Increasing evidence from the fields of neurophysiology and neuropathology has uncovered the role of polyunsaturated fatty acids (PUFA) in protecting neuronal cells from oxidative damage, controlling inflammation, regulating neurogenesis, and preserving neuronal function. Numerous epidemiological studies have shown that deficits in the dietary PUFA docosahexaenoic acid and eicosapentaenoic acid are associated with the onset and progression of neuropsychiatric illnesses such as dementia, schizophrenia, depression, and posttraumatic stress disorder (PTSD). Recent clinical trials have offered compelling evidence that suggests that n-3 PUFA could reduce depressive, psychotic, and suicidal symptoms, as well as aggression. Although many studies have had the validity of their results questioned because of small sample size, several studies have indicated that n-3 PUFA are useful therapeutic tools for the treatment of dementia, major depression, bipolar disorder, and PTSD. These findings suggest that the pharmacological and nutritional actions of n-3 PUFA may be beneficial in certain neuropsychiatric illnesses. This review article outlines the role of PUFA in neurodevelopment and the regulatory mechanisms in neuronal stem cell differentiation and also the possible use of PUFA as a prescription medicine for the prophylaxis or treatment of neuropsychiatric illnesses such as dementia, mood disorder, and PTSD.