A file-based dataset is as simple as it sounds: it's a complete dataset stored within a single file.
An AutoCAD DXF file is a good example of this; each .dxf file is a separate dataset.
Feature Types within File-Based Datasets
File-based datasets usually have some method of assigning data to different categories. In FME, these categories are treated as different feature types.
For example, in an AutoCAD DXF file, the data is organized into "layers". DGN files, on the other hand, use "levels". In each case, FME reads these categories as distinct feature types.