I didn't want to tell you too much so you can discover it yourself. But here it goes! Lol
splitstaff scale with both magic and courage. So to do more damage, yes,you need to level up and max both. How you know is that when you level them up the attack for the weapon goes up too.
For the sets, there are other ways to do this too. But I do 5 pieces of Spirit of Seimei because it reduced enemy defense whenever you use magic on them AND it gives you untouched magic (some people just go for 4 pieces)
for reference about sets bonuses see here
The Spirit of Seimei is a Set Bonus in Nioh 2. The Spirit of Seimei effect, pieces, set bonuses, location, builds and tips for Nioh 2
nioh2.wiki.fextralife.com
Now, there are also grace bonuses, which is essentially another set. For magic, you go with Inari. Why? Because it buffs your elemental damage. So whenever you imbue your weapon with an element (this is why you don't need the shots you have been using), your attack goes up even more
depending on the difficulty you are playing on, you might not even see graces. But you will see them and higher gear and skill variation if you play on higher difficulties (dream of demon and above, the newest dlc)
Oh and forgot to talk about demon scroll? If you find a decent one it will even further your attack. I have been using one where my ki damage is increased and my ki usage is reduced, so this is perfect for me since I'm going for ki damage with my attack
This is just one example. Builds are arguably the best part about this game. You can mix and match and some people get crazy stuff going on