From the Super Mario Wiki
Mermushrooms are a sub-species of Mushroom People that resemble merfolk. Although they have the heads of Mushroom People, the rest of their bodies appear to be entirely fish-like. The only place where Mermushrooms are known to live is their own kingdom, Aqua Land. The ruler of Aqua Land is King Neptune. Ironically, King Neptune himself does not appear to be a Mermushroom, and instead resembles a typical merman.
Mermushrooms were only ever seen in The Super Mario Bros. Super Show! episode "Mario of the Deep". Here, Barra-Koopa had taken over all of Aqua Land, and was forcing all the Mermushrooms to be his slaves. What their duties were as slaves is partially unclear, as the only duty they were shown to perform was gathering up the Gold Coins from the sunken ships in Aqua Land for Barra-Koopa.
One unnamed, female Mermushroom in particular was featured throughout the episode. In an attempt to seek help, she was seized by a Bloober, and was eventually rescued by Mario and Luigi. This Mermushroom then continued to guide Mario's group around Aqua Land, and explained the situation concerning Barra-Koopa's takeover to them. She eventually led them to the dungeon where King Neptune was being held captive, so that Mario's group could rescue him, and stayed with the group up until the end of the episode.