This paper presents a detailed comparison between the latent functionally thermal fluids (LFTFs) and nanofluids in terms of heat transfer enhancement. The problem used to carry the comparison is natural convection in a differentially heated cavity where LFTFs and nanofluids are considered the working fluids. The nanofluid mixture consists of Al2O3 nanoparticles and water, whereas the LFTF mixture consists of a suspension of nanoencapsulated phase change material (NEPCMs) in water. The thermophysical properties of the LFTFs are derived from available experimental data in literature. The NEPCMs consist of n-nonadecane as PCM and poly(styrene-co-methacrylic acid) as shell material for the encapsulation. Finite volume method is used to solve the governing equations of the LFTFs and the nanofluid. The computations covered a wide range of Rayleigh number, 104 ≤ Ra ≤ 107, and nanoparticle volume fraction ranging between 0 and 1.69%. It was found that the LFTFs give substantial heat transfer enhancement compared to nanofluids, where the maximum heat transfer enhancement of 13% was observed over nanofluids. Though the thermal conductivity of LFTFs was 15 times smaller than that of the base fluid, a significant enhancement in thermal conductivity was observed. This enhancement was attributed to the high latent heat of fusion of the LFTFs which increased the energy transport within the cavity and accordingly the thermal conductivity of the LFTFs.