Well, yes it should, of course but the best fiction is stronger when it is backed by non-fiction. I talk about this more in my Chandler's Ford Today post for this week called Facts and Fiction. I look at, for example, how a working knowledge of history can and has inspired some wonderful works of fiction.
So yes you make things up when story telling but you also draw on what you know about how people act and behave to create credible characters. Sometimes historical or scientific facts can be the pivot around which a short story or novel is based. To be able to use your imagination to make things up for stories, you need to feed that imagination and, by far, the best way is to read and read widely, in and out of your own genre.
Think about what draws you to create the characters you have. Who are your favourites? Those for whom upholding justice is vital? Why is that so? Does it reflect your own love of justice and fair play or a wish that more of these things were seen in our world and, since you can't fix that, you can put it into your fiction?!
When you create your worlds, what knowledge are you using of this one to help you work out what your fictional one should be like? So yes, fiction should be made up but there is all sorts of unconscious thoughts influencing what you write. And this is based on what you know and what you find out.
The really great thing about all this? There is no limit to how much you read, how much you feed your imagination and so on so, go on, have a "feast" here! Your future characters will reflect what you know and what you experience both directly and what you read about so the more widely you read, the bigger the area you can fish from for ideas for your characters and stories. All images below from Pixabay.