Zombie Fund is the name given to a closed with- profits fund that no longer accepts new business. They are so called Zombie because, like Zombies, they are seen as the living dead of funds. The term can apply to Pension Funds, Investment Funds, Bonds or Endowment Plans. 

It is such fund which is not going to make profit in present or even in future, such funds with no scope of making profit in future or even encashing it will only make loss to the investor.

The best call to take is losing small rather than losing all, so the safe way is to encash the fund at least loss thinking of recovering the capital invested in it.

Exmaple:
Fund invested in equity of XYZ Co. and one day they stop the business activities and so money invested in it will become Zombie Fund.