file set is collection of sequential files. if source database is greater than 2 GB than prefer to use file set.
Data set is internal stage in datastage. The extension of data set is .ds it never used to extract data from client location . it is used as intermediate stage between two tables. Sequential : It supports all formats like txt,csv,xls,etc. it is used to extract data from flat files from client location.
it supports only .ds format It will never extract data from flat files from client location.