New Delhi: With the countdown for the closure of India’s largest art fund having begun, the steep erosion in valuations is causing anxiety to its investors.

Poor valuation: Neville Tuli, OAF’s chief adviser.

Osian’s Art Fund (OAF), valued at nearly Rs100 crore, is due for closure on 10 November as per its redemption schedule.

OAF’s chief adviser Neville Tuli says that the capital of unitholders has been preserved despite the market dropping by over 45%.

But the rate of return is much lower than what was expected when the fund was set up in July 2006.

Investors will now get returns of 5% a year as opposed to 20-22% (after tax), as the fund’s disclosure report had suggested in January 2007.

Set up under the Indian Trusts Act, Osian’s launched its first scheme, Contemporary 1, on 9 July 2006 as a closed-ended scheme with a lock-in period of 36 months, which was open to investors only by private placement. The minimum investment was Rs10 lakh and thereafter in multiples of Rs5 lakh, with a purchase price per unit of Rs100.

The investment services wing of BNP Paribas was one of the chief mobilizers of the fund. Sharad Sharma, country head for private banking at BNP Paribas, says that he would still advise clients to invest in art funds.

Art allows investors such as high networth individuals to distribute their holdings among various asset classes to hedge their risks.

“They are a good avenue for diversification into a new asset class," says Sharma. “The recession impacted investments across the board and it doesn’t make sense to be put off completely because of this recent debacle."

However, in the same period (9 July 2006 to 6 November 2009), the Sensex gained 51.23% and gold rose 77.08% on the Multi Commodity Exchange of India Ltd.

Funds with redemption dates already set, such as Osian’s, have to sell at whatever price they get at the time of closure. Funds that are scheduled for closure in late 2010 and 2011 may face a better fate.

Mukesh Panika, director of Religare Arts Initiative Ltd whose fund closes in January 2011, predicts that upheavals in market sentiment will be largely resolved by then and that investors will be able to get a higher rate of return.

Panika doesn’t disclose the expected rate of return, but says he’s positive that investors would be appeased.

Arvind Vijaymohan, who heads Indian arts advisory Japa Arts Pvt. Ltd, makes recommendations to clients on their personal art collections.

He strongly believes that the basic premise of art funds in a young market such as India is not very solid.

Vijaymohan also attributes the disproportionate rise and subsequent fall of prices in Indian contemporary art to the profusion of art funds in 2006.

“By collectively raising money to the tune of crores, these art funds made a lot of sudden capital available in the market," he says. “And since proportional quantities of work weren’t available, severely inflated values got attached to what was."

Ashwin Ramarathinam in Mumbai contributed to this story.