Red mushrooms are already 100% bad, so why not make them capable of becoming monsters as well. If a red mushroom has a creature die near it, it should have a chance to uproot itself as a Redcap Dwarf.
https://en.wikipedia.org/wiki/Redcap
Redcaps should be durable, move quickly, and attack fiercely with pikes, seeking to kill nearby creatures in order to prolong their own 1-3 day long lifespan by keeping their hats wet with fresh blood. They should be difficult to outrun, and perhaps perform an attack animation quick enough where simply running away is not enough to avoid being struck.
Redcaps could also emerge in the absence of a red mushroom if there is enough death happening in a specific area--maybe as a potential risk to creating infinite war-zones. If this is implemented, it might be worth considering having them pick up/eliminate loose items on the ground in order to avoid having Redcaps simply become a different kind of farm.
Their lore already arms them with three unique and iconic options for drops which I will mock up some ideas for below:
1.) A bloody red hat that has no durability, but instead decays over 1-3 days. Killing a creature in melee would refresh the duration of this hat in part, allowing you to keep it indefinitely as long as you continue killing. The hat itself could provide a movement speed increase to emulate the supposedly inescapable nature of a Redcap.
2.) A spear, special or not. I am imagining these to be a fairly dangerous monster, so a pike with enhanced power or duration might be in line depending on their tuning.
3.) Iron Boots to go in the body slot (or I guess unlock them as a footwear skin). If they are an armor, they should grant damage reduction and prevent slowing effects like spider web.