When to Create groups ?

Creates a group structure in your project that matches the structure of the selected files and folders on disk. Xcode creates a group in the Project navigator for each folder you add, and it adds the contents of the folder to that group. Choose this option when you want the group structure in Xcode to differ from the directory structure on disk, or you want to reference files outside your project.

When to Create folders ?

Displays the folders in the Project navigator, and either copies, moves, or references files depending on the selection you make in the Action picker. In the Project navigator, each added folder points to a folder in the file system. Choose this option when you want your Project navigator folders to match the file and directory structure on disk, and to minimize changes to your project file when you add or remove files.