Single phase cobalt ferrite (CoFe2O4, CFO) nanoparticles of a controlled size (~ 6 nm) exhibiting superparamagnetic properties have been synthesized by hydrothermal technique using oleic acid (OA) as surfactant. The oleic acid coated CFO nanoparticles are stable in nonpolar organic media, such as hexane but are not well dispersible in water. The surface of these snanoparticles has been further modified by citric acid using ligand exchange process, which makes CFO nanoparticles more stable colloidal solution in water. Citric acid coated CFO nanoparticles exhibits high dispersibility in water, high zeta potential, very low coercivity and moderate saturation magnetization. Biocompatibility of these CFO nanoparticles is demonstrated through cytotoxicity test in L929 cell line.