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Basically they determine how your hdd is going to operate. NTFS is more flexible and in fact, if security of folders/files is a must, NTFS is the preferred file system to use.
FAT and NTFS are 2 different ‘structures’ for the file system on your hard drive.
FAT = File Allocation Table
NTFS = New Technology File System
NTFS was introduced as part of Windows NT.
It is a more secure file system with some built in error correction. It can also handle larger drives than FAT32.
FAT has been the file system since before the first IBM PC.
DOS and Windows up through Windows 95 used FAT 16 exclusively.
With the 16 bit address limit, FAT 16 is limited to 2.1GB per drive / partition.
FAT32 was introduced toward the end of Windows 95 (W95 version 2.5 / C) to accommodate the then new large hard drives.
If you need to access files from DOS or Windows 95, 98, or Me, then you NEED to set up your drive as a FATvolume.
If your drive is small (under 3GB), it may be more efficient to set it up for FAT, as there is a bit of drive space needed to set up a NTFS volume.