@Jason G From the information provided, you seem to have good understanding of Azure Backup service. For File \ Folder backup you can perform item level restore (ILR) from Online RPs. For VM the ILR from cloud RP is not supported yet. One workaround to retrieve specific file is to configure disk recovery points at local. These recovery points can be used for offline restore and ILR is possible.
I do understand that it seem little confusing but each of the features in Azure Backup has its own advantages and limitations . Based on your requirement, you need to choose the features.
On other hand, you can also provide your feedback on the product here and respective Azure feature team takes into consideration of the feedback and prioritize it.