Bioactive compounds are naturally derived chemical compounds having distinct biological activities and pronounced effects on human health. Dairy products offer a great way to incorporate these substances and create functional food items which are able to cater to the needs of consumers. Dairy fortification has been getting a lot of attention, especially in functional dairy foods like probiotic yogurts, butter, cheese, ice cream, and other fermented milk goods. Microencapsulation, a technique by which tiny particles of target chemical are enclosed in a coating, is an efficient way to fortify milk and associated byproducts. In addition to providing a protective barrier for volatile substances, encapsulation also extends controlled release, improved stability, and enhanced bioavailability of bioactive compounds. Though varied, the technique involves three main stages creating a wall around the substance, avoiding inadvertent leakage, and guaranteeing product purity. The present literature attempts to consolidate microencapsulation methods viz extrusion, coacervation, spray drying, emulsion, etc. along with the bioactive compounds predominantly used with dairy products. The review also evaluates the difficulties that microencapsulation faces in the dairy business, including the necessity for regulatory compliance, quality control testing, and sterile processing. However, the future of Microencapsulation in the dairy business is bright, particularly with regard to improving the nutritive content of products and developing new types of packaging.