I am not so sure how it will be on an iPod touch but I have a full body set applied to my Macbook and reviewed it a while back, and smaller scratches actually are harder to see with the invisible shield on. I guess it's because of the reflections on the invisible shield itself.
As for your second question there are some manufacturers that offer polishing products for the iPod...maybe something like that would help to get rid of smaller scratches...obviously big deep scratches won't go away.
byakuya