We report on the synthesis of water-soluble gold nanoclusters capped with polyethylene glycol (PEG)-based ligands and further functionalized with folic acid for specific cellular uptake. The dihydrolipoic acid-PEG-based ligands terminated with -OMe, -NH2 and -COOH functional groups are produced and used for surface passivation of Au nanoclusters (NCs) with diameters <2 nm. The produced sub 2 nm Au NCs possess long-shelf life and are stable in physiologically relevant environments (temperature and pH), are paramagnetic and biocompatible. The paramagnetism of Au NCs in solution is also reported. The functional groups on the capping ligands are used for direct conjugation of targeting molecules onto Au NCs without the need for post synthesis modification. Folic acid (FA) is attached via an amide group and effectively target cells expressing the folate receptor. The combination of targeting ability, biocompatibility and paramagnetism in FA-functionalized Au NCs is of relevance for their exploitation in nanomedicine for targeted imaging.