Funds are a way for your organization to allow giving to be set aside for a specific use. For example, a church might have a general tithe fund where most donations go, and a special fund for a new building campaign. You can have as many funds as you'd like, and every organization starts out with one default fund (it has the same name as your organization).
Donors have the option to give to as many funds as they'd like in the same donation. These funds are compiled into one transaction and later split into funds via reporting. In other words, if a donor sets up a donation for $50 to both a General Fund and a Building Fund, then a single $100 transaction is processed, not two $50 transactions.