In this paper, we demonstrate a simple, template-free, reproducible and one-step synthesis of hydrophilic KGdF4: Ln3+ (Ln = Ce, Eu, Tb and Dy) nanoparticles (NPs) via a solution-based route at room temperature. X-Ray diffraction (XRD), scanning electron microscopy (SEM), transmission electron microscopy (TEM), Fourier transform infrared spectroscopy (FT-IR), photoluminescence (PL) and cathodoluminescence (CL) spectra are used to characterize the samples. The results indicate that the use of water–diethyleneglycol (DEG) solvent mixture as the reaction medium not only allows facile particle size control but also endows the as-prepared samples with good water-solubility. In particular, the mean size of NPs is monotonously reduced with the increase of DEG content, from 215 to 40 nm. The luminescence intensity and absolute quantum yields for KGdF4: Ce3+, Tb3+ NPs increase remarkably with particle sizes ranging from 40 to 215 nm. Additionally, we systematically investigate the magnetic and luminescence properties of KGdF4: Ln3+ (Ln = Ce, Eu, Tb and Dy) NPs. They display paramagnetic and superparamagnetic properties with mass magnetic susceptibility values of 1.03 × 10−4 emu g−1·Oe and 3.09 × 10−3 emu g−1·Oe at 300 K and 2 K, respectively, and multicolor emissions due to the energy transfer (ET) process Ce3+ → Gd3+ → (Gd3+)n → Ln3+, in which Gd3+ ions play an intermediate role in this process. Representatively, it is shown that the energy transfer from Ce3+ to Tb3+ occurs mainly via the dipole–quadrupole interaction by comparison of the theoretical calculation and experimental results. This kind of magnetic/luminescent dual-function materials may have promising applications in multiple biolabels and MR imaging.