Opinion: What causes the downward spiral of India's stock market

Stocks across the world are in a funk and how!

And your take your pick on who to blame it on: Rising US wages; India's Finance Minister Arun Jaitley introducing the long-term capital gains tax on equities; Foreign investors finding valuations a trifle too high or just plain old profit booking after a significant event ends (India's annual budget).

It was Black Monday today after India's benchmark Nifty Index plunged 5.7 percent or 378 points to a 7-week low in early deals. Panic was strewn across Asian markets in the morning after the US Dow Index dropped 4.5 percent, overnight, on news that US salaries rose by the highest since 2009. That means inflation is likely to raise its head in America and that may prompt the U.S. Federal Reserve to hike interest rates more aggressively. Rising interest costs mean that companies' earnings may be at risk, and that triggered an across-the-board sell-off in equities.

So, what should you be doing? Kahani abhi baaki hai, mere dost! Read on:

The selling contagion landed on Indian shores today, in a market that barely fell for 4 days between Dec 1st, 2017 and Jan 31st, 2018. A total of 42 sessions saw the Nifty surge 9 percent. These kind of gains are rare and need to be pocketed.

Therefore, Monday's sell-off has to be seen against this background. This unreasonable jump in equity prices, driven by robust liquidity and in a broad absence of strong earnings growth, had to moderated. The sell-off on Wall Street provided just that.

As a consequence, the Nifty dropped 1.6 percent, or 168 points, to 10,498 points. All 35 sector and broad market indices ended lower between 1.5- 3.2 percent. Stocks are down for the sixth day in a row on disappointments related to the budget. The Sensex, too, shed 561 points at 34,195.

I believe the selling is here to stay for a while as the fluff still remains in large parts of the market. Sustained buoyancy and optimism had seen the Nifty, the mid cap and the small cap indices surging between 29-40 percent during 2017 as thousands of crores of rupees poured into systematic investment plans of mutual funds every month.

Nimble traders and savvy investors, therefore, were looking for a reason to sell and that came in the reintroduction of Long Term Capital Gains Tax of 10 percent deployed on sales of shares held for more than one year. Some investors also found the budget math awry and pressed sales on front line stocks. There are chances that the market may settle down in the 10,000-10,400 range for next month or so as investors rework their excel sheets on earnings expectations.

So, how should you tackle this volatility?

1. Uncertainty is here to stay till clarifications emerge on how the Long Term Capital Gains Tax is implemented. From the face of it, the tax does not allow indexation of purchases and that is a dampener. I see more steam coming out of the market as investors take profit away from the table ahead of April 1, when the new budget proposals come into effect.

2. If you are a long term investor and you have your SIPs in place with good quality equity diversified funds, DO NOTHING. Relax, India's growth story in not dented. Just wait for the volatility to pass away and stick to your investment philosophy of buying stocks each month. Brave investors can put in an extra SIP this month to average costs lower.

3. If you haven't started investing, this is the right time. Buy a simple equity diversified fund and put in a SIP. Choose the Direct route and don't go through an advisor. Contact the asset management company directly. It takes less than 5 minutes and the returns, or 10 years, are far higher. Trust me.

4. If you are a trader, then I hope The Good Lord is with you!

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)