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For example a plain text file or a .docx file

I'm aware of inSync app but text files that this syncs to Google Drive can't be edited in drive in the web browser.

I'm also aware of NotepadApp but feel uncomfortable about an external server handling the file (privacy).

What would be ideal would be for a text or doc created outside of Drive and synced to it, that this is converted on the fly to be editable in drive in the browser. For a file created in Drive, then this can be synced a local machine folder where it can also be edited. Is there an app to do this? Or a different approach I should consider - I like what Drive does but want to piece of mind of being able to access the files outside of it conveniently and not have to download them as a zip.

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To do this natively with Google Drive, you'd need to convert the document to Google Docs format1, make your edits, then save the file again in the original format2.

1While viewing the file with the Google Drive Document viewer, use File | Open with | Google Docs.

2File | Download as and choose the appropriate format.

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