Actually what it does is it allows you to see the whole working space. It usually isn't needed when you are using just one PIP track, but as you add more, you will see that you lose the visibility of the bottom lines, audio - voice - title and so on. If you click on fit timeline it squishes everything up so that you can see all lines.
When you do this is removes the visibility of the audio wave in the video tracks on the timeline and PIP line, it doesn't really remove the audio, you just can't see the audio waves.