How does it work: 

In the example below, by selecting the parent category called 'Group 1' , all the sub categories 'Finance,Other,Supplier' are selected automatically.

Or we can only select the sub category (Like the category 'Marketing' In the example below)

Search for contact by category

 How to group categories:

Go to Admin and open the 'pick list manger' and select the table called  'Contact Category', this table holds the list of categories.

Create new category like 'Group 1', this category will be