As with Bergman’s other work, Fanny and Alexander focuses on the depths of the human psyche, childhood experience, and the shackles of oppression. In their idyllic hometown, Fanny and Alexander Ekdhal meander through the corridors of their bourgeois home, exploring blooming gardens, partaking in local festivities, and bearing witness to the metamorphosis of their family members. The film's lavish production and costume design owe their splendour to the Finnish film producer Jörn Donner, who insisted on sourcing exclusively from Bergman's native country – a decision initially met with skepticism by the director himself. Yet the sanctuary of love and tenderness represented by the household is tragically shattered when the patriarch Oscar dies.

Much of the world of Fanny and Alexander is viewed through the eyes of a child, in which the boundaries between reality and fiction are less clearly delineated. As Alexander’s abuse gets more severe, Emilie’s characterisation becomes blurrier. Is she a vulnerable woman being taking advantage of by a nefarious patriarchy, or is she an enabler of her son’s pain? Soon, unusual mystical blips start to be woven into the narrative. Isak Jacobi, a family friend of the Ekdahls, attempts to smuggle the grandchildren out of the bishop's house by hiding them in a trunk. When the bishop discovers their absence and searches for them, the children mysteriously appear in their room. At the Jacobi residence, the children meet Isak's nephews, Aron and Ismael. Alexander, while disoriented one night, has a conversation he believes to be with God, only to discover it's a puppet manipulated by Aron. Bergman uses magical realism not just to induce a childlike perspective, but as autobiographical mechanism. Many of the characters in the film resemble players from Bergman’s earlier films, as if Bergman is reckoning with the ghosts of his own life.