Abstract Biodiesel is an unsurpassed alternative fuel source intended to extend the value to fossil fuels, and the longevity and cleanliness of diesel engines. It reduces the dependence on the foreign fuels and reduces the greenhouse gas emissions due to its closed carbon cycle. The plentiful advantages of biodiesel are overcome by few drawbacks such as the increase in the nitrogen oxide emission, its incompatibility with cold weather conditions, and the regular intervals of engine parts replacement such as fuel filters, fuel tanks and fuel lines due to clogging. There is a further scope for enhancement in fuel properties and to overcome the drawbacks by addition of nanoparticles as fuel additives. Recent researches on fuel additives indicated the inclusion of nano-sized particles (metallic, non-metallic, oxygenated, organic and combination) with diesel-biodiesel fuel emulsion. The results achieved demonstrated an improvement in the thermophysical properties, enhancement in the heat transfer rate, and stabilization of the fuel mixtures. Also, there was an increase in the engine performance parameters and reduction in the exhaust emissions depending on the dosage of nanofluid additives. This review paper includes the methods for preparation of nanofluids, the stability enhancement of nanofluids by various technique, several characterization methods to find the chemical bonding, nanoparticle shape, and size, dispersion of nano-additives in liquid fuel, the health effects, and applications of nanoparticles in the automotive industry. The numerous literature reviewed had some degree of indistinct and inconsistent outcomes. The experimental results from the various researchers were not generalized to reach a general accord regarding this innovative approach of fuel adulteration. The present work summarizes the literature from most recent articles on nanoparticles as a liquid fuel additive. The effect of dispersion of several nanoparticles on the enhancement in the performance characteristics and reduction in emission of a CI engine fuelled with diesel-biodiesel blends are discussed. The further scope suggests the development of an economically sustainable and feasible nanoparticle additive for diesel and biodiesel fuel. Nevertheless, few obstacles and challenges which have been recognized in this review must be addressed before they can be fully put into practice in the industrial applications.