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Nanoparticles range in size from 1-100 nm although much larger nanoparticles i.e. up to 300 nm, are widely reported for medical application. Current trends in drug delivery research have shifted focus toward the designing of the “smart” drug delivery systems (DDS) for spacial and temporal control of the drug delivery. When a magnetic moiety is added to a DDS i.e. nanoparticle or liposome, it can be retained in a specific part of the body through localized magnetic field. These magnetically modulated drug delivery systems (MDDS) can also carry payload to deep lying tumor tissues which are difficult to target with other targeting modalities. MDDS are also used as hyperthermic agents under the influence of externally applied alternating magnetic field. Not only the magnetic hyperthermia can kill cancer cells but also causes phase-change in nanoparticles to induce abrupt drug release. Magnetic resonance imaging (MRI) is a diagnostic techniques used to image disease specific changes in tissues using contrast agents such as iron oxide nanoparticles. When iron oxide nanoparticles are loaded with drugs, they act as a contrast agent and carrier for targeted drug delivery which is revolutionizing medical field. In addition to drug delivery applications, magnetic nanoparticles are also being used in biosensors for identification and separation of target molecules/cells from complex mixture. However, challenges associated with optimized particle size, selection of biocompatible materials, and fate of MDDS after in vivo application need to be addressed. Emerging literature also points towards interaction of magnetic field with human body. Thus, carefully tailored magnetic modulated nanoparticles are expected to emerge as a key player in medical field due to their unique diagnostic, therapeutic, sensing and multifunctional application.