OBJECTIVE--To compare the efficacy of home based care with standard hospital care in treating serious mental illness. DESIGN--Randomised controlled trial. SETTING--South Southwark, London. PATIENTS--189 patients aged 18-64 living in catchment area. 92 were randomised to home based care (daily living programme) and 97 to standard hospital care. At three months' follow up 68 home care and 60 hospital patients were evaluated. MAIN OUTCOME MEASURES--Use of hospital beds, psychiatric diagnosis, social functioning, patients' and relatives' satisfaction, and activity of daily living programme staff. RESULTS--Home care reduced hospital stay by 80% (median stay six days in home care group, 53 days in hospital group) and did not increase the number of admissions compared with hospital care. On clinical and social outcome there was a non-significant trend in favour of home care, but both groups showed big improvements. On the global adjustment scale home care patients improved by 26.8 points and the hospital group by 21.6 points (difference 5.2; 95% confidence interval -1.5 to 12). Other rating scales showed similar trends. Home care patients required a wide range of support in areas such as housing, finance, and work. Only three patients dropped out from the programme. CONCLUSIONS--Home based care may offer some slight advantages over hospital based care for patients with serious mental illness and their relatives. The care is intensive, but the low drop out rate suggests appreciation. Changes to traditional training for mental health workers are required.