All fluent readers read by sight. But more importantly, as a parent, you need to understand that there is no one way to read. There are as many ways to decode as there are readers. Let us take the example of how 3-year-olds might read the word "catch". One 3-year-old might read the word based on audio-visual familiarity with the word, "batch". Another might know to sound out "cat," and the "ch" sound from "such," and combine them to enunciate the word, but later learn while listening to a story that the "t" in "catch" is, in fact, silent.
A few points to remember are that English is a non-phonetic language; learning to read by sight is more intuitive and therefore, inclusive, while the phonics-based approach is more linear and logical. A child might use a combination strategy to decipher words – using phonics for word-units, recognising whole-words and word-patterns by sight, and mostly predicting new words based on listening.