A facile sol-gel synthesis of novel ZnO/MgO/Fe2O3 nanoparticles (NPs) is reported and their performance is compared to that of ZnO/MgO. Powder x-ray diffraction (XRD) patterns reveal the crystal structure of the prepared samples. The average particle size of the sample was found to be 4.8 nm. The optical properties were determined by UV-vis absorption and fluorescence measurements. The NPs are stable in biologically relevant solutions (phosphate buffered saline (PBS), 20 mM, pH = 7.0) contrary to ZnO/MgO NPs which degrade in the presence of inorganic phosphate. Superparamagnetic properties were determined with a superconducting quantum interference device (SQUID). Biocompatible and stable in PBS ZnO/MgO/Fe2O3 core/shell composite nanocrystals show luminescent and magnetic properties confined to a single NP at room temperature (19-24 ° C), which may render the material to be potentially useful for biomedical applications.