The 'Ad Group By' section refers to the top most section of the Ads & Ad-Groups tab in the Campaign Builder. This is where you select the structure of your campaign, deciding on your ad groups. This automates the ad group creation process by allowing you to quickly and easily define the structure for all of your campaign's ad groups. Rather than creating each ad group individually, you simply define your ad group structure by selecting from your Feed's previously mapped "Dynamic Fields".
To create ad groups, select the feed categories that have been mapped as "dynamic fields" from the drop-down menu. Only feed fields that have been specified as dynamic fields will appear in the drop-down menu and can be used to create ad groups.