Add water, milk and butter to a small saucepan and heat over a low setting until butter is melted. Set aside to cool.
Sift flour into a large mixing bowl, add caster sugar, salt and yeast. Mix through with a spoon.
Beat egg and egg yolk, add to the dry ingredients along with the vanilla extract. Mix with a spoon or dough hook.
With the stand mixer on low speed, mix the ingredients while slowly the warm milk, water and melted butter.
Turn the speed up to medium and mix all the ingredients through, then turn up to high and start to knead the dough with the dough hook. Add small amounts of flour to the mixture if it is still sticky.
Once the dough comes together, create a ball and place it into a greased bowl. Cover with glad wrap and tea towel. Prove for 1 hour in a warm area, eg. oven
Oven the dough has doubled in size, gently punch the dough a couple of time to release the trapped air.
Roll the dough out to 1 cm to 1 ½ cm thickness and using a doughnut cutter or two different sized cookie cutters cut out your doughnuts.
Gather all the scraps and reshape and roll out the dough again to cut out more. Repeat until no dough is left.
Place the doughnuts onto a baking track lined with baking paper, loosely cover with glad wrap, then a tea towel and prove for 30 minutes in a warm area.
Preheat your air fryer for 2 minutes at 175 C on the bake or manual mode setting.
Spray the bottom of the air fryer basket with cooking spray. Place doughnuts (about 4) in the air fryer then spray with cooking spray. Cook for 4 minutes.
Place cooked doughnuts on a cooling rack to cool.
Melt Nutella in a heatproof bowl in the microwave. Dip the top of the doughnuts into the melted Nutella, smooth with a spoon, then decorate with sprinkles.