Over the past few years, engineered inorganic nanoparticles have been studied, researched, and applied extensively in the biomedical field because resultant platforms increase the usage of nanoparticles for particular theranostic applications. The innovation of such nanosystems has the potential to develop a theranostic mode that integrates both the diagnosis and treatment of diseases in a particular system via combinatorial approaches of imaging, targeting, and therapy that accomplish the potential of personalized and tailored medicine. The manipulation of magnetic nanoparticles (MNPs) as theranostic agents has attained growing consideration in materials science owing to their exclusive capability in magnetic targeting, magnetic resonance imaging, chemotherapy, hyperthermia, bioseparation, gene therapy, enzyme immobilization, and controlled release of the drug. To intensify the diagnostic and therapeutic efficacy, MNPs have been ornamented or functionalized with a range of materials to enhance their biocompatibility, stability, and capability of carrying therapeutic payloads and encapsulating imaging agents. Preferentially synthetic and natural polymers have been exploited as coatings to ensure their colloidal stability and good dispersibility in biological fluids. Stimuli-responsive polymers have also been used to functionalize MNPs to establish a therapeutic approach that can significantly enhance their therapeutic effectiveness including real-time monitoring in specific cells and tissues. The present review highlights the progress of MNPs emphasizing functionalization using diverse inorganic and organic biomaterials. Furthermore, it also provides a soundproof concept on the potential of MNPs and their colloidal counterparts, which offer attractive possibilities for theranostic applications. Finally, the main challenges and limitations in the use of MNPs for advanced biomedical applications have also been critically provided.