What does correlation mean? In the simplest of terms, correlation is a statistical indicator that measures, in percentages, the extent to which two funds move in tandem. If two funds have a 100% positive correlation, it means they go up and down at the same time. This is not always good because, to reduce portfolio risk, you want one fund's gains to offset another fund's losses. A high correlation also means that, in most likelihood, the tow funds hold very similar securities. You do not need both funds in your portfolio, because one of them is redundant. Getting rid of one of them, and replacing it with a fund that has lower correlation with the rest of the portfolio, will significantly reduce your portfolio risk.
Which fund do you retain and which one do you remove? Various factors might influence your decision, such as the company that sponsors the fund, the portfolio manager and, most importantly, which fund better suits your objectives and tolerance for risk. However, other things being equal, if two funds have very similar attributes, the one with a lower MER has a constant advantage over the long term. However, before you make up your mind, make sure you analyze each fund's holdings, investment style and risk profile to determine which one suits you best.
You can also use the FundScope Similarity Analysis to compare equity and balanced funds offered by each of your favourite mutual fund companies. You can also use it to compare various funds steered by the same portfolio manager. The correlation matrix shows you if a Mutual Fund Family, or if a fund manager truly offer diversity, or whether all the funds are in fact similar and...redundant.