This was due to lower operating profits from companies in its portfolio. It was also due to a difficult external environment.
The decline comes after a doubling of net profit in the previous year.
Temasek's year-end portfolio value, however, was a record S$198 billion, up from S$193 billion last year.
From the shareholders' perspective, Total Shareholder Return (TSR) for the year was a modest 1.5 per cent.
In the year ended 31 March, Temasek invested a total of S$22 billion and divested S$15 billion. Net investments for the year amounted to S$7 billion.
During the year, Temasek doubled its exposure to the energy and resources sectors from 3 per cent to 6 per cent, including a S$2 billion investment in FTS International, a US shale energy production service provider. Temasek also invested S$1.3 billion on US fertiliser producer The Mosaic Company.
However, Temasek said its portfolio is now firmly anchored in Asia.
It ended the year with an underlying portfolio exposure of 72 per cent in Asia, including 30 per cent in Singapore.
Temasek's exposure in mature economies such as Australia and New Zealand was 14 per cent while North America and Europe accounts for 11 per cent. Latin America and other growth regions such as in Africa, Central Asia and Middle East remained at a steady 3 per cent.
In a statement, Temasek chairman S. Dhanabalan said: "In the 10 years since March 2002, we invested almost S$140 billion, and divested just under S$90 billion as an active investor in Asia.
"In the process, we reshaped our portfolio from one largely focused on Singapore to one riding on the twin transformations of Asia and Singapore, growing it from S$77 billion at end March 2002 to S$198 billion a decade later.
"Investments made since March 2002 delivered over 18% annualised returns to Temasek over the last 10 years, while blue chip investments we held as at end March 2002, such as SingTel and Singapore Airlines, delivered a steady 11% annualised returns to Temasek over the same period.
"Based on a theoretical simulation of key holdings, had we kept our portfolio as at 31 March 2002 unchanged, and not stepped out actively into Asia, it would have grown to a lower S$165 billion in March 2012."
Looking ahead, Temasek expects the investment environment to remain challenging amid heightened volatility in the global economy.
Temasek adds that as an active investor, it remains positive on Asia's potential.
"Asia's long-term growth potential remains healthy, though there will be structural and policy risks along the way, especially in the medium term," said Mr S. Dhanabalan. "In the near term, Europe and the US present significant risks, as well as potential opportunities."
In the statement, Temasek's CEO Ms Ho Ching said: "Urbanisation and middle income population growth continue to underpin the long term transformation of Asia and other growth economies. Sectors such as energy, resources and consumer good and services are proxies to the demographic drivers of growth, while technology in the media, computing and biotech may provide new break-through opportunities."
Amid the slower global economy, Singapore Airlines and Neptune Orient Lines are some of Temasek's portfolio companies that have seen lower earnings.
But the investment firm says it is in a good position to pounce on opportunities.
Loy Wee Khim, Standard & Poor's Director of Asia Pacific Corporate Ratings, said: "Temasek has been in a net cash position for the past eight years."
Tan Chong Lee, Chief Investment Officer and Co-Head of Americas at Temasek, said: "We ended the year with a net cash position, and have full financial flexibility to respond to opportunities ahead. As a long-term investor, we continue to invest in sectors that are proxies for growth economies in Asia and other growth regions."
More than 70% of Temasek's portfolio is invested in Asia, including Singapore.
Over the past year, it has also increased exposure in North American energy companies and Chinese banks.
Chia Song Hwee, Head of Strategy and Head of Credit Portfolio at Temasek, said: "We firmly believe that with the underlying demand for energy and resources, that is a sector that we will have significant exposure.
"Periodically, we will have issues, whether macro or micro at the company level but it is more important for us to focus on the long-term potential of the sector and company, and we will adjust accordingly.
"With regard to financial services, it is the best proxy for the underlying economy. Therefore we continue to have a large part of our portfolio in financial services."
Temasek's total shareholder return for the year was 1.5 percent, down from 4.6 percent in the previous year.
Associate Professor Sundaram Janakiramanan, Head of Finance Programme, School of Business, SIM University, said: "Last year they paid out about 30 percent of the profit as dividends, this year it is reduced to 25 percent. So maybe they are keeping money by paying less dividends in order to make prudent investments in the near future."
That one-year rate of return of 1.5 percent is below Temasek's internal hurdle rate of 8 percent.
Wealth Added (WA) bonuses are awarded to key staff should returns exceed the hurdle.
Dilhan Pillay Sandrasegara, Head of Portfolio Management and Head of Singapore at Temasek, said: "So yes, we would expect no WA bonuses this year for our financial year ended 31 March 2012, but for the other members of the company, there are other parts of the compensation pool available to them."
Over the year, Temasek invested S$22 billion, snapping up stakes in North Amercian energy-related firms like Clean Energy Fuels and FTS International, while divesting S$15 billion, selling stakes in firms like Singapore semiconductor company Avago Technologies and Chinese property developer Kaisa.
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