Is there a way to only display folders in a normal menu and not the pages??
Not really – unless you give all the pages TYPE_2 links. However, this is someone counter-intuitive for Matrix. You shouldn't be using folders for navigation items, as they cannot contain content. The folder does not redirect or display any default content either. So, when a user clicks on the folder link in the menu, they'll just get a blank page.
So for this i should be placing site assets within site assets.
Actually, I'd recommend using Redirect assets, if this is exactly what you want to do (so that elements in the menu point to content beneath it). However, you should just be using things like Standard Pages, so that each level within your site has content.