Favourites Tab Category - This is the forum category that is used to hold the content of the Favourites tab. It needs to be visible to all users and must be a category forum.
I dont fully understand the above settings, what exactly does it do?
The setting is partially redundant and can be ignored as of the current version of DFT. It will be used in a later version to enable better control of the Favourites layout. When that change comes in I'll explain it in better detail.