for gold in
the world and more then 90% of this gold is acquired in the form of jewellery. The demand from
jewellery mainly comes from rurual sector; about 65-70% of the gold purchase are from rural india,
which live upon agriculture for their livelihood. The main reason for such high rural gold demand is
non-taxation of agricultural income.

Investors’ perspective

Gold continued its record breaking spree in india as investors poured money into the safe
haven asset due to the deepening global recession. As a general rule whenever a gold declines
in value, people run to gold for safety. This is true because gold ispriced in dollars and as the
dollar depreciates, gold becomes cheaper.as more and more people buy gold, its price goes
up. Recently, the price of gold has hit the record high because the us dollar continyes to lose
its value. Gold is still considered a reliable currency. The biggest advantage that investors
perceived is that, by investing in gold they could get the monay back anytime either ata a profit or
a loss. India is the largest market for gold jewellery in the world, representing a staggering 440
tonnes of gold in 2009. All evidence suggests that 2010 will exceed that figure.
Indian consumers are actively engaged in considering their next piece; 75% of women say they are
constantly searching for new designs. Whilst over 50% of gold jewellery is bought for weddings, the
wedding anniversary has now become the most aspirational occasion for receiving gold today,
extending a couple’s relationship with gold beyond the marriage ceremony. India’s culture and
mythology embrace gold. And India’s traditions of unparalleled craftsmanship and skill are
exemplified by the country’s gold jewellery manufacturing, with the majority of pieces still made
meticulously by hand. Each region’s symbols and designs are reinterpreted in gold which is
overwhelmingly high in caratage.
High gold prices did not deter india’s commodity investors to put more money into gold ETF. Gold
ETFs have shown an empressive performance. Investors grew up by 100%. However, the main
problem for rapid growth of gold ETFs in India is the lack of awareness and complicated investment
norms.

ART FUNDS
Introduction
Art funds have started mushrooming in recent years as people have woken up to the blow ou
returns they can realize from investments in works of art. Since the end of World War II, the value of
work of art has appreciated enormously. Quality works of art proved to be a remarkable store of
value. Where earlier art was the preserve of only the artists nad art aficionados, toady it replaces
blue chip stocks as an invest option. And financial institutions and atr gallaries in the country have
jumped onto the wagon and floated art funds. This is predominantly due to increasing rarity caused
by an expanding demand from museums and collectors and dwindling supplies. Art investment
ranges from paintings to stamps, coins, books, musical instruments, porcelain and ceramics as well.

Size of the market and growth

The top end of the art market has shown annual compound growth of 8-12% between 1976 and
2002 as measured by the market research index. The general index for the top 2% produced a rate
of return of 11.3% fro the 1976-2002 periods. This compares with shares which achieved 8.5% as
measured by the S&P 500 over the same period. While in India the art market is still in its nascent
stage, when compared to countries such as China. According to industry estimates, the indian art has
grown from $2 million to $400 million over the past seven years.robust economy and the emergence
of the moneyed class are sales of contemporary indian art to new highs. According to experts, the
boom in the indian art scenario is closely linked to the global art cycle, whuich is further linked with
global economies in the world, Indian being one of them. The organized art market in the country is
valued around Rs800 crore a year, which experts say growing at a rate of over 30% p.a. but, they say
art scene in India has still some way to go. Liquidity is an important concern among art investors as
there are not enough buyers. Maybe, with more financial institutions getting involved and SEBI
putting more importance on art as an asset, this can be solved.

Phillip Hoffman, the founder of one of the largest international art fund management firm, the UK
based The Fine Art Fund group told ET, “ the market for indian art globally is still in its emerging
phase and the growth has been much slower compared to that of china. One difference between the
two has been that as against the Chinese art market where the demand spurt come from European
and American buyers, Indian art till now has largely been bought by Indians or Indians living abroad.
According to estimates the size of Indian art market has grown from $2 million to $400 million over
the last seven years. While the exponential growth rates may not continue I still see the demand for
indian art growing significantly from the current level to cross $1 billion soon. Indian art market is by
no means matured. The global art market is estimated at about $60 billion today”, he added.

Awesome returns
However, prices of works of art are surging like never before. Recently, a 1971 water colour by M F
Husain titled ‘shiva’ sold for Rs34 lakh. As compared to about a decade ago, when Husain’s works
fetched about Rs 60000. Not only this, auctions of modern and contemprory indian art have fetched
million of dollars in oversees market in recent years. The art industry in india growing at 35% per
year is being considered as a safe haven by HNIs and NRIs even in times of an economic depression.
The growth of the art market has gone hand in hand with the great wealth creation of the past
decade. Many more investors and art lovers are entering the market and many of them are getting
heavily involved in the art market for the very first time.but with growing interest, this is now
changing. Many financial institutions are now building large database that covers many segments of
the art market ranging from furniture to prehistoric antiques.
Investors are getting attracted to art investment for several reason and advantages-
 Art as an investment cannot be overlooked for one unique reason: An ever changing
demand coupled with an absolutely limited supply.
 Volatile stock markets have become the norm. real estate requires huge chunks of
investment and bank deposits rates were not able to keep up with rising inflation rate. Given
this scenario, art seems to have become a safe option for imvestment. Art experts feel that,
apart from gold, it is the only commodity which gives steady returns. Art can make its own
money over a period of time.
 The growing importance of the market for Indian art is driven by the affluence of Indians
worldwide, coupled with a nationalistic desire among Indians to collect work from their own
culture, as well as increasing interest from NRIs, Europeans and Americans.
 Though unlike the realty market, for instance, the supply of art is, after all, finite, but
galloping prices(up a thousand times in five years) have lured in a new legion of
entrepreneurs attracted if not the first mover advantage then at least by the early mover
advantage.
 The biggest advantage of invetsing in good art is- it survives economic downturn. Indices
tracking the performance of high class art have held up well in the recent economic
slowdown, while art auction houses report record prices. In art markets cumulative selling
pressure arises only during economic depression and that is primarily confined to the lower
segment of the art market. Usually, there is a time lag of nine months to two years between
the decline of the art market.
 But the main attraction of the art market and the prime reason for its resurgence as an
investment is its low correlation with other financials assets. Cycles in the art market are not
necessarily linked to those of other asset classes and there is low correlation between
different categories within the art market, i.e. art prices move in opposite directions to
bonds and shares, thus diversifying risk because when market fall art prices will supposedly
remain steady or even rise. Thus, art has the ability to reduce the risk of a portfolio when
combined with the other assets. This makes art a good choice for investors that want ot
diversify their portfolios. Indeed, the art market has a very low correlation to the equity
 markets. Over the past 26 years, the correlation to the equity markets was 0.5 for the top
2% of the art market and 0.4 for the top 5%.
 The alterantive investment’s performance is alluring. It has outperformed more conservative
investments over the last few decades. For example, from 1875 to 2000 art has performed
fixed income, but underperformed equities. And in the past three years of stock market
losses, art has outperformed equities. It is now being shouted as an investment earning
capital gains rather then a dividend. In the short term, market volatility is relaticely high
compared with other asset classes. In the past few years, art prices have witnessed record
jumps, going up to over three times their original price in the last three yaers. Currently, the
indian art is growing at a pace of about 35% per annum.
 Corporate scandals, stock market losses and low interest rates have helped art investments
to emerge strongly as an investment option. In one of the most prominent examples of art
investing, british rail pension fund invested 2.9% of its portfolio in the 1970s earning a return
of 40% p.a., above inflation till 1999.
All this makes art a good choice for investors that want to diversify their portfolios.

Disadvantages: Art investments though an attractive instrument avenue as it sounds, investors need
to be well informed of the following:-
 For frightened investors returns of considerable size may sound soothing. But art is high-risk
investment, riskier than stocks. Prices of art fluctuate more widely than stocks.
 The main trouble with investing in art is that it is almost impossible to identify an intrinsic
value. It is about aesthetic judgements. Investment horizons typically run for years or even
decades, and the market is generally illiquid, which significantly limits an investors ability to
convert a holding to cash.
 Generally, the entry point for the investment is quite high. Moreover, transaction costs
(auction fees, appraisal fees, insurance, handling costs etc) are by far larger than in other
markets.
 Artworks do not generate any income, except to the extent that income in the form of
storage and associated costs.
However, with knowledge, practice and discernment, the risk involved in the investment can be
alleviated. Moreover the high end of the market is not at the mercy of public taste. The art makes
has its blue chip investments and these quality investment is certainly not short term. Give it some
time and this does not mean lifetime but at least around three years. In some cases, certain prices of
art have given 100% returns and more.

Various ways to deal in Art

There is a lot of money floating in the market and with prices for art going sky high, the big investors
are circling the waters, hoping for a kill. In this situation, with auction houses like christies and
sotheby’s coming to india and a number of indian art galleries are also mushrooming. However, in
addition to private collectors and these art galleries, art can also be purchased through online
auctions. Through this medium, collectors can purchase works of artists in other parts of the country
and also get a mix of well established and lesser known artists, attracted art lovers and investment
oriented people from across the globe.
Art funds and their management
Many investors do not have the money to buy a painting or a piece of sculpture from a top artist.
The art funds raise money from people and create a small collection. The returns are paid out when
they sell the collection and they are usually handsome. Thus, investing ina an art fund is a way to
become involved in the world of art without actually spending large sum of money on one particular
art object and at the same time reap the benefits of an appreciating art market. However, one has to
be careful about these investments. The fund must be professionally managed by individuals,
experienced in buying and selling art. An established art gallery or auction house should back such a
fund. By definition, art fund essentially operate like mutual funds. People invest money in them and
the fund manager buys the art with this money. Usually, there’s an annual appraisal of art in each
investors portfolio to asses the investment value. In the penultimate year, buying and selling takes
place and profits are distributed among investors. However, it is not wise to handover your money
to just any fund manager. Once you have surveyed the art funds in the market, the next step is to
find out the profile of the fund manager. Apart from assessing the reputation and expertise of the
fund manager, one also needs to identify a fund, which is open to accepting investments, since most
art funds are close ended. With international auctioneers taking a keen interest in the indian art
scene, a growing brood of art curators , advisories, auctioneers and online galleries, there is no
dearth for ways and means to purchase art. Potential investors are however advised to do their
homework about the artists, his previous works, the authenticity of the artwork and the dealer or
gallery. According to Osian’s-Connoisseurs of Art Private Ltd, a leading archive and auction house,
those eager to invest must come ready not only with funds but also with expertise. Apart from
taking a call on the type of artist, art collectors have to take a long-term stand towards this form of
investment.

Hence, before investing, the investors are advised to visit galleries if possible, look at the art sites,
read up about artists and look out news about Art, decide what kind of art they want to invest in and
set their limit, not to look for instant returns. This is where a role of wealth advisor comes into play
i.e. providing all this necessary information to the investor or the client. Art funds typically operate
by pooling in money from selected investors and use it to buy art objects that have huge
appreciation potential in a short period of time. However art lovers must invest only in art funds
registered with SEBI. The regulator has handed out a note of caution to various art funds saying that
the launching or floating of art funds or schemes without obtaining registration from SEBI would
amount to violation of SEBI act and regulations. Through the centuries, many investors have chosen
to invest a good part of wealth in art and other collections, though putting money into art may not
be as straightforward as investing in bonds or equities.

Art funds management involves a range of tasks, including-

 Raising capital, a challenge that has proved too difficult for some funds
 Liaising with investors
 Identification of potential acquisitions
 Buying the works at auctions, in a private sale or from a commercial gallery
 Supervising works that have been acquired, for example ensuring that there is appropriate
storage, transport, insurance and security
 Negotiating with curatorial institutions if works are to be lent to museums and galleries
 Meeting government compliance requirement
  Determining when to upload the investments onto the market
 Selling the works and distributing the proceeds to the investor( and to other entities such
as the auction house and the tax agency)

Though, various fund managers and fund houses have unique styles to fund management. For
example- Ajay Seth of Copal art manages the fund with a somewhat different agenda is to take art to
the masses, but its “fund” does not follow any premise, since he deals in the secondary market. “We
buy the art first”, he says, “Then ask people to invest in it, so they know what they are getting into.”

Various art funds launched in India

The year 2007 and 2008 saw announcement that several art funds- often badged as ‘unique’ or ‘the
first’- were being launched and would provide fortunate investors with returns of around 15 to 20%
along with opportunities for portfolio diversification. The total size of domestic art market is
estimated to be around Rs. 1000 crore and currently, there are a few art funds in India. Financial
Institutions such as Citibank, ABN Amro, ICICI Bank, and Kotak Mahindra Bank have had to foresight
to look at art as a viable form of investment. Banks have set up art advisories, where high net worth
individuals (HNIs) are offered advice to select and purchase or sell art works. Several banks have tied
up with auction houses and art galleries for the purpose. A number of financial institutions like
Edelwiess Capital and Dawnay Day have also came out with art funds or schemes, trying to cash in
on this growing new market. Over the past two or three years, a number of art funds have been set
up in India. Most of these funds have been floated by people who manage art galleries. Some have
also been floated by art collectors. Notably, most art funds are concentrating on established Indian
artists who have already made a name for themselves in the domestic and international market.
However, it the near future, many funds are likely to be set up to deal in the works of upcoming
artists.
Some established art funds in India are:-
1. Osian Art Fund: Osian’s-Connoisseurs of Art Private Ltd, a leading archive and auction house,
launched the first ever art fund in India in 2006. The close-ended fund has a lock-in-[period
of 36 months. The purchase price per unit was Rs 100 and the minimum investment would
be Rs 10 lakhs. It was a new transparent option for HNWIs in the country, especially
Connoisseurs of art.
2. Yatra Art Fund: Was set up shortly after Osian’s by Edelweiss Capital. Buoyed by the success
of their maiden launch, the second art fund was shortly after the first one. Thus, they run
two art funds at present Yatra Fund I and Yatra Art Fund II with sizes of $ 2.5 million and $5.5
million, respectively and there are about 60 members in the first fund and 150 members in
the second. These funds are closed-end with a four year maturity. The fund buys work
directly from artists or through private and online auctions. On maturity, the fund will sell
the works, again through auctions or to galleries. Investors have to commit a minimum of
Rs10 lakh in the first round. After six to eight months, when the initial monies are deployed,
the next instalment is collected.
3. Copal Art Fund: