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Is it possible to create a particular set of metadata and use it in a site collection, and create a different set of metadata terms to be used in a separate site collection without them seeing the entire list of terms from both site collections? is this the purpose of groups in the managed metadata service?

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The term set group is intended as the security boundary for managed metadata. But usually all users can see (read) all the groups; the security applies to permissions to modify and manage the metadata.

If you want to make certain termsets hidden from certain users, for example if you have a term set that is confidential, you will have to create a separate Managed Metadata service application and control access to it by restricting read access to the service application connection. This is managed in Central Administration by selecting the service application and clicking on Permissions in the ribbon. This will be easy to manage if your two site collections are hosted in separate web applications.

It is also possible to manage user access by partitioning the managed metadata service if you are running your web application in partitioned mode. This is more relevant to a hosting situation.

This subject is covered in more detail on TechNet.

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