Osmotic shrinkage of liposomes filled with a magnetic colloid (also called a ferrofluid) is described. Quantitative characterization of the shrinking process was performed by direct measurement of the vesicle radius as a function of the imposed osmotic pressure. Permeability of the 1,2-dioleoyl-sn-glycero-3-phosphocholine (DOPC) bilayer, to water was calculated from the initial linear decrease of the radius with time. Spectacular shape modifications are also reported; the shrinking process leads to the formation of daughter vesicles as shown by optical microscopy. The reversibility of the osmotic shrinkage is proof of a neck connection between the daughter vesicles and the mother liposome. A phase transition of the magnetic colloid inside the liposome was observed in the last stage of the process.