A file system is an index that contains the physical location of data on a storage device and is responsible for storing and indexing metadata. It partitions storage into manageable allocation units. File systems are needed for efficient organization, easier management, and balancing efficient disk use with performance. FAT and NTFS are two common file systems, with FAT being simpler and used in portable media while NTFS is more advanced with features like encryption and compression. They differ in security, compatibility, space efficiency, and reliability. Clusters help divide hard disks into blocks to properly arrange and maintain data.