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In recent years considerable research has been done in the area of "nanofluids". Nanofluids are colloidal suspensions of nanometer size metallic or oxide particles in a base fluid such as water, ethylene glycol. Nanofluids show enhanced heat transfer characteristics compared to the base fluid. The thermal transport properties of nanofluids depend on various parameters e.g. interfacial resistance, Brownian motion of particles, liquid layering at the solid-liquid interface and clustering of nanoparticles. In this work atomic scale simulation has been used to study possible mechanisms affecting the heat transfer characteristics of nanofluids. Molecular dynamics simulation for a single silica nanoparticle surrounded by water molecules has been performed. Periodic boundary condition has been used in all three directions. The effect of nanoparticle size and temperature of system on the thermal conductivity of nanofluids has been studied. It was found that as the size of nanoparticle decreases thermal conductivity of nanofluid increases. This is partially due to the fact that as the diameter of nanoparticle decreases from micrometer to nanometer its surface area to volume ratio increases by a factor of 103. Since heat transfer between the fluid and the nanoparticle takes place at the surface this enhanced surface area gives higher thermal conductivity for smaller particles. Thermal conductivity enhancement is also due to the accumulation of water molecules near the particle surface and the lattice vibration of the nanoparticle. The phonon transfer through the second layer allows the nanofluid thermal conductivity to increase by 23%-27% compared to the base fluid water for 2% concentration of nanosilica.