Last August, Edelweiss Capital and Sakshi Gallery launched India's first art fund, the Yatra Fund. In the market now is Osian's Art Fund, a three-year closed-end fund (the investment is locked in) with a minimum investment amount of Rs 10 lakh.

Although not a registered mutual fund, it will work on the lines of one, offering the benefit of pooling resources to buy assets that might otherwise be out of reach and to construct a diversified portfolio. The fund's corpus will be invested only in artworks by major artists from the sub-continent India, Bangladesh, Pakistan, Nepal and Sri Lanka who have a history of at least 25 years.

One of the USPs of an art fund, as opposed to direct investing, is that you don't have to pay gallery commission or VAT. True, but you still have to pay for fund management and high taxes, and share profits with the sponsor, all of which considerably whittles down what you get in hand. The Osian's Art Fund can charge annual fee and expenses of 9% (Tuli says it won't cross 5%). Besides that, it will retain 30% of profits and pay 33.8% corporate profit tax on its gains. So, even if the fund earns an annual return of 43% the return from the Osian's art index since 1997 the net return to an investor will be only 14.8%.

For the uninitiated and those unable to rustle up big money, an art fund managed by a gallery or an auction house is a better way to invest. These experts have a feel of the craft and the business, a rich clientele, and you don't have to pay them the 25-40 per cent gallery commission on transactions. Still, compared to other asset classes like equity and debt, art is much, much more punishing in terms of costs and taxes.

For instance, a gain of 43.4 per cent how much Osian's art index has appreciated since 1997 on an annualised basis works out to a post-expenses and post-tax return of 14.8 per cent (See table: When 43% is 15%). That takes away some colour of this investing canvas. Tuli says the art fund is likely to do better, backing his argument with a unique sales model. Rather than sell through auctions, Osian's plans to enter into forward contracts with clients (See box: We can earn 100% a year').

While Tuli's claim might seem outrageous to investors brought up on a staple diet of financial assets like stocks and bonds, those in the art business don't think so.

Much hinges on the expert's ability to strike profitable deals, more so in the context of the direct sales model Osian's is looking at. Investing in Osian's Art Fund is effectively about taking a call that Indian art will continue to make waves over the next three years at least and on Osian's ability to be in the thick of things. While both the art market and Osian's have a lot going for it, invest at best only a small part of your portfolio (5-10 per cent) in its art fund. These are early days for such vehicles and some circumspection is not a bad thing.

This 40 per cent return is in the public arena what you would earn if you were to transact by yourself. But if an expert like Osian's were to invest, the returns would be higher 100 per cent a year on the conservative side. On repurchases, Osian's has made a gain of 185 per cent a year on all repurchases in the last six years.

We know most clients who buy art. At the very outset, we plan to enter into forward contracts with them, which will bind them to buy a particular painting at a price quoted by us at the time of entering into the contact, with the right to exercise that option resting solely with us. Hopefully, that contract will be in place in 99.9 per cent of paintings.

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