The unique optical characteristics of lanthanides (Ln3+) like high colour purity, long excited state lifetimes, less perturbation of excited states by the crystal field environment and ability towards easy spectral conversion of wavelengths through upconversion and downconversion processes have caught the research attention of many scientists in the recent past. To broaden the scope of using these properties, it is important to make suitable Ln3+-doped materials, particularly in colloidal forms. In this feature article, we discuss the different synthetic strategies to make Ln3+-doped nanoparticles in colloidal forms, particularly on ways of functionalizing hydrophobic surfaces to hydrophilic ones for enhancing their dispersibility and luminescence in aqueous medium. We have enumerated the various strategies and sensitizers utilized to increase the luminescence of the nanoparticles. Further, the use of these colloidal nanoparticle systems in sensing application by appropriate selection of capping ligands has been discussed. In addition, we have shown how the energy transfer efficiency from Ce3+ to Ln3+ ions can be utilized for detection of toxic metal ions and small molecules. Finally, we discuss examples where the spectral conversion ability of these materials has been used in photocatalysis and solar cell applications.