Elections in nine states coupled with possible geo-political tension and rise in oil prices may prove to be a dampener for high economic growth.

Stating that India has the potential to outperform other economies, a leading mutual fund said as a cascading effect to the above factors funds from foreign institutional investors in the equity markets may also dwindle.

In its annual report, Franklin Templeton Investments said impressive performance by the economy's new growth drivers -- infrastructure spending and retail lending -- bolstered growth in manufacturing and services sector.

"All indicators point towards a good economic growth in 2003-04," Templeton said in its report.

Indicating that free-fall in interest rate might not be there in the long run, the report said, "changing market dynamics warrant a shift towards equity funds."

Income funds (which mainly invest in risk-free government securities) had posted strong performance in recent years mainly due to falling interest rates and "most indications are that it may not be wise to plan for such strong results in the coming years," it said.

Templeton said the evidences showed equity investments were underweighed, while they were overweighed in the case of debt.

The last fiscal saw domestic equity markets finish in the negative category due to a host of events, including selling by domestic institutions, geo-political tensions in the Gulf (Iraq war) and poor monsoon, it said.

However, cyclical turnaround in the economy, combined with attractive valuations, led to FII inflow to the tune of $524.7 million into India in 2002-03, the fund said.

Citing that in the current fiscal (2003-04), FII inflows were about $1.24 billion, the fund said it was "a clear indication that India has emerged as one of the favourite investment destinations for global fund managers."