do you guys leave it on standbye when not in use ?This is a matter of personal preference. I leave mine running all the time. Energy Saver is set to never sleep. If you don't use it everyday, you might want to shut it down and power up only when you need it. You don't need a monitor for this. You can power down from your remote device (ipad, laptop).
At somepoint, especially in initial setting up, is monitor needed ?This will be the easiest way. When you're done with set up, you can remove the monitor and use your ipad or laptop to remote in and do everything you need. Here are instructions on how to set up screen sharing:
http://docs.info.apple.com/article.html?path=Mac/10.6/en/11848.html
If you are using the MacMini as a server, how does one disable the other functions not useful for music making ?Instructions to disable Spotlight:
http://hints.macworld.com/article.php?story=20091030173117381
You'll want to have some sort of backup system in place. You'll get plenty of advice for different routes to take. IMHO, the easiest approach is Apple's built in software called Time Machine:
how to set up Time Machine to perform backups
You'll need an external hard drive for this. In my experience, smaller 2.5" USB and Firewire drives are significantly quieter than 3.5" drives. They get their power from the cable connected to the Mini. 3.5" drives have a separate power supply with fans which makes them inherently louder. Sizes and pricing on 2.5" drives is not as good as 3.5", but you can find 500gb for $60 and 750gb for $80.