This is probably the only time that I will directly address literary fiction.
Literary fiction ranges from the Renaissance’s archives to the latest off-world experiments. Literary fiction today often dispenses with plot. It may dispense with either, but not both, character or setting. It can make setting the character. It demands greater engagement and work from readers than other genres.
Litfi can also use every rule in the book, as well as break them all. The writer is completely free of rules and templates provided that their system still works, still communicates to the audience. No one said it had to be a large audience, or that they could interpret the fiction without prior training. In fact, some litfi schools prefer that the reader have to study the author’s life and writings about writing to access the fiction: it deepens the game.
Since litfi has only one rule–what works–one can learn it, but no one can teach it, since the rules change all the time, from complete subjectivity (James Joyce’s Ulysses) to complete objectivity (Hemingway’s “The Killers”), and the extremes of any other spectrum or axis you care to research.
So do assume when you read any of the other how-to-write bits that every dictum has attached to it “except, of course, in literary fiction, where rules don’t necessarily apply.”
Litfi writers, please enjoy reading around here. You may find lots that you want to use as tools, especially about purpose, reasons, and work styles. But I cannot address your genre directly. As a former editor of literary “little magazines” I know it too well. I can’t delude myself into thinking it can be defined enough for how-to-write rules. I can mentor it, I can workshop it, but without reading your particular work, I can’t help guide you through what is and isn’t working.
Complete freedom has none of the security that rules give. Welcome to the anarchy.
Novelty Fiction, of course falls in here. Think of fiction written as an encyclopedia’s articles, in alphabetical order, to be revealed not by linear reading but by article hopping. Think of a love story presented, not just as a series of letters whose text is printed out in one typeface, but with all the visual input of picture postcards, souvenirs, the emphasis of handwriting. It’s not for the reader who wants to be spoonfed the usual.
Magic Realism is considered a form of litfi crossed with trepidatious elements of fantasy. Like Water for Chocolate might be considered the classic example, but Dona Flor and Her Two Husbands is an older one often given. It’s basically a woman living and dealing with her present husband and the ghost of her dead one. If you consider his ghost merely an internal experience of hers, it’s Magic Realism; otherwise, today it might be Urban Fantasy or even Ghost Romance. A great deal depends on marketing in this decision, but the decision effects the style of your revision, also.